Category Archives: Broker dealer

We proudly invite you to 4th Annual Crowdfunding USA on May 4-5, 2017 National Press Club Washington, DC.

Crowdfund Beat Media Presents: 
 
The Important gathering will discuss what’s new on State of Investing and Risk Mitigation through evolving Internet finance space under the label “2017 the Year of 2.0 Equity & SME Finance-Online Lending or Investing- Crowdfunding “Jobs Act” under new congress & President Trump administration”

 See Conference website & Full Agenda Speakers 

 
For Promotional Opportunities, Group Discount, Sponsorship, and how to become a panelist call 1-888-580-6610 or email to info@crowdfundingusa.com

CF USA AGENDA’s  SNAPSHOT

SEC – FINRA – JOBS ACT – Early Investing
Family Offices – IRA Trust
Rules and Regulations Consideration
Rule 506(c) – Title II Tittle III REG D REG CF
Definition of accredited investor?
Liquidity for the private securities space
Redefining Securities Distribution through Crowdfunding

Real Estate Crowdfunding

Why Hot Real Estate CrowdFunding Is The Next  New Frontier?
Impact of crowdfunding on real estate finance and deal-making
Is Real Estate Crowdfunding Offers An Attractive Alternative For Secure Investments?
The Impact of Technology and Internet on Real Estate Crowdfunding

Trump to Lift Community Bank Regulations (and what that means for house flippers)

Shadow Banking
Dodd-Frank: A Republican Congress
will likely be looking for ways to scale back time and money on business regulation.
Real Estate Crowdfunding and Community Development

Pros & Cons of Internet finance and lending 

2017 State of CrowdFunding

Business of Crowdfunding & Reaching the Goal – How to Make It Happen

Multiple Faces of Crowdfunding on Equity

Future of EB-5 Business Finance & Crowdfunding
Disruption of Equity Crowdfunding on VC’s – Angel Investors
Is Online Lending & Fintech industry here to stay?

Exploring Title II
Why it dominates and will continue to dominate crowdfunding
What initiatives are being pursued to create secondary markets or other means
Effect of IPO window

Regulation A+ Mini IPO
Many of the Reg A deals got pulled this last year.
Is this offering type holding up to investor interest.
Need research on Reg CF, Reg A+ and other offerings.
How much was raised, and how have they performed.
Aftermarket performance of Reg A+ deals

After hours Networking 

Round table discussion

 

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.

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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.

 

2017 State of Crowdfunding


Brian Korn is a corporate and securities attorney at the law firm Manatt, Phelps & Phillips, LLP

2017 Real Estate Crowdfunding Sites

Alphabetically

CrowdFundBeat Media, Copyright © All Rights Reserved

Report: Real Estate Crowdfunding Set to Be $5.5 Billion Industry in 2017

Also:  CrowdFunding Lists, Data, Analytics, Research, Statistics, Reports, Infographic

Crowdfund Beat Media, “2020 Prospect Report”the leading research and advisory and firm specializing in  crowdfunding solutions for private, public and social enterprises, has announced the release of its comprehensive 2017 CF-RE Crowdfunding for Real Estate report, which will provide the first ever detailed look at the intersection of real estate and crowdfunding. The 120-page report features data on the exponential growth of real estate crowdfunding, the emergence of specialized real estate crowdfunding platforms and how this revolutionary new method of real estate finance and investment is disrupting this asset class.

Interesting to note that some platforms are purely providing additive capital to sponsored deals, earning a fee for intermedition, while some are a bit more compensatory, with the inclusion of management fees and a carried interest. As of now, all are focused on accredited investors, though one has included DPOs in their mix. Here is the lists:

2017 Real Estate Crowdfunding Sites. Alphabetically

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in the list? News@crowdfundbeat.com

CrowdFundBeat Media Copyright © All Rights Reserved

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!

Crowdfunding- The Good, The Bad & The (really) Ugly Part II –The Bad

By Shane Liddell is the CEO and chief Crowdfundologist at Smart Crowdfunding LLC,. Crowdfund Beat Guest post,

Introduction

In Part 1 I covered all of the good things that we have seen as crowdfunding continuously gathers momentum across the world. The future looks bright indeed!

However, as with any new industry forging ahead and desperate for acceptance, the surrounding hype that comes with it often blurs reality, with any form of negativity simply  ‘brushed under the carpet’ so to speak. Naturally, those fully vested in the industry (including yours truly) have a lot on the line, as everyone charges ahead in full promotion mode. The ‘painted picture’ is a rosy one and for a very good reason, but there is a dark and sometimes sinister side to the industry as well.

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Part 2-The Bad

 The Industry Evolves

 

 

Let’s rewind a little. In an interview with Film Threat back in October 2010, Indiegogo co-founder, Slava Rubin said “… what we are now and what we are for the future is we’re all about allowing anybody to raise money for any idea” Although this may have been true at the time, it’s certainly not applicable today. Reality is that not ‘anybody ’can raise money through crowdfunding unless they are a) extremely lucky, or b) have a substantial amount of money to begin with. Let me explain a little further.

