Category Archives: jobsact

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

 

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

 

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/

Communications and publicity by issuers prior to and during a “Regulation CF” offering

By Sara Hanks , CrowdFundBeat  Sr.contributing Guest Editor  CEO/Founder, CrowdCheck, Inc.

The idea behind crowdfunding is that the crowd — family, friends and fans of a small or startup company, even if they are not rich or experienced investors — can now invest in that company’s securities. For a traditionally risk-averse area of law, that’s a pretty revolutionary concept!

In order to make this leap, Congress wanted to ensure that all potential investors had access to the same information. The solution that Congress came up in the JOBS Act with was that there had to be one centralized place that an investor could access that information — the website of the funding portal or broker-dealer that hosts the crowdfunding offering (going forward we will refer to both of these as “platforms”).

This means (with the exception of some very limited exceptions that we’ll describe below) most communications about the offering can ONLY be found on the platform. On the platform, the company can use any form of communication it likes, and can give as much information as it likes (so long as it’s not misleading). Remember that the platforms are required to have a communication channel (basically a chat or Q&A function) — a place where you can (though you must identify yourself) discuss the offering with investors and potential investors. That gives you the ability to control much of your message.

So with that background in mind, we wanted to go through what you can and cannot do as far as communications prior to and during the offering. Unfortunately, there are a lot of limitations. Securities law is a very highly regulated area and this is not like doing a Kickstarter campaign. Also, bear in mind this is a changing regulatory environment. We put together this guide based on existing law, the SEC’s interpretations that it put out on May 13, and numerous conversations with the SEC Staff. As the industry develops, the Staff’s positions may evolve.

We do understand that the restrictions are in many cases counter-intuitive and don’t reflect the way people communicate these days. The problems derive from the wording of the statute as passed by Congress. The JOBS Act crowdfunding provisions are pretty stringent with respect to publicity; the SEC has “interpreted” those provisions as much as possible to give startups and small businesses more flexibility.

What you can say before you launch your offering

Before the point at which you file your Form C with the SEC, you can’t make any “offers” of securities, either publicly or privately. Remember that the SEC interprets the term “offer” very broadly. So no meetings with potential investors, or giving out any information on forums which offer “sneak peeks” or “first looks” at your offering. No public announcements about the offering. And especially no discussions at a conference or a demo day about your intentions to do a crowdfunding offering. Any communication made prior to filing the Form C may be construed as an unregistered offer of securities made in violation of Section 5 of the Securities Act — a “Bad Act” that will prevent you from being able to use Regulation CF, Rule 506, or Regulation A in the future.

Prior to publicly filing the Form C, you are limited to communications that don’t mention the offering at all (regardless of whether you mention any specific terms of the offering or not), and which don’t “condition the market” for the offering. “Conditioning the market” is any activity that raises public interest in your company, and could include suddenly heightened levels of advertising, although regular product and service information or advertising (see discussion below) is ok. This means no “coming soon” and no hints or winks.

Normal advertising of your product or service is permitted as the SEC knows you have a business to run. However, if just before the offering all of sudden you produce five times the amount of advertising that you had previously done, the SEC might wonder whether you were doing this to stir up interest in investing in your company. If you plan to change your marketing around the time of your offering (or if you are launching your company at the same time as your CF offering, which often happens), it would be prudent to discuss this with your counsel so that you can confirm that your advertising is consistent with the SEC’s rules.

Genuine conversations with friends or family about what you are planning to do and getting their help and input on your offering and how to structure it, are ok, even if those people invest later. You can’t be pitching to them as investors though.

What you can say after you launch

After you launch your offering by filing your Form C with the SEC, there are only two types of communication permitted outside the platform:

  • Communications that don’t mention the “terms of the offering”; and
  • Communications that just contain “tombstone” information.

Communications that don’t mention the terms of the offering

We are calling these “non-terms” communications in this memo, although you can also think of them as “soft” communications. “Terms” in this context are the following:

  • The amount of securities offered;
  • The nature of the securities (i.e., whether they are debt or equity, common or preferred, etc.);
  • The price of the securities; and
  • The closing date of the offering period.

There are two types of communication that fall into the non-terms category.

First, regular communications and advertising. You can still continue to run your business as normal and there is nothing wrong with creating press releases, advertisements, newsletters and other publicity to help grow your business. If those communications don’t mention any of the terms of the offering, they are permitted. Once you’ve filed your Form C, you don’t need to worry about “conditioning the market.” You can ramp up your advertising and communications program as much as you like so long as they are genuine business advertising (e.g., typical business advertising would not mention financial performance).

Second, and more interestingly, offering-related communications that don’t mention the terms of the offering. You can talk about the offering as long as you don’t mention the TERMS of the offering. Yes, we realize that sounds weird but it’s the way the statute (the JOBS Act) was drafted. Rather than restricting the discussion of the “offering,” which is what traditional securities lawyers would have expected, the statute restricts discussion of “terms,” and the SEC defined “terms” to mean only those four things discussed above. This means you can make any kind of communication or advertising in which you say you are doing an offering (although not WHAT you are offering; that would be a “term”) and include all sort of soft information about the company’s mission statement and what it will use the money for and how the CEO’s grandma’s work ethic inspired her drive and ambition.

You can link to the platform’s website from such communications. But be careful about linking to any other site that contains the terms of the offering. A link (in the mind of the SEC) is an indirect communication of the terms. So linking to something that contains terms could mean that a non-terms communication becomes a tombstone communication that doesn’t comply with the tombstone rules. This applies to third-party created content as well. If a third-party journalist has written an article about how great your company is and includes terms of the offering, linking to that article is an implicit endorsement of the article and could become a statement of the company that doesn’t comply with the tombstone rules.

Whether you are identifying a “term” of the offering can be pretty subtle. While “We are making an offering so that all our fans can be co-owners,” might indirectly include a term because it’s hinting that you are offering equity, it’s probably ok. Try to avoid hints as to what you are offering, and just drive investors to the intermediary’s site to find out more.
Even though non-terms communications can effectively include any information (other than terms) that you like, bear in mind that they are subject, like all communications, to the securities anti fraud rules. So even though you are technically permitted to say that you anticipate launching your “Uber for Ferrets” in November in a non-terms communication, if you don’t have a reasonable basis for saying that, you are in trouble for making a misleading statement.

Tombstone communications

A tombstone is really what it sounds like — just the facts — and a very limited set of facts at that. Think of these communications as “hard” factual information.

The specific rules under Regulation CF allow for “notices” limited to the following:

  • A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act;
  • The name of the intermediary through which the offering is being conducted and a link directing the potential investor to the intermediary’s platform;
  • The terms of the offering (the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period); and
  • Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer.

These are the outer limits of what you can say. You don’t have to include all or any of the terms: “Company X has an equity crowdfunding campaign on Super Portal — Go to www.SuperPortal.com/CompanyX to find out more.” The platform’s address is compulsory.

“Brief description of the business of the issuer” does mean brief. The rule that applies when companies are doing Initial Public Offerings (IPOs) (which is the only guidance we have in this area) lets those companies describe their general business, principal products or services, and the industry segment (e.g., for manufacturing companies, the general type of manufacturing, the principal products or classes of products and the segments in which the company conducts business). The brief description does not allow for inclusion of details about how the product works or the overall addressable market for it, and certainly not any customer endorsements.

“Limited time and availability”-type statements may be acceptable as part of the “terms of the offering.” For example, the company might state that the offering is “only” open until the termination date, or explain that the amount of securities available is limited to the oversubscription amount.

A few “context” or filler words might be acceptable in a tombstone notice, depending on that context. For example, the company might state that it is “pleased” to be making an offering under the newly-adopted Regulation Crowdfunding, or even refer to the fact that this is a “historic” event. Such additional wording will generally be a matter of judgement. “Check out our offering on [link]” or “Check out progress of our offering on [link]” are OK. “Our offering is making great progress on [link]” is not. Words that imply growth, success or progress (whether referring to the company or the offering) are always problematic. If you want to use a lot of additional context information, that information can be put in a “non-terms” communication that goes out at the same time and through the same means as a tombstone communication.

The only links that can be included on a tombstone communication are links to the platform. No links to reviews of the offering on Stratifund, Crowdability or Early Investing. No links to any press stories on Crowdfund Insider or CrowdFundBeat. No links to the company’s website. The implicit endorsement principle applies here just as with non-terms communications, meaning that anything you link to becomes a communication by the company.

An important point with respect to tombstone notices is that while content is severely limited, medium is not. Thus, notices containing tombstone information can be posted on social media, published in newspapers, broadcast on TV, slotted into Google Ads, etc. Craft breweries might wish to publish notices on their beer coasters, and donut shops might wish to have specially printed napkins.

What constitutes a “notice”

It is important to note that (until we hear otherwise from the SEC) the “notice” is supposed to be a standalone communication. It can’t be attached to or embedded in other communications. That means you cannot include it on your website (as all the information on your website will probably be deemed to be part of the “notice” and it will likely fail the tombstone rule) and you cannot include it in announcements about new products — again, it will fail the tombstone rule.

We have listed some examples of permissible communications in Exhibit A.

Websites
It’s a bad idea to include ANY information about the terms of the offering on your website. However, some issuers have found a clever solution: you can create a landing page that sits in front of your regular website. The landing page can include the tombstone information and two options: either investors can continue to your company’s regular webpage OR they can go to the platform to find out more about the offering on the platform. We have attached sample text for landing pages on Exhibit A.

“Invest now” buttons

Under the SEC’s current interpretations as we understand them, having an “invest now” button on your website with a link to the platform hosting your offering is fine although you should not mention any terms of the offering on your website unless your ENTIRE website complies with the tombstone rule. Most of them don’t.

Social Media

As we mention above, the medium of communication is not limited at all, even for tombstone communications. Companies can use social media to draw attention to their offerings as soon as they have filed their Form C with the SEC. Social media are subject to the same restrictions as any other communications: either don’t mention the offering terms at all or limit content to the tombstone information.

Emails

“Blast” emails that go out to everyone on your mailing list are subject to the same rules as social media: either don’t mention the offering terms at all or limit content to the tombstone information. Personalized emails to people you know will probably not be deemed to be advertising the terms of the offering, so you can send them, but be careful you don’t give your friends any more information than is on the platform — remember the rule about giving everyone access to the same information.

Images

Images are permitted in tombstone communications. However, these images also have to fit within the “tombstone” parameters. So brevity is required. Publishing a few pictures that show what the company does and how it does it is fine. An online coffee table book with hundreds of moodily-lit photos, not so much. Also, a picture tells a thousand words and those words better not be misleading. So use images only of real products actually currently produced by the company (or in planning, so long as you clearly indicate that), actual employees hard at work, genuine work space, etc. No cash registers, or images of dollar bills or graphics showing (or implying) increase in revenues or stock price. And don’t use images you don’t have the right to use! (Also, we never thought we’d need to say this, but don’t use the SEC’s logo anywhere on your notice, or anywhere else.)

While the “brevity” requirement doesn’t apply to non-terms communications, the rules about images not being misleading do.

Videos

Videos are permitted. You could have the CEO saying the tombstone information, together with video images of the company’s operations, but as with images in general, the video must comport with the tombstone rules. So “Gone with the Wind” length opuses will not work under the tombstone rule, although they are fine with non-terms communications.

Updates and communications to alert investors that important information is available on the platform

Updates can and should be found on the platform. You can use communications that don’t mention the terms of the offering, to drive readers to the platform’s site to learn about updates and things like webinars hosted on the platform. They may include links to the platform. Updates that include information as to the progress of the offering are permitted as “non-terms” communications, but please be careful about wording. “We have raised 25% of our target on SuperPortal” is ok, while “We have raised 25% of our $1 million target” is not.

Press releases

Yes, they are permitted, but they can’t contain very much. Press releases are also laden with potential pitfalls, as we discuss below. Press releases that mention the offering terms are limited to the same “tombstone” content restrictions that apply to all notices. Companies may say that they are pleased (or even thrilled) to announce that they are making a crowdfunding offering but the usual quotes from company officers can’t be included (unless those quotes are along the lines of “ I am thrilled that Company will be making a crowdfunding offering,” or “Company is a software-as-a-service provider with offices in six states”). The “about the company” section in press releases is subject to the same restrictions and if the press release is put together by a PR outfit, watch out for any non-permitted language in the “about the PR outfit” section of the press release (nothing like “Publicity Hound Agency is happy to help companies seeking crowdfunding from everyday investors who now have the opportunity to invest in the next Facebook”).
You could also issue non-terms press releases that state you are doing an offering (and you can identify or link to the platform) but doesn’t include terms and still include all the soft info, including quotes, mission statements and deep backgrounds. It’s likely, though, that journalists would call asking “So what are you offering, then?” and if you answer, you are going to make your non-terms communication into communication that fails the tombstone rule.

Press interviews and articles

Interviews with the media can be thorny because participation with a journalist makes the resulting article a communication of the company. In fact, the SEC Staff have stated that they don’t see how interviews can easily be conducted, because even if the company personnel stick to the tombstone information (which would make for a pretty weird interview), the journalist could add non-tombstone information later, which would result in the article being a notice that didn’t comply with the tombstone rule.