My own entry into the crowdfunding space happened by default during June of 2012 when confronted with a desperate plea for funding from a lady by the name of Louise Joubert of the Sanwild Wildlife Sanctuary. Louise put out a post on the Sanwild Facebook page saying that sponsors had pulled up to 70% of the funding for Sanwild due to the recession, so she was unable to feed the 16 lions she rescued from the ‘canned hunting’ industry, and she was getting to the point of desperation and was seriously considering euthanizing them. Louise saw this as the kind way to put an end to any potential suffering. This sad story really pulled at my heartstrings and after a phone call or two to South Africa, I volunteered to see if I could help by using this new fundraising method called Crowdfunding. To cut a long story short, we did manage to raise over $20,000 through an Indiegogo campaign and in turn bring a happy ending to this story with the 16 lions being saved. It was an exhausting process, especially with little to no budget to market the campaign; but through teamwork, perseverance and leveraging off of our social contacts, we made it. The point here is that with almost no campaign budget (but instead 100’s of hours invested) we were able to do what we set out to achieve – Save Our Lions.

During 2012 we saw on average 30-50 campaigns launching on the Indiegogo platform each week and probably around 60-70 per week on Kickstarter. These low numbers made things much easier for anyone crowdfunding their ideas, as competition for ‘eyeballs’ was almost non-existent, the media was receptive to any crowdfunding news at all, and the public was in a state of confusion as to what they were really doing when contributing to these campaigns, with many thinking they were simply making an online purchase just as they would do on Amazon.

How things have changed.

Fast forward to 2016 and with approximately 300-400 campaigns launching per week on the Indiegogo platform and up to 600 per week launching on Kickstarter, the competition is fierce. Add to this that there are now well over 1000 (and counting) crowdfunding platforms globally and you’ll begin to see the real picture.

The corporate world is now waking up to this new, low cost way of validating and funding projects and products. Big names such as Sony and GE’s entry into crowdfunding gives the small guy very little chance of competing with them.

In a recent article published by The Verge earlier this year titled “Indiegogo wants huge companies to crowdfund their next big products” and a sub heading which reads “Indiegogo wants big brands to start crowdfunding” we see how they have changed for the worse. Their “Enterprise Crowdfunding” clearly showing that they are not in any way ‘democratizing access to funding’ but instead are an entity solely in the business of making a profit at all costs (more on this particular story in Part 3 –The Ugly).

I guess the most disturbing words I read in that article are these:

“Large companies can also pay for special placement on Indiegogo’s site, making them more discoverable than other campaigns.”

So, Indiegogo now earns revenue from advertising placements only available to corporates? Shocking to say the least!

This whole scenario stinks and reminds me of a certain politician, who now as president elect, has already made several ‘about turns’, continuously going against the words he used to gain popularity.

I hope you all now realize why the small guy has little to no chance of success, especially now that the heavyweights enter with the resources to squeeze them out. In fact, a well know marketing agency recommends a campaign budget today of a whopping $40,000. I don’t know too many ‘little guys’ with that kind of cash to spend on an upcoming crowdfunding attempt, do you? Wasn’t the whole point of crowdfunding to raise money and not spend it?

Although crowdfunding was originally pitched as democratizing access to funding for the small guys, this is no longer true. Without a good chunk of capital to start with, their campaigns are doomed before they begin.

 

Equity Crowdfunding – The SEC (Securities and Exchange Commission)

Background

On April 5th 2012 president Obama signed the Jump Start Our Business Act (commonly referred to as “The JOBS Act”) giving the SEC 274 days to write up the necessary rules and regulations. The main purpose in the implementation of the JOBS Act was to stimulate the creation of jobs through small business access to capital.

The JOBS Act substantially changed a number of laws and regulations making it easier for companies to both go public and to raise capital privately and stay private longer. Changes include exemptions for crowdfunding, a more useful version of Regulation A, generally solicited Regulation D Rule 506 offerings, and an easier path to registration of an initial public offering (IPO) for emerging growth companies.

The titles of the bill that make equity crowdfunding work are:

  • TITLE II – Access to capital for job creators (REG D)
  • TITLE III – Crowdfunding (REG CF)
  • TITLE IV – Small company capital formation (REG A+ or mini IPO)

What’s with all this jargon you may ask? Good question, and the answer is one which I hope many academics will learn to answer in their writings. Effective communication is always better crafted to suit a broader audience. Within crowdfunding, I feel it is important for all – lawyers, accountants, broker dealers etc. – to understand that in our attempt to educate the market, we need to simplify the language used so as to be better understood by the majority.

Back in the 70’s the KISS acronym and methodology – “Keep It Simple Stupid” was very popular for good reason. The simplicity of this methodology should be more applicable today than it ever has been.