The same thing could happen with interviews where the company tries to keep the interview on a non-terms basis. The company personnel could refrain from mentioning any terms (again, it’s going to be pretty odd saying, “Yes, we are making an offering of securities but I can’t say what we are offering”), but the first thing the journalist is going to do is get the detailed terms from the company’s campaign page on the platform’s site, and again the result is that the article becomes a non-complying notice.

These rules apply to all articles that the company “participates in.” This means that if you (or your publicists) tell the press, “Hey, take a look at the Company X crowdfunding campaign” any resulting article is probably going to result in a violation of the rules. By you.

Links to press articles are subject to all the same rules discussed in this memo. If you link to an article, you are adopting and incorporating all the information in that article. If the article mentions the terms of the offering then you can’t link to it from a non-terms communication (such as your website) and if it includes soft non-terms information, then you can’t link to it from a tombstone communication. And if it includes misleading statements, you are now making those statements.

Remember that prior to the launch of the offering you should not be talking about your campaign with the press (or publicly with anyone else). If you are asked about whether you are doing a campaign prior to launch you should respond with either a “no comment” or “you know companies aren’t allowed to discuss these matters.” No winking (either real or emoji-style.)

Press articles that the company did not participate in

In general, if you (or your publicists) didn’t participate in or suggest to a journalist that he or she write an article, it’s not your problem. You aren’t required to monitor the media or correct mistakes. However, if you were to circulate an article (or place it or a link to it on your website), then that would be subject to the rules we discuss in this memo. You can’t do indirectly what you can’t do directly.

Also, if you add (or link to) press coverage to your campaign page on the platform’s site, you are now adopting that content, so it had better not be misleading.

Demo days

Demo days and industry conferences are subject to many of the same constraints that apply to press interviews. In theory, you could limit your remarks to a statement that you are raising funds through crowdfunding, but in reality people are going to ask what you are selling. You could say “I can’t talk about that; go to SuperPortal.com,” but that would lead to more follow-up questions. And following the tombstone rules means you can’t say too much about your product, which rather undermines the whole purpose of a demo day.

“Ask Me Anythings”

The only place you can do an “Ask Me Anything” (AMA) that references the terms of the offering is on the platform where your offering is hosted. You can’t do AMAs on Reddit. Unless you limit the AMA to non-terms communications or tombstone information. In which case, people aren’t going to be able to ask you “anything.”

Product and service advertising

As we mentioned above, once you’ve filed your Form C, ordinary advertising or other communications (such as putting out an informational newsletter) can continue and can even be ramped up. Most advertising by its nature would constitute non-terms communication, so it couldn’t include references to the terms of the offering. So don’t include information about your offering in your supermarket mailer coupons.

What about side by side communications?

You are doubtless wondering whether you could do a non-terms Tweet and follow it immediately with a tombstone Tweet. It appears, at least for the moment, that this works. There is the possibility that if you tried to put a non-terms advertisement right next to a tombstone advertisement in print media or online, the SEC might view them collectively as one single (non-complying) “notice”. It is unclear how much time or space would need to separate communications to avoid this problem, or even whether it is a problem.

“Can I still talk to my friends?”

Yes, you can still talk to your friends face to face at the pub (we are talking real friends, not Facebook friends, here) and even tell them that you are doing a crowdfunding offering, even before you file with the SEC. You aren’t limited to the tombstone information (man, would that be a weird conversation). After you’ve launched the offering, you can ask your friends to help spread the word (that’s the point of social media) but please do not pay them, even in beer or donuts, because that would make them paid “stock touts.” Don’t ask them to make favorable comments on the platform’s chat board either, unless they say on the chat board that they are doing so because you asked them to. If they are journalists, don’t ask them to write a favorable piece about your offering.

“What if people email me personally with questions?”

Best practice would be to respond “That’s a great question, Freddie. I’ve answered it here on the SuperPortal chat site [link]”. Remember the Congressional intent of having all investors have access to the same information.

Links

As we’ve seen from the discussion above, you can’t link from a communication that does comply with the rule you are trying to comply with to something that doesn’t. So for example, you can’t link from a Tweet that doesn’t mention the offering terms to something that does and you can’t link from a tombstone communication to anything other than the platform’s website.

Emoji

Emoji are subject to antifraud provisions in exactly the same way as text or images are. The current limited range of emoji and their inability to do nuance means that the chance of emoji being misleading is heightened. Seriously people, you need to use your words.

After the offering

These limitations only last until the offering is closed. Once that happens you are free to speak freely again, so long as you don’t make any misleading statements.

And what about platforms?

The rules for publicity by platforms are different, and also depend on whether the platform is a broker or a portal. We’ll be doing a separate memo for them.

CrowdCheck is not a law firm, the foregoing is not legal advice, and even more than usual, it is subject to change as regulatory positions evolve. Please contact your lawyer with respect to any of the matters discussed here.
©CrowdCheck, Inc. 2016

Exhibit A
Sample Tombstones:
 Company X, Inc.
[Company Logo]
Company X is a large widget company based in Anywhere, U.S.A. and incorporated on July 4, 1776. We make widgets and they come in red, white, and blue. Our widgets are designed to spread patriotic cheer.

We are selling common shares in our company at $17.76 a share. The minimum amount is $13,000 and the maximum amount is $50,000. The offering will remain open until July 4, 2017.

This offering is being made pursuant to Section 4(a)(6) of the Securities Act.

For additional information please visit:
https://www.SuperPortal.com/companyx

  • Freddy’s Ferret Food Company is making a Regulation CF Offering of Preferred Shares on FundCrowdFund.com. Freddy’s Ferret Food Company was incorporated in Delaware in 2006 and has its principal office in Los Angeles, California. Freddy’s Ferret Food Company makes ferret food out of its four manufacturing plants located in Trenton, New Jersey. Freddy’s Ferret Food is offering up to 500,000 shares of Preferred Stock at $2 a share and the offering will remain open until February 2, 2016. For more information on the offering please go to www.fundcrowdfund.com/freddysferretfoodcompany.

Sample “non-terms” communications

We are doing a crowdfunding offering! We are going to use the proceeds of our offering to Make America Great Again by selling a million extra large red hats and extra small red gloves with logos on them, and to bring jobs back to Big Bug Creek, Arizona. The more stuff we make, the greater our profits will be. We think we are poised for significant growth. Already we’ve received orders from 100,000 people in Cleveland. Invest in us TODAY, while you still can and Make Capitalism Great Again! [LINK TO PLATFORM].

  • Feel the “Burn”! We are making a crowdfunding offering on SuperPortal.com to raise funds to expand our hot sauce factory. Be a part of history. Small investors have been screwed for years. This is your chance to Stick it to the Man and buy securities in a business that has grown consistently for the last five years.

Sample Communications on Social Media:

Note all these communications will have a link to the platform.
Company Y has launched its Crowdfunding campaign, click here to find out more.
Interested in investing in Company Y? Click here.

Sample Landing Pages:
Come hither, come all.
Thanks to Regulation CF, now everyone can own a stake in our widget maker.
[Button] Invest in our Company
[Button] Continue to our Website

sarahanks

Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. Crowd Check provides due diligence and compliance services for online alternative securities offerings. Its services help entrepreneurs and project sponsors through the disclosure and due diligence process, give investors the information they need to make an informed investment decision and avoid fraud and help intermediaries avoid liability. Sara’s prior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world.Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process. Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Advisory Council on Small and Emerging Companies. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.

 

4 Crowdfunding Tips for Women Entrepreneurs

By Rayanne Dany CrowdfundBeat Media Gust Post.

When joining the entrepreneurial journey as a woman, you must be well aware of the fact that how difficult it is to make your mark as an entrepreneur in the male-dominated world of business. It is also a fact that most male funders are notoriously slow in investing in women-led startups.

 

crowdfundingLuckily, women don’t have to stick to the traditional ways of finding the funds for their business. There is Crowdfunding for them, and it is getting popular every passing year.

Crowdfunding is a great way for women to pave their way into the business realm. There are two ways of going about it: rewards-based or through equity. For a reward based funding method, you send a product or any service of your company in exchange for the money.

For equity, you can simply ask your funders to buy stocks of your company. This way, they’ll have a fair share and the proper know-how.

Below are a few ways you can run a crowdfunding campaign successfully.

1. Social Networking Platforms
Build a strong network of followers. The majority of your crowdfunded money comes from the people who know you directly or through connections.  They are the ones who take a special interest in what you’re doing. You also need their help to help you make your campaign go viral.

Before you head out to a crowdfunding platform, you should already have a social media pages devoted to your cause. Gain a following by interacting with the people. Get a strong hold and backing. But don’t stop here.

Promote yourself and your cause through other, traditional means as well. Take the opportunity to connect with your community in public events.  You can also speak about causes which you are connected to, and like-minded people will rally to support you.

2. Do a Thorough Research
Make sure that you choose a platform that put your idea in front of the right target audience. It will help if the platform particularly targets your cause and generates good traffic. Carefully research the benefits and services they provide.

Do your homework well, and see what’s best for the business. Is it reward based, equity or security? Is it targeted towards other women?

You can also see what the other companies are doing on that platform. To get yourself familiar with the process, fund a small amount to a cause you are interested in. This will help you put yourself in your customer’s shoes.

3. Effective Communication
Be sure to communicate well with your audience. It can be in terms of sales tax or new developments. Keep your audience updated with all the current happenings in your startup or cause.

Make a convincing business plan because it will help you engage well with your customers. Keep in mind that all your efforts should effectively communicate your message with your audience. For instance, if you’re planning to offer True assignment help to school girls, your message needs to highlight this point.

You must keep in mind that you are not employing a traditional method where you pitch in your ideas to venture capitalists before speaking out in public. You are looking forward to grabbing the attention of a crowd that is a mix of both professionals and volunteers looking to put their money for the right cause.

4. Goals
Plan what goals you hope to achieve and how you would achieve them. Your efforts are determined by your passion. Properly plan how everything should be executed and how you hope to communicate. Make sure your audience understands your goals.

If you’re making a video, it should be short, clear and concise. If it’s more than three minutes, it might not make that much of an impact. If it is a message that takes no more than a minute for it to be conveyed but your video is taking more than 1 minute, you’re not doing it right.

Women mostly fund other women, so it’d help if your goal is to target the women audience too. Recognize the hole in the market and fill it.

 

By crowdfunding, you manage to evade through the prejudice held against women startup businesses. Being a woman, you can get offered special benefits, allowing you to bypass male funders.

You can directly reach out to friends, family, colleagues, and other like-minded people. All you need to have is a convincing power and the ability to sway other people to your cause.

 “When you’re trying to influence, persuade or convince people, nothing is more powerful than a good story,” says Donna Cravotta, CEO of Social Sage PR.

By Line: Rayanne Dany is a growth hacker currently working for a tech startup. When not working, he spends his time writing blogs on topics related to business growth, fundraising, etc.

Crowdfunding with Self Directed IRA?

Lending Club, Well that was unexpected.

By Bo Brustkern, CEO NSR Invest, Crowdfund Beat Gust Post,

I certainly didn’t think I would be reading about Renaud Laplanche’s resignation as CEO of Lending Club while drinking my morning coffee last Monday. Since then, the news hasn’t gotten any better and emotions are… shall we say, running high? Here at NSR Invest we have fielded a large number of calls from anxious investors over the past several days, so in lieu of our traditional monthly newsletter I figure let’s just talk about Lending Club.

But before I weigh in, I need you to keep a couple things in mind. First, this short missive can only scratch the surface of the issues at hand. It is a summary of events as they have been reported, together with a few of my thoughts as of this moment. Second, this is a dynamic situation and facts and perceptions are surely going to change rapidly and continuously for many weeks to come. What I say today may not apply to tomorrow’s situation, to tomorrow’s facts, to tomorrow’s revelations. What’s more, there are always at least two sides to any story, and at this point it feels like we have only one: the alarmist. Or half of one: the alarmist who is still coming up to speed on the story.

To recap, here’s a brief overview of what we understand happened at Lending Club that led to the ousting of Renaud. Note that essentially all of this has already been reported in the media, and we have made no effort to independently verify any of the below “facts,” nor have we received the benefit of hearing the other side(s) of the story.