For clarification:
REG D allows the issuer to raise funds from accredited investors only meaning in essence from a select few rich people.

REG CF allows issuers to raise funds from both accredited investors and non-accredited investors (the general public) but is subject to limitations.

REG A+ allows the raising of up to $20M through Tier 1 and up to $50M through Tier 2.

Titles I, V, and VI of the JOBS Act became effective immediately upon enactment. Understanding these within the context of this article is not really important so I won’t bother explaining.

The SEC approved the lifting of the general solicitation ban on July 10, 2013, paving the way for the adoption of REG D which went into effect in September 2013. Following this was REG A+ which went live during June 2014 – 2 years after the signing of the Jobs Act – and finally the long anticipated (and most beneficial to small business) REG CF on May 16th 2016 – more than 4 years since the signing of the Jobs Act!

Yes, you read that right – 4 years later. A whole 4 years of lost opportunity. Why 4 years you may ask? Well, through a series of meetings, mountains of paperwork, a change of chair, commenting periods, rewriting this and rewriting that and a whole heap of other hurdles to jump through in between, a whopping 685 pages of regulations was created. Certainly no KISS methodology involved there!

During this period, how many small businesses have folded because they had no access to much needed capital? How many could have been saved from collapse? How many precious jobs were lost during this lengthy and tedious process? The answers should be fairly obvious to fathom.

Based on current information from successfully funded campaigns, we see that so far around $175M has been raised under REG A+ crowdfunding and about $15M over the past 6 months through REG CF. Imagine what these numbers would look like had the SEC been more efficient in the role they played during the entire rulemaking process.

On the other hand, the United Kingdom took a fairly relaxed approach to rulemaking which has led to the creation of the most dynamic alternative finance market in the world. In real terms they are 5 years ahead in the game and are seen as the leaders in this space. The United States is seen as a failure.

Were the SEC attempting to break records as the slowest crowdfunding rulemakers in the world? Maybe not, but it appears they are well positioned to claim this shameful accolade!

 

The Pretenders – Self –Promoters and the Charlatans

Before I begin, let me just say that there are many among us who have ‘earned their stripes’ in this industry. I hold these people in the highest regard for their dedication and commitment to the cause. Far too many to mention of course, but you know who you are, so thank you for doing what you do! Through the many long days of hard work, dedication, countless hours of research, and in some cases, hands on experience with crowdfunding projects of all shapes and sizes, they stay true to their objectives of making the crowdfunding industry one to admire. These people gain respect naturally through their words and actions alone. They generally keep a fairly low profile too, with little need to go on the self-promotion bandwagon, as people naturally migrate to them anyway.

Let’s briefly return back to 2012, when crowdfunding was really still in its infancy and there were very few players involved. To put things into perspective, at the time of launching my own crowdfunding marketing agency Smart Crowdfunding under the crowdfunders.us domain, there were only four other active crowdfunding marketing agencies globally. The industry was tiny and it was very easy to know who was who.

This leads me to a telephone conversation I had one day during early 2013 with one of the other agency founders who had taken issue with the fact that I was now actively competing with him. After listening to his concerns, I politely brushed them aside and ended the call saying “If you are concerned about competition now, then wait to see what’s coming over the next few years”. He grumped and the call ended. Move on to 2016 and we see a whole load of entrants into this space.

Back to the point:
There are those who clearly try to take shortcuts in an attempt to get to the top, with integrity thrown right out the window in their pursuit of money and stardom. Many of these types have little care for the health of the industry as a whole, but instead their own greed drives them forward. They are quite easy to spot though. Lies are abundant and a little due diligence goes a long way in discovering the truth about them. The wonderful world of the Whois lookup is a great tool to confirm some claims of “we’ve been doing this for the past 5 years” as domain registration dates tell the truth. Some have woken up to hiding these details and hide behind a proxy registration service. In fact, a little while ago I had discovered exactly this with a crowdfunding marketing agency who made such claims (and still do) of having been around for the past 6 years. I did a Whois search many months ago to only find that their domain was registered in 2013 – and not 6 years ago as claimed. Further investigation confirmed this. Today their domain registration information is now hidden via a proxy.

One of the most common things I see today is those with very little industry experience becoming self-proclaimed “Experts”. Let’s elaborate on this for a moment.

During 2014 I attended a crowdfunding industry conference, and as I sat in the audience while the proceeding began, the moderator allowed the panel give a brief introduction of themselves. There were 4 on this particular panel, 3 of whom I knew of. To my amazement, one particular character was introduced as a crowdfunding marketing expert. I listened intently to this persons ‘pitch’ and also the advice they gave to the audience when confronted with questions such as “What’s the single most important tool to use when crowdfunding? Their answer? PPC (Pay per click). Wrong! In disbelief, there were a few shaking heads in the audience, mine included. Had this person’s earlier claim of “I’ve worked on 80 Kickstarter and Indiegogo campaigns” during their introductory pitch been true, they would clearly know this was incorrect information. Following up from this and after checking out the real facts it turns out that today, this person has run a single Indiegogo campaign of which struggled to get to $10,000 funded. I suspect a fair share of self-funding activity there too. This example is one of many we see as the industry powers forward. Being able to spot these “experts” is fairly easy when you know what to look for.