What we think we know

  1. Renaud Laplanche, CEO of Lending Club, apparently made an investment in a fund that purchases loans from Lending Club. Doing this creates a conflict of interest, as Lending Club is supposed to remain neutral when it comes to serving its client-investors. If Renaud is invested in one of his clients, can he remain truly neutral?
  2. Renaud apparently requested that the Board of Directors (BoD) approve an investment by Lending Club in the same fund. This only exacerbates the conflict of interest. What’s more, Renaud apparently did not notify the board that he had already invested in the fund. From the company’s recently filed 10Q we learn that “The Board did not have the information required to review and approve or disapprove investments made by its former CEO… in accordance with Company policies, including the Code of Conduct and Ethics.”
  3. After years of saying no to securitization, the company began working with a prominent investment bank, Jefferies, to put together loan portfolios that could be securitized and sold, which supported Lending Club’s growth plans. As part of this effort, Jefferies required Lending Club to enhance its disclosures to borrowers, making more prominent a Power of Attorney (PoA) clause. This Lending Club faithfully did. Later, however, a staff engineer was allegedly ordered by a Senior VP to change the origination dates on $3 million worth of loans that were allocated to the Jefferies securitization portfolio, possibly to obfuscate the fact that the loans were not originated in accordance with the new PoA clause; upon investigation, it was discovered that in total $22 million in notes allocated to Jefferies did not meet Jefferies’ requirements. Lending Club later reversed the transactions and allocated the loans to other investors, but the breach of contract — and confidence — was recognized.
  4. According to the Wall Street Journal, LC’s BoD “was presented with evidence that Mr. Laplanche knew many of the details of the $22 million loan sale and wasn’t upfront with directors about what he knew.” Naturally, this would have caused great discomfort at the board level.
  5. On Friday, May 6, Renaud was asked by the BoD to resign, and at least three of his lieutenants were summarily dismissed. Scott Sanborn, who had been President of Lending Club, became also Acting CEO while Hans Morris of Nyca Capital assumed the role of Chairman of the Board.

So that’s what we “know” about the situation at Lending Club. To sum it up, it sounds like Renaud made some bad decisions related to conflicts of interest and compliance, and he and/or his lieutenants got caught manipulating data in the loan book. If all of this is true, then my deepest concern is that some members of the LC team chose (and were able) to tamper with the data provided to investors. This is of grave concern to me because our loan selection system at NSR Invest is only as reliable as the data we receive. In other words, if Lending Club were to send us inaccurate data, then our system could very likely make an imprudent judgment about which loans to buy for our clients.

We’ll dig deeper there in a sec, but for the moment let me underscore a very important point: in my opinion, none of these apparent transgressions contradict the basic tenets of the Lending Club model, which is to provide responsibly structured, lower-cost loans to borrowers while providing uncorrelated, higher-yielding investment opportunities to lenders. Nothing here undermines the clear market need for p2p lending. In the words of the inimitable Dara Albright, people are “not going to suddenly start liking banks more than root canals.” While these are sad days indeed for our friends at Lending Club, I perceive no Achilles Heel in the p2p lending industry.

So if the model works, and the credits are good, and the data is reliable, then what we have here is a headline-grabbing corporate governance scandal and conflicts-management problem. With this perspective, we can continue purchasing Lending Club loans with confidence, and we are doing that very thing for ourselves and for our clients.

Confidence

Every day after the scandal broke we engaged in countless conversations with investors, partners, and key players in the space about the scandal, and what it means for Lending Club, for investors and borrowers, and for our industry. And while everyone was shocked and dismayed, there was also a certain feeling of confidence shining forth… an “our industry is going to come out stronger as a result” kind of sentiment.

“The FinTech train has long left the station and there is no turning back. The earth doesn’t spin in reverse. What we are experiencing now is the natural evolution of an industry. In order to evolve, we must err. Stumbling is how we learn and grow. This is nothing new. Mankind has been advancing in this manner for centuries.”
— Dara Albright, co-Founder of the LendIt Conference, One scandal does NOT mean that marketplace lending is over, CNBC
And then on May 16, Acting CEO Scott Sanborn, a well-respected executive with a long tenure at LC, issued a letter to investors through Lending Club’s investor relations department, asserting that a Big Four accounting firm had been retained to conduct “forensic data change analysis” on 673,000 loans sold to investors over the past 8 quarters, and “99.99%… display either no changes or changes explained by the normal course of business.” While the results of the audit are not yet complete, they are indeed encouraging. In fact, the audit simply re-confirms the due diligence performed by presumably scores of institutional investors like Banco Santander, Morgan Stanley, BlackRock, and others, prior to collectively pouring billions of investment dollars into loans originated by Lending Club.

The sentiment of confidence was echoed In a recent post on the Lend Academy blog, where Peter Renton wrote, “Lending Club’s business model is about providing a lower rate of interest to American borrowers using a more responsible structure than credit card-style revolving debt, and at the same time providing a high return by passing through 99% of the cash flows (that’s 100% minus a 1% servicing fee) to investors. Lending Club’s underwriting model – the way in which it selects loans to list on its marketplace – has absolutely nothing to do with the recent events that ended in the resignation of its CEO and founder.”

What the data tells us 

In addition to all the grief Lending Club is going through, the media has also been bashing the purportedly surprising increase in credit defaults at both LC and Prosper. Makes for a nice headline, but where this conclusion comes from I don’t rightly know. It’s not what the data tells us.

We used NSR Platform to conduct a study of the loss rates for quarterly cohorts from 2009 to present. Our analysis examined the six-month loss figures across all loans originated by Lending Club and Prosper for each quarterly cohort. By comparing losses at a fixed age, we can quickly assess whether there is a material difference in performance during the early stages of portfolio maturation, when losses can lead to material detrimental effects to returns.

Note that the “Loss Rate” in this analysis is the NSR-estimated projected loss based on a loan status analysis 6 months after origination. These aren’t the final loss numbers for the cohorts, but a snapshot at a given point in time.
Note also that the “Average Rate” for Lending Club and Prosper are heavily influenced by the blend of loan grades originated for each platform for each cohort.

This test does not perfectly isolate underwriting, and can be impacted by many variables, including macro-economic impacts such as employment rates. However, it’s a reasonable way to quickly establish whether the results of Lending Club’s or Prosper’s underwriting has materially changed from one quarter to the next. And we conclude: it hasn’t. You can easily see that, contrary to media opinion, recent vintages are showing strong performance.

Press Contributions

For a detailed review of the reported events that led up to the sacking of Renaud, readInside the Final Days of Lending Club CEO Renaud Laplanche in the Wall Street Journal by Peter Rudegeair and Annamaria Andriotis with contributions from Michael Rapoport.

To read Lending Club’s official response, which can be found on their Investor Relations website, check out this two-page investor letter from President and Acting CEO Scott Sanborn, which explains the rigorous internal controls testing the company has conducted, along with its quick response to the crisis. In it Scott pledges, “The problems identified this quarter run counter to our values and will never be tolerated. We’re working hard to make things right and prove to you that we continue to deserve your trust.”

Nav Athwal of Forbes offers this opinion in the article Lending Club and What it Means for FinTech: “This is an unfortunate development, but it doesn’t erase the solid foundation and talented teams that most fintech companies, including Lending Club, have built over the last decade. Fintech will not only survive, but thrive, largely because the business model these pioneers developed is still sound.”

Kadhim Shubber of the Financial Times has this more sobering report on What happens if Lending Club goes out of business?, in which he extensively covers the difference between owning a loan and owning a borrower-payment dependent note, as is typical for individual investors who invest through Lending Club.

Mr Shubber also wrote in the FT Who knew what at Lending Club?, in which he unpacks some of the more salient footnotes that appear in LC’s 10Q filing, which posted on Monday, May 16, for the period ending March 31, 2016.

Stone Fox Capital wrote Lending Club: Death Watch Value and posted it on Seeking Alpha, arguing that LC “now trades at a death watch valuation despite no fundamental change to the performance of the loans on the platform.”

My partner Peter Renton wrote a piece called Why I am Keeping My Money in Lending Club for Lend Academy, in which he explains why the governance issues at Lending Club are not affecting his allocations to p2p investments on the LC marketplace. In it he states, “I am very confident that Lending Club loans will continue to perform well despite the governance issues that cropped up and came to light over the past two weeks… nothing in this narrative shakes my confidence in the underlying business model of Lending Club.”

Finally, Dara Albright throws a cold, wet towel on the alarmists with her article One scandal does NOT mean that marketplace lending is over, which appeared on CNBC.

There, that should get you a fair way into — and out of — the sea of information swirling about the industry.

Conclusion

Surely, the foundation of our industry is built on transparency and straight-arrow ethics, and our faith in those pillars has been shaken by recent events. But the peer-to-peer model has not been challenged here. There has been no discovery of a fundamental flaw in the business of originating healthy consumer installment loans. In fact, the apparent transgressions at LC seem to cry out for a return to the fundamentals of the industry: transparency, freedom from conflict, and service to borrowers and lenders.

If we find good in the events of the past several weeks, it will be because Lending Club specifically, and our industry generally, respond to this crisis in a reasonable, considered fashion. It will be because we used this opportunity to recommit ourselves to the heroic ideals that comprise our foundation. It will be because we march onward, putting forth new leaders who will carry the flag and find higher ground.

 

The views and opinions expressed in this article are those of the authors and do notnecessarily reflect the official policy or position of CrowdFund Beat Media Group.

 

 

 

Reg A+ Offering : 8 Tips to Funding Success

By Rod Turner  founder and CEO of Manhattan Street Capital, Crowdfundbeat Guest Editor,

The doors to Reg A+ are now open, with approximately 100 filings, 29 qualified by the SEC, to seek an average $23 million goal. The aggregate capital being sought is now $1.5 billion. The first company to complete a Reg A+ offering, Elio Motors, raised $16.9 millionfrom 6,600 investors at a pre-money valuation of $300 million, and is now listed on the OTCQX.

Reg A+ Offering

 

 

 

 

 

 

 

If you’re considering raising funds with Reg A+, check out the following tips: 

1. Don’t Underestimate The Importance of Consumer Appeal. In private equity, beyond providing enough of the right evidence to prove market validation, the venture capital (VC) investors are the only people you need to impress. In a classic IPO, the marketing and press you can do pre-opening is strictly regulated. But with Reg A+, broader marketing is not only allowed, it will be vital in securing the interest you’ll need to get the investors you require on board. Get the right kind of 360-degree marketing agency in place immediately (which can be surprisingly cost effective when your company is a great “fit” for Reg A+).

Reg A+ is unlikely to be right for your company if your products do not appeal to consumer investors, even if the fundamentals are strong. That is simply because the cost of reaching investors that are attracted to a purely financial return is far higher than for attracting consumer investors. Investors looking for a great return are more likely to wait for Reg A+ to develop a proven track record before acting.

2. Consider this method for raising your up front cash: Angel or VC investors that invest in your company to pay for the cost of the Reg A+ offering can sell their shares in the Reg A+ offering as a reward for them putting up the capital. The percentage of their shares that you offer to make liquid is up to you, the company, to choose. Of course, you cannot guarantee the Reg A+ offering will succeed or that it will reach its maximum. And no more than 30 percent of an offering can be from selling insiders. Typically, there will be a step up in valuation from the Angel/VC round, which can be motivating to the VC or Angel (accredited) investors. There is no Rule 144 holding period restriction on this transaction.

3. Be sure your offering pitch is truly compelling, and plan to launch with high impact marketing. Remember, this is not just about logic and the quality of your team and company; it is about the emotional appeal you create (and your personal credibility). Keep your video short and engaging so the audience watches every second and comes away wanting more. Build momentum rapidly with front-loaded effort. Early traction builds success for the whole campaign.

4. Offer rewards. Attractive awards (similar to those on Kickstarter) can help. A lot in Reg A+

5. Don’t be fooled by the amount of your Test The Waters reservations. Know ahead of time that casually made reservations will overstate the true investment potential on hand. Conservatively compress them down to know where you really stand.

6. Don’t expect rapid results. This is a process that takes time. Your Reg A+ funding will generally take 4-6 months to complete; perhaps the shortest possible time is 90 days if you start the SEC filing and the marketing simultaneously – which I generally do not recommend. The set-up for your TestTheWaters(TM) offering and comprehensive marketing campaign will usually take six weeks.

7. Be careful to keep your valuation at a sensible level. One problem in raising capital from consumer investors is that you may be able to get a valuation that is too high, as they tend to be less valuation sensitive than seasoned angel investors. Yes, you heard that right – you could get more money for less stock in the near term by pushing for the highest valuation possible. But if the valuation isn’t sustainable, your investors will hate you later. You want happy investors who will spread the word about your products and strengthen your brand, for the greatest long-term success.

8. Investor due diligence matters. Be selective about which investors you accept, above and beyond the SEC requirements. Do full due diligence to reduce the risk of future lawsuits and to make for a smoother journey with thousands of shareholders.

With this guidance in hand, you are on the first step to dynamic funding success.

Rod-Turner-headshot-207x200

Rod Turner is the founder and CEO of Manhattan Street Capital, helping successful mid-stage and mature, low risk startups to raise the capital they need to scale faster under the newly-approved criteria of Regulation A+. Turner has played a key role in building six successful companies including Symantec/Norton, Ashton Tate, MicroPort, Knowledge Adventure, and ArtSlant, Inc. He is an accomplished investor who has built a Venture capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris, Ask, and eASIC.

 

 

 

 

 

 

 

 

What “Solicit” Means Under Title III

By Mark Roderick , CrowdFund Beat   Sr. Guest  Contributor, @CrowdfundAttny.