You see, I have followed Indiegogo campaigns in particular like a hawk. My early career in crowdfunding was built around this platform so it’s rare that even a single campaign that’s raised more than $5,000 gets by me without notice.

The biggest telltale sign of those who attempt to take shortcuts to stardom is the lack of consistency in their pitch. Many appear to have short memories! The character I reference above has since spoken at numerous industry events and their pitch varies from “I have 8 staff and have worked on over 100 Kickstarter and Indiegogo campaigns” to “I have 25 staff and have worked on 80 Kickstarter and Indiegogo campaigns” In reality, as of today they’ve worked on a handful at most and only 1 on the Indiegogo platform can be confirmed under deeper investigation.

I have major concerns! Besides ‘the blind leading the blind”, the entire industry is at stake here, and addressing the real issues now can only bode well for a healthy and prosperous industry for all.

As a colleague recently said “….the integrity of the entire industry is on the line, and if the charlatans are allowed to run roughshod it’ll soon turn into a house of cards.” No truer words have ever been spoken.

Scampaigns – Yes and No

Now this section will be fairly short.

Let me start by saying that intentional scams are really very rare. During my time in the industry I have seen no more than 3 or 4 which were clearly scams from the very beginning ( I’ll elaborate more on this in Part 3 – The Ugly).

What I have seen, however, even from some of my earlier clients may surprise you. They begin the crowdfunding process with good intentions but unrealistic expectations (a common trait among those crowdfunding today).This is their real downfall.

Many are young, inexperienced men and women whose entire focus is on how great their product is. They are emotionally invested and in some cases spend lengthy periods developing their concept or prototype. When the time comes to go crowdfunding, in many cases they lay everything on the line. Some win. Some lose.

Even after running a successful campaign, for many the process of handling large amounts of cash and developing their idea into a real manufactured product, leads to failure due to lack of experience. A weak team adds to their woes and they burn through cash at an alarming rate. In time, they sit in disbelief that they no longer have enough cash to actually finish the product. At other times their concept was flawed from the very beginning but they only discover this when attempting to go to the prototype stage. Facing the inevitable truth is hard for them, and with the angry abuse from their supporters awaiting, they are stuck between a rock and a hard place. Many come to the conclusion that their only route of escape is a disappearing act.

What do the backers, journalist and millions of other disgruntled people call these people? Scammers. Many of their backers didn’t know at the time they were backing a concept in the first place and shout to the high heavens in disgust when they don’t get what they thought they “ordered’ a year prior.

A very recent case of the scam label being attached to something that was not a crowdfunding scam from the very beginning is Healbe GoBe – “the first and only wearable device that automatically measures the calories you consume and burn, through your skin” which raised over $1M. Despite being slammed by all and sundry – including backers, engineers, scientists, and journalists – they eventually brought their product to market, albeit with many ‘teething problems’ still to be ironed out.

Conclusion

My biggest challenge when writing  part 2 of my article, was in trying to condense as much as possible, but to still get the message(s) across. I hope I have achieved this even though we still ended up with over 3,000 words.  I promise a much shorter part 3. Thank you for reading and I hope this has been helpful.

Look out for Part 3 – The (really) Ugly, where I delve deeper into the real scams of the crowdfunding world, as well as extortion and blackmail attempts and the platforms that seemingly turn a blind eye to it all.

About The Author

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Shane Liddell is the CEO and chief Crowdfundologist at Smart Crowdfunding LLC, the crowdfunding marketing agency. He became active within the crowdfunding industry early in 2012, seizing the opportunity to offer help to crowdfunders from all corners of the world. He has delivered successful campaigns for entrepreneurs, startups, corporations and filmmakers and has assisted over 500 crowdfunders with campaign development, consulting, marketing and promotion services, some of whom have raised millions of dollars in the process. He has attended numerous equity crowdfunding industry events, including the SEC Small Business Forum and the CfPA Summit in Washington DC. Shane holds the position of Executive Director of the Crowdfunding Professional Association (CfPA).

First Crowdfunding portal to be expelled from FINRA

By   Crowdfund Beat Guest post,

On November 2, 2016, FINRA terminated the FINRA registration for UFP, LLC (“UFP”), making UFP the first crowdfunding portal to be expelled from FINRA.   UFP ran an online funding portal, uFundingPortal.com, where it acted as an intermediary in debt and equity crowdfunding offerings conducted in reliance on SEC Regulation Crowdfunding rules.  FINRA’s investigation into UFP alleged that from May through September 2016, UFP violated various SEC Regulation Crowdfunding rules and FINRA Funding Portal Rules. As a result of FINRA’s investigation, UFP pulled its website and submitted a Letter of Acceptance, Waiver and Consent (the “AWC”) in order to settle these alleged rule violations with FINRA.  The AWC is available at: http://disciplinaryactions.finra.org/Search/ViewDocument/67004.

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FINRA alleged that UFP violated Rule 301(a) and Rule 301(c)(2) under SEC Regulation Crowdfunding.  Rule 301(a) requires funding-portal intermediaries like UFP to have a reasonable basis for believing that issuers using its crowdfunding portal comply with applicable regulatory requirements, and Rule 301(c)(2) requires that access to funding portals be denied to issuers that present the potential for fraud or otherwise raise investor protection concerns. FINRA found UFP to be in violation of Rule 301(a) because 16 of the issuers on UFP’s portal had failed to file certain requisite disclosures with the SEC and, in each case, UFP had reviewed these issuers’ SEC filings and therefore had reason to know that these filings were incomplete.

In addition, FINRA found UFP to be in violation of Rule 301(c)(2) by failing to deny access to its portal when it had a reasonable basis to believe these issuers and/or their offerings presented the potential for fraud. For example, FINRA found that these 16 issuers all had impracticable business models and oversimplified and unrealistic financial forecasts; 13 of these issuers disclosed identical amounts for their funding targets, maximum funding requests, price per share of stock, number of shares to be sold, total number of shares and equity valuation; three of these issuers had identical language in the “Risk Factors” sections of their websites; and two issuers listed identical officers and directors even though they had vastly different business plans.  Additionally, UFP had reason to know that four of these issuers either had officers or directors who owed back taxes or had not filed an annual tax return for 2015.   FINRA also alleged that UFP violated Funding Portal Rule 200(c)(3), which prohibits funding portals from including any issuer communication on its website that it knows or has reason to know contains any untrue statement of material fact or is otherwise false or misleading.

source http://www.mofojumpstarter.com/2016/12/16/finra-action-against-crowdfunding-platform/

FINRA Action Against Crowdfunding Platform

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.

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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.

SEC Makes Intrastate Crowdfunding A Little Easier

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.aaeaaqaaaaaaaaf7aaaajdm2zwu1ywjmlwe2zjgtndljns04mtu3ltzmnza4mde3m2y4ma

The SEC just adopted rules that should make intrastate Crowdfunding easier, at least if State legislatures do their part.

To understand how the new rules help and how they don’t, start with section 3(a)(11) of the Securities Act of 1933, which has been, until now, the basis for all intrastate Crowdfunding laws. While section 5 of the Securities Act generally provides that all sales of securities must be registered with the SEC, section 3(a)(11) provides for an exemption for:

Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.

In 1974 the SEC adopted Rule 147, implementing section 3(a)(11). That was long before the Internet, and as state legislatures have enthusiastically adopted intrastate Crowdfunding laws since the JOBS Act of 2012, some aspects of Rule 147 have proven problematic. The rules just adopted by the SEC fix some of the problems of Rule 147:

  • In its original form, Rule 147 required that offers could be made only to residents of the state in question. The revised Rule 147 says it’s okay as long as the issuer has a “reasonable belief” that offers are made only to residents.
  • In its original form, Rule 147 required issuers to satisfy a multi-part test to show they were “doing business” in the state. Under the revised Rule 147, an issuer will be treated as “doing business” if it satisfies any one of several alternative tests.
  • The revised Rule 147 provides safe harbors to ensure that the intrastate offering is not “integrated” with other offerings.
  • In its original form, Rule 147 provided that securities purchased in the intrastate offering could not be sold except in the state where they were purchased for nine months following the end of the offering. The revised Rule 147 provides, instead, that securities purchased in the intrastate offering may not be sold except in the state where they were purchased, for a period of six months (not six months from the end of the offering).

Those are all good changes. But the SEC didn’t stop there. In addition to changing Rule 147 for the better, the SEC has adopted a brand new Rule 147A. Rule 147A more or less begins where Rule 147 leaves off and adds the following helpful provisions:

  • Most significantly, offers under Rule 147A may be made to anyone. That means the issuer may use general soliciting and advertising – and the Internet in particular – to broadcast its offering to the whole world. Purchasers – the investors who buy the securities – must still be residents of the state, but offers may be made to anybody.
  • The issuer doesn’t have to be incorporated in the state, as long as it has its “principal place of business” there – defined as the state “in which the officers, partners or managers of the issuer primarily direct, control and coordinate the activities of the issuer.” Thus, a Delaware limited liability company could conduct an intrastate “offering in Indiana, as long as all the officers and managers live and work in Indiana.

Why did the SEC bother to create a whole new Rule 147A to add these provisions, rather than just adding them to Rule 147?