Before the JOBS Act came along, listing a security on a public website would itselfhave been treated as an act of “solicitation.” That’s the odd thing: Title III portals aren’t allowed to “solicit,” yet in the traditional sense of the term that’s the most important thing Congress created them to do.

red-figure_listen-to-me.jpg

 

 

 

 

The fact is that Congress was ambivalent when it created Title III portals. They are allowed to list offerings of securities, but are not allowed to do other things often associated with the sale of securities, including holding investor funds or offering investment advice. They are regulated by the SEC and FINRA, but with a light touch compared with other regulated entities. They are privately-owned, but are required to provide educational materials to investors, police issuers, provide an online communication platform, and ensure that investors don’t exceed their investment limits – in short, they are required to assume a quasi-governmental role.

Title III portals are a new animal, part fish, part bird. Which makes it that much more difficult to decide what “solicit” means when they do it.

Based on the statute, the SEC regulations, the legislative background of the JOBS Act, and the history and overall context of the U.S. securities laws, I think a Title III portal engages in prohibited “solicitation” anytime it tries to steer an investor to a particular security. If it’s not trying to steer an investor to a particular security, then it’s probably okay.

I’ve included some practical guidelines in the chart below. Although there are plenty of gaps, I hope this helps.

Click the following for a print ready version of the complete chart: Rules for Title III Portals

1c53d7e-1-120x120

 

 

 

Mark also maintains a widely-read Crowdfunding blog at crowdfundattny.com. In addition to Flaster/ Greenberg’s Crowdfunding Practice, Mark is also a member of the firm’s Mergers and Acquisitions, Business and Corporate, and Taxation Practice Groups. He represents entrepreneurs and their businesses across a wide range of industries, including technology, real estate and healthcare. Mark holds a Master’s degree in mathematics as well as a J.D. from the University of Virginia. You can reach Mark at 856.661.2265 or mark.roderick@ flastergreenberg.com.

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, : @CrowdfundAttny.

 

 

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 my blog or twitter handle: @CrowdfundAttny

 JOBS Act Regulatory Action Update

 

By Scott Andersen, CrowdfundBeat Guest Contributor, Principal at finLawyer.com

During her keynote address at the 47th Annual Securities Regulation Institute on October 28, 2015, SEC Chairman Mary Jo White reminded us that the securities industry is an industry closely monitored by its regulators.  While the speech focused attention on the dramatic changes in capital raising now permissible through the JOBS Act, White made clear that enforcement investigations and actions were a critical part of the SEC’s monitoring of the industry.

jobs-act

 

 

 

 

 

White stated that enforcement investigations were open and focused on the Rule 506 offering space, focusing on discrete areas such as issuers’ failures to take reasonable steps to verify the accredited status of investors (required by Rule 506(c)), sales to unaccredited investors, and unregistered broker-dealer activity, as well as some instances of fraud.

White did not comment on Reg A investigations, as it is still too early to see the enforcement trends in this area, but we can expect a steady stream of investigations as the SEC police’s industry practices.

FINRA has also been active in the JOBS Act space.  It has been actively monitoring funding platforms websites to ensure the content standards of FINRA’s advertising rules are met.  FINRA has directly reached out to a number of its members to raise issues with marketing practices.

Recently, FINRA issued Regulatory Notice 15-32 which highlighted FINRA filing requirements for Reg A offerings.  In the Notice, FINRA emphasized that broker-dealers’ must meet FINRA advertising standards, including that any communication be fair, balanced and not misleading.  FINRA also suggested that it will carefully review Reg A offerings to ensure that FINRA members  comply with suitability standards.

FINRA shortly will assume a more central role in the JOBS Act industry as the primary regulator of broker-dealers and the newly created “funding portals,” which are required to participate in Title III crowdfunding capital raises.

With all the revolutionary changes triggered by the JOBS Act, the recent speech by White reminds us that the securities industry is highly regulated.  Both the SEC and FINRA are already active in this space, and it is only a matter of time before investigations and enforcement proceedings are constant as the industry continues to mature.  While the JOBS Act provides tremendous opportunity for capital raises, proper precautions and care should be employed to ensure that your capital raising under the JOBS Act is in compliance with the law and sufficient to meet the imminent regulatory scrutiny.

 

187d2c8

About Scott Andersen:
Scott is principal at finLawyer.com and General Counsel of FundAmerica. He was most recently the Deputy Regional Chief Counsel at FINRA, and prior to that was the Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. He concentrates his practice on securities and regulatory law.

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The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.

 

 

 

Q&A on Title III Crowdfunding “Outline for Portals and Issuers”

By Mark Roderick , CrowdFund Beat   Sr. Guest Contributor, 

The JOBS Act was signed into law by President Obama on April 5, 2012. The SEC was supposed to issue regulations under Title III 270 days later, by December 31, 2012. Instead, the SEC issued final Title III regulations last Friday, which will become effective around May 1, 2016, or about 1,466 days after enactment.

But better late than never! In its final regulations the SEC has again bent over backward to make Crowdfunding easier, for example:

  • Liberalizing the financial disclosures required of issuers
  • Clarifying that a Title III offering will not interfere with other exempt offerings
  • Allowing Title III portals to pick and choose among issuers
  • Allowing Title III portals to take financial interests in issuers

Hat’s off the to the SEC staff for doing excellent work with a flawed statute!

CrowdFunding Title III Primer

For those of you who want to read all 686 pages of preambles, regulations, and forms, here’s a link.

This is a brave new world, the transformation and democratization of the U.S. capital formation industry. I am very, very interested to hear what all of you think.

Mark Roderick is speREG A+ Let’s Start the Dancearheading Flaster/ Greenberg’s Crowdfunding Practice. He speaks and writes regularly on Crowdfunding. Expanding on his in-depth knowledge of capital-raising and securities law, Mark represents many portals and other players in the Crowdfunding field, spending much of his day helping entrepreneurs build an entirely new industry from the ground up.

 

Mark also maintains a widely-read Crowdfunding blog at crowdfundattny.com. In addition to Flaster/ Greenberg’s Crowdfunding Practice, Mark is also a member of the firm’s Mergers and Acquisitions, Business and Corporate, and Taxation Practice Groups. He represents entrepreneurs and their businesses across a wide range of industries, including technology, real estate and healthcare. Mark holds a Master’s degree in mathematics as well as a J.D. from the University of Virginia. You can reach Mark at 856.661.2265 or mark.roderick@ flastergreenberg.com.