The answer is that Rule 147 is an implementation of section 3(a)(11) of the Securities Act, and if you look at section 3(a)(11) you’ll see that the additional provisions in Rule 147A – allowing offers to everybody, allowing a non-resident issuer – are prohibited by the statutory language. To add these provisions, the SEC had no choice but to create a new Rule 147A that is entirely independent of section 3(a)(11).

And there’s the rub. Many of the existing intrastate Crowdfunding laws require the issuer to comply with Rule 147 and section 3(a)(11). Texas, for example, says:

Securities offered in reliance on the exemption provided by this section [the Texas intrastate Crowdfunding rule] must also meet the requirements of the federal exemption for intrastate offerings in the Securities Act of 1933, §3(a)(11), 15 U.S.C. §77c(a)(11), and Securities and Exchange Commission Rule 147, 17 CFR §230.147.

This means that issuers in Texas will not be allowed to conduct an offering under the more liberal provisions of Rule 147A until the Texas State Securities Board changes that sentence to read:

Securities offered in reliance on the exemption provided by this section must also meet the requirements of the federal exemption for intrastate offerings in the Securities Act of 1933, §3(a)(11), 15 U.S.C. §77c(a)(11), and Securities and Exchange Commission Rule 147, 17 CFR §230.147, or, alternatively, the requirements of the federal exemption for intrastate offerings in Securities and Exchange Commission Rule 147A, 17 CFR §230.147A.

To those who have spent the last three years pushing intrastate Crowdfunding laws through state legislatures, it might look as if the boulder has rolled back down the hill. But there might also be a silver lining. Almost all the state rules were adopted before Title III became final, and almost all include very modest offering limits. Now that Title III is working as promised, Rule 147A might present an opportunity for legislatures not just to take advantage of the more liberal provisions, but also to raise offering limits and make other adjustments, seeking to make their state rules more competitive with the Federal Title III rules.

In the big picture, the SEC has once again proven itself a fan of Crowdfunding. And that’s good.

Questions? Let me know.

Mark Roderick is one of the leading Crowdfunding lawyers in the United States. He represents platforms, portals, issuers, and others throughout the industry. For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, follow Mark’s blog, or his twitter handle: @CrowdfundAttny. He can also be reached at 856.661.2265 or mark.roderick@flastergreenberg.com.

Busted!  SEC Targets Reg A+ Marijuana Company, Med-X, in Administrative Proceeding.

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

The Regulation A+ industry was buzzing this week – not with excitement, but with a healthy dose of trepidation.  One of the first, high (no pun intended) profile Regulation A+ offerings, launched in November 2015, after a seemingly successful “Testing the Waters” campaign, was for a company called Med-X, a startup formed to participate in the newly burgeoning marijuana industry – the so called “Green Rush.”

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But this month’s headline for Med-X was a bit more sanguine, enough to counteract even the most potent dosage of THC:  “REGULATION A EXEMPTION OF MED-X, INC. TEMPORARILY SUSPENDED.”  The story that followed was not the kind of publicity any company is looking for – especially when it is in the throes of raising money under Reg A+. Actually, it was not a story. Rather, it was an Administrative Order issued by the SEC on September 16, 2016, temporarily suspending the exemption of Med-X under Regulation A+.

Why? Well, it seems that this company failed to notice, or at least heed, the requirement that Reg A+ issuers file periodic informational reports as a condition of maintaining their status as Reg A+ issues. The basic requirement calls for a company, at the least, to file a semi-annual and annual report with the SEC following the “qualification” of the offering.  Seems that Med-X failed to file its annual report, which would include audited financial statements, when due back in the Spring of 2016.

Some have speculated that the SEC was targeting a disfavored industry – marijuana. I doubt it. The SEC  has approved the registered sale of other companies in this industry long before Regulation A+ was adopted.

Others have speculated that this action reflects an uneven hand towards Regulation A+ issuers. After all, this type of swift action is rare for fully reporting companies which are delinquent in their filings. One more time: I think not.

The Staff at the SEC has been remarkably supportive of the rollout of Regulation A+, as measured anecdotally in terms of the efficiency in which it has been processing the review of Regulation A+ offerings.

Rather, I think back to one of the more notable sound bytes I coined in a Webinar back in April 2015: “Regulation A+ is not your daughter’s Kickstarter campaign.”  Raising capital from outside investors is serious, heavily regulated business.  And as indicated by some of the early Regulation A+ participants, the level of sophistication of the management of some of these issuers has hardly met the bar required to file and prosecute a Regulation A+ offering.

Yes, Regulation A+ is a little more complex than the pipedream: filling out a form, waiting for SEC approval, and then crowdfunding your way to $50 million.  Apart from detailed disclosure rules, including audited financial statements, and the always difficult task of raising capital – especially for early stage companies – there is an ongoing SEC reporting requirement. Yes, the requirement is lighter than a fully reporting public company, to be sure, but enough to quickly overload an early stage company, with limited financial and human resources.