Emailmark.roderick@flastergreenberg.com

 

SEC Adopts Rules to Permit Crowdfunding FACT SHEET

CrowdFundBeat News Wire,

Today was a monumental day in our industry. 3 1/2 years after the landmark passage of the JOBS Act, the SEC has finally approved the final rules for Title III!  What does that mean for the private investing market?  Well, as of January 2016, our vision of enabling retail investors to invest in the private securities market will become a reality!

Proposes Amendments to Existing Rules to Facilitate Intrastate and Regional Securities Offerings

U.S._Securities_and_Exchange_Commission_headquarters

FOR IMMEDIATE RELEASE
2015-249

Washington D.C., Oct. 30, 2015 —The Securities and Exchange Commission today adopted final rules to permit companies to offer and sell securities through crowdfunding.  The Commission also voted to propose amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings.  The new rules and proposed amendments are designed to assist smaller companies with capital formation and provide investors with additional protections.

Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects.  Title III of the JOBS Act created a federal exemption under the securities laws so that this type of funding method can be used to offer and sell securities.

“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” said SEC Chair Mary Jo White. “With these rules, the Commission has completed all of the major rulemaking mandated under the JOBS Act.”

The final rules, Regulation Crowdfunding, permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits.  The rules also limit the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering, and create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.

The Commission also proposed amendments to existing Securities Act Rule 147 to modernize the rule for intrastate offerings to further facilitate capital formation, including through intrastate crowdfunding provisions.  The proposal also would amend Securities Act Rule 504 to increase the aggregate amount of money that may be offered and sold pursuant to the rule from $1 million to $5 million and apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection.

The SEC is seeking public comment on the proposed rule amendments for a 60-day period following their publication in the Federal Register.

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FACT SHEET

Regulation Crowdfunding

SEC Open Meeting
Oct. 30, 2015

Action

The Securities and Exchange Commission will consider whether to adopt final rules that would allow the offer and sale of securities through crowdfunding.  The recommended rules would give small businesses an additional avenue to raise capital and provide investors with important protections.  If adopted, this would complete the Commission’s major rulemaking mandated under the JOBS Act.

Highlights of the Recommended Final Rules

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions.  More specifically, the recommended rules would:

  • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, than the greater of:
      • $2,000 or
      • 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the recommended rules, certain companies would not be eligible to use the exemption.  Ineligible companies would include non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification under Regulation Crowdfunding, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Securities purchased in a crowdfunding transaction generally could not be resold for one year.  Holders of these securities would not count toward the threshold that requires a company to register its securities under Exchange Act Section 12(g) if the company is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

In addition, all transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.

Disclosure by Companies 

Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with the Commission and provide this information to investors and the intermediary facilitating the offering, including among other things, to disclose:

  • The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.  A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;
  • A description of the business and the use of proceeds from the offering;
  • Information about officers and directors as well as owners of 20 percent or more of the company; and
  • Certain related-party transactions.

In addition, companies relying on the crowdfunding exemption would be required to file an annual report with the Commission and provide it to investors.

Crowdfunding Platforms 

A funding portal would be required to register with the Commission on new Form Funding Portal, and become a member of a national securities association (currently, FINRA).  A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.

The recommended rules would require intermediaries to, among other things:

  • Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;
  • Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
  • Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
  • Provide communication channels to permit discussions about offerings on the platform;
  • Provide disclosure to investors about the compensation the intermediary receives;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a reasonable basis for believing an investor complies with the investment limitations;
  • Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with completion, cancellation and reconfirmation of offerings requirements.

The rules also would prohibit intermediaries from engaging in certain activities, such as:

  • Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

Regulation Crowdfunding would contain certain rules that are specific to registered funding portals consistent with their more limited activities than that of a registered broker-dealer.  The rules would prohibit funding portals from, among other things: offering investment advice or making recommendations; soliciting purchases, sales or offers to buy securities; compensating promoters and other persons for solicitations or based on the sale of securities; and holding, possessing, or handling investor funds or securities.

The rules would provide a safe harbor under which funding portals could engage in certain activities consistent with these restrictions.  The rules also would require funding portals to maintain certain books and records related to their transactions and business.

Background

Crowdfunding is an evolving method of raising money through the Internet, but it has generally not been used to offer and sell securities.  That is because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and an offer or sale of securities must be registered with the SEC unless an exemption is available.

The JOBS Act included an exemption to permit securities-based crowdfunding and established the foundation for a regulatory structure for these transactions.  It also created a new entity – a funding portal – and allows these Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.  The SEC was tasked with adopting rules to implement these provisions, which are intended to facilitate capital raising by small businesses while providing significant investor protections.

Staff Report 

The staff would undertake to study and submit a report to the Commission no later than three years following the effective date of Regulation Crowdfunding on the impact of the regulation on capital formation and investor protection.

What’s Next?

The new rules and forms would be effective 180 days after they are published in the Federal Register, except that the forms enabling funding portals to register with the Commission would be effective January 29, 2016.

FACT SHEET

Proposed Amendments to Facilitate Intrastate and Regional Securities Offerings

SEC Open Meeting
Oct. 30, 2015

Action

The Securities and Exchange Commission is considering whether to propose amendments to Securities Act Rule 147 and Rule 504 of Regulation D.  The proposed amendments would be part of the Commission’s efforts to assist smaller companies with capital formation consistent with its investor protection mission.

Highlights of the Proposed Amendments

Proposed Amendments to Rule 147

The proposed amendments would modernize Rule 147 to permit companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level.  The proposed amendments to Rule 147 would, among other things:

  • Eliminate the restriction on offers, while continuing to require that sales be made only to residents of the issuer’s state or territory.
  • Refine what it means to be an intrastate offering and ease some of the issuer eligibility requirements in the current rule.
  • Limit the availability of the exemption to offerings that are registered in-state or conducted under an exemption from state law registration that limits the amount of securities an issuer may sell to no more than $5 million in a 12-month period and imposes an investment limitation on investors.

Proposed Amendments to Rule 504

The proposed amendments to Rule 504 of Regulation D would increase the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million and disqualify certain bad actors from participation in Rule 504 offerings.  The proposed rules would facilitate capital formation and increase investor protection in such offerings.

Background

The Commission adopted Rule 147 in 1974 as a safe harbor to a statutory intrastate exemption – Section 3(a)(11) – that was included in the Securities Act upon its adoption in 1933.  Market participants and state regulators have indicated that the combined effect of the statutory limitation on offers to persons residing in the same state or territory as the issuer and the prescriptive eligibility requirements of Rule 147 limit the availability of the exemption for companies that would otherwise conduct intrastate offerings.

What’s Next?

The Commission will seek public comment on the proposed rules for 60 days.  The Commission will then review the comments and determine whether to adopt the proposed rules.