So if nothing else, this is one SEC enforcement action can be expected to inject a dose of reality into the Regulation A+ capital raising process.  As our President might say, “A Teachable Moment.”

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

 

Attorney Sanctioned by SEC for Unregistered Broker-Dealer Activity

By  Bret Daniel , Wealthforge.com, CrowdfundBeat Guest Post,

The SEC crackdown on unregistered entities continues to grab headlines. Recently, we wrote about the importance of complying with the broker-dealer registration requirement under Section 15(a) by highlighting the latest violations by portfolio managers, online platforms, and individuals.

We suggested that anyone that helps to facilitate a securities offering, even in the broadest sense, should consult a lawyer about the necessity of registering as a broker. The most recent SEC enforcement action, however, demonstrates that even lawyers can get tangled up in the wide net cast over unregistered broker-dealers.

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EB-5: Visa or Security?

Mark Ivener was a partner at the California-based law firm Ivener & Fullmer, LLP (both “Respondents”).1 Ivener specialized in immigration law and regularly counseled clients on how to qualify for EB-5 visas under the Immigrant Investor Program. The program allows foreign investors to obtain an EB-5 visa—and permanent resident status for themselves, their spouses, and their children—by investing $1 million2 in a commercial enterprise in the United States that creates or preserves at least ten full-time jobs for American workers.  A prevalent vehicle for making such an investment is through a Regional Center. Regional Centers are allocated a certain number of EB-5 visas for qualifying investments that typically take the form of limited partnership interests, a security under federal securities law. When Ivener counseled clients on how to qualify for EB-5 visas, he referred them to at least one Regional Center. The relationship between Ivener, his firm, and that Regional Center was formalized in a “Referral Services Agreement” that provided for referral commissions. In effect, Ivener was advising his clients to invest in EB-5 securities, and further, receiving transaction-based compensation from those investments. From January 2009 to December 2011, Ivener earned commissions totaling $450,000.

The SEC determined the Respondents’ actions were in violation of Section 15(a)(1) of the Exchange Act. Commonly known as the “registration requirement,” Section 15(a)(1) makes it unlawful for an unregistered entity “to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security.” Per the terms of a settlement offer, the SEC ordered Respondents to pay $450,000 in disgorgement and $87,855 in interest. Based on the plain language of the statute and broad application by the SEC, it is unsurprising for those versed in securities law that Ivener’s conduct rose to the level of “effecting” or “inducing” the purchase of securities. For Ivener, however, by all accounts an immigration expert, the pitfalls and minefields of securities law may have been completely foreign.

Transaction-Based Compensation

This not the first time we have seen EB-5 matching, a prevalent practice, result in SEC enforcement action.  We provided analysis about one such case relating to a Florida company, Ireeco LLC, and a related foreign entity.

In the Ivener Order, the SEC notes that the Regional Center, the investment vehicles, and the managers “paid commission to anyone who successfully facilitated the sale of limited partnership interests to new investors.” The SEC explicitly classified the commission as transaction-based, but did not provide details on the commission structure.

In the Ireeco case, the sanctions totaled nearly $3.2 million dollars in disgorgement plus prejudgment interest.3 There, the respondent’s illicit commissions were a set percentage of a related flat-fee, but the commissions were contingent upon the investor receiving a condition green card. Therefore, although the Ireeco respondents’ commission was independent of the size of the investment, it was contingent upon a successful closing.

Regardless of what technically qualifies as transaction-based compensation, the range of activities garnering enforcement activity highlights some very important points: (a) a broad range of commission structures may draw ire from the SEC and (b) transaction-based compensation may not be dispositive of whether one is in violation of Section 15(a).

Other Factors to Consider

Generally, “[a] person effects transactions if he or she participates in securities transactions ‘at key points in the chain of distribution.’4 Transaction-based compensation is a clear indicator of participation in key points of the securities distribution chain. However, it is only one of several factors. Other activities to consider include:

  • Selecting the market to which a securities transaction will be sent
  • Assisting an issuer to structure prospective securities transactions
  • Helping an issuer to identify potential purchasers of securities
  • Helping purchasers to identify potential security offerings
  • Soliciting securities transactions (including advertising)
  • Participating in the order taking or routing process
  • Operation or control of electronic or other platforms to trade securities

Such broad framing affords the SEC flexibility, and enforcement action like that taken against Mr. Ivener and his firm illustrates the Commission’s commitment to rooting out and shutting down unregistered brokers in every field.

Bret Daniel

Bret is part of the legal team at WealthForge where he manages client contract flow, internal policy development, and contributes thought leadership on issues ranging from tax to employment law. Bret brings a small business background to WealthForge and is currently a law student at the University of Richmond

Improving Legal Documents in Crowdfunding: New Tax Audit Language for Operation Agreements

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

Last year I reported that Congress had changed the rules governing tax audits of limited liability companies and other entities that are treated as partnerships for tax purposes. The changes don’t become effective until tax years beginning on or after January 1, 2018, but because most LLCs created today will still be around in 2018, it’s a good idea to anticipate the changes in your Operating Agreements today.

Under the current rules, the IRS conducts audits of LLCs at the entity level through a “tax matters partner” (normally the Manager of the LLC), and collects taxes from the individual members. Under the new rules, the IRS will continue to conduct audits at the entity level, but will also collect taxes, interest, and penalties at the entity level. That puts the LLC in the position of paying the personal tax obligations of its members, a drain on cash flow every deal sponsor will want to avoid.

Naturally, there are exceptions to the new rules and exceptions to the exceptions. Trouble sleeping? I’ll send you a detailed summary.

Consult with your own tax advisors, of course, here’s some language for your Operating Agreements that gives the deal sponsor maximum flexibility:

Tax Matters.

  1. Appointment. The Manager shall serve as the “Tax Representative” of the Company for purposes of this section 1. The Tax Representative shall have the authority of both (i) a “tax matters partner” under Code section 6231 before it was amended by the Bipartisan Budget Act of 2015 (the “BBA”), and (ii) the “partnership representative” under Code section 6223(a) after it was amended.
  2. Tax Examinations and Audits. At the expense of the Company, the Tax Representative shall represent the Company in connection with all examinations of the Company’s affairs by the Internal Revenue Service and state taxing authorities (each, a “Taxing Authority”), including resulting administrative and judicial proceedings, and is authorized to engage accountants, attorneys, and other professionals in connection with such matters. No Member will act independently with respect to tax audits or tax litigation of the Company, unless previously authorized to do so in writing by the Tax Representative, which authorization may be withheld by the Tax Representative in his, her, or its sole and absolute discretion. The Tax Representative shall have sole discretion to determine whether the Company (either on its own behalf or on behalf of the Members) will contest or continue to contest any tax deficiencies assessed or proposed to be assessed by any Taxing Authority, recognizing that the decisions of the Tax Representative may be binding upon all of the Members.
  3. Tax Elections and Deficiencies. Except as otherwise provided in this Agreement, the Tax Representative, in his, her, or its sole discretion, shall have the right to make on behalf of the Company any and all elections under the Internal Revenue Code or provisions of State tax law. Without limiting the previous sentence, the Tax Representative, in his, her, or its sole discretion, shall have the right to make any and all elections and to take any actions that are available to be made or taken by the “partnership representative” or the Company under the BBA, including but not limited to an election under Code section 6226 as amended by the BBA, and the Members shall take such actions requested by the Tax Representative. To the extent that the Tax Representative does not make an election under Code section 6221(b) or Code section 6226 (each as amended by the BBA), the Company shall use commercially reasonable efforts to (i) make any modifications available under Code section 6225(c)(3), (4), and (5), as amended by the BBA, and (ii) if requested by a Member, provide to such Member information allowing such Member to file an amended federal income tax return, as described in Code section 6225(c)(2) as amended by the BBA, to the extent such amended return and payment of any related federal income taxes would reduce any taxes payable by the Company.
  4. Deficiencies. Any deficiency for taxes imposed on any Member (including penalties, additions to tax or interest imposed with respect to such taxes and any taxes imposed pursuant to Code section 6226 as amended by the BBA) will be paid by such Member and if required to be paid (and actually paid) by the Company, may  be recovered by the Company from such Member (i) by withholding from such Member any distributions otherwise due to such Member, or (ii) on demand. Similarly, if, by reason of changes in the interests of the Members in the Company, the Company, or any Member (or former Member) is required to pay any taxes (including penalties, additions to tax or interest imposed with respect to such taxes) that should properly be the obligation of another Member (or former Member), then the Member (or former Member) properly responsible for such taxes shall promptly reimburse the Company or Member who satisfied the audit obligation.
  5. Tax Returns. At the expense of the Company, the Tax Representative shall use commercially reasonable efforts to cause the preparation and timely filing (including extensions) of all tax returns required to be filed by the Company pursuant to the Code as well as all other required tax returns in each jurisdiction in which the Company is required to file returns. As soon as reasonably possible after the end of each taxable year of the Company, the Tax Representative will cause to be delivered to each person who was a Member at any time during such taxable year, IRS Schedule K-1 to Form 1065 and such other information with respect to the Company as may be necessary for the preparation of such person’s federal, state, and local income tax returns for such taxable year.
  6. Consistent Treatment of Tax Items. No Member shall treat any Company Tax Item inconsistently on such Member’s Federal, State, foreign or other income tax return with the treatment of such Company Tax Item on the Company’s tax return. For these purposes, the term “Company Tax Item” means any item of the Company of income, loss, deduction, credit, or otherwise reported (or not reported) on the Company’s tax returns.