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2017 Real Estate Crowdfunding: Surveying the Landscape

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

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

What is Crowdfunding?

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

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

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

Securities-Based Crowdfunding

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

Investing Under Rule 506(c)

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

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

Investing Under Regulation A

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

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

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

Regulation CF

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

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

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

Surveying the Landscape

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

Peer Street

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

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

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

Real Crowd

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

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

Realty Mogul

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

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

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

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

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

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

Realty Shares

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

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

Residential Real Property Sites

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

LendingHome

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

Roofstock

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

Patch of Land

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

Fund That Flip

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

The Future of Real Estate Crowdfunding

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

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

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

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

 

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

 

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

 

[4]           www.peerstreet.com.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

SEC Metrics on Reg A+

On 12/31 the SEC published a report on Reg A activity as of Q3 that has some eye-opening bullets. Here are a few of the key metrics, along with my observations and musings.

  • 147 offering statements filed, of which 81 were qualified (as of the date of the stats)
  • Of the 81 qualified, 49 were Tier 2, 32 were Tier 1
  • 121 days avg time from filing to qualification (Tier 2)
  • 17% used broker-dealers (Tier 2)
  • $18M avg max-raise
  • 20% used “test the waters”
  • 87% equity/13% debt or other offerings
  • $50,000 avg legal costs to file & get qualified
  • $15,000 avg accounting audit costs
  • 50%+ of all issuers are incorporated in either Delaware or Nevada and located in California, Texas, Florida or DC-area
  • Typical issuer had no assets, no revenue, no net income (in other words, they are start-ups)
  • Real estate was dominant, accompanied by financial services

Thoughts on:

Time to qualification, 121 days (Tier 2 avg):
This puts an exclamation mark on the fact that this isn’t a Reg D, which can be launched overnight. If you want to allow non-accredited investors to participate in a large or continuous private offering, and if you want the securities to be free of various restrictions (e.g. Rule 144 on Reg D), then you are going to need to allow for the time it takes to get audited, prepare the offering statement, and go through a 121 day avg SEC qualification process (though I know of several that have been much shorter, it seems to depends upon the experience of the lead attorney).

Broker-Dealer Activity, 17%: This is the most disturbing metric to me. You’d think that every broker-dealer in the country with “private placements” as an approved business line would be jumping on the bandwagon as Reg A is a fantastic Reg D alternative. But they’re not. The reasons, from my experience, are…

  1. Brokers think Reg A’s are IPO’s. As such they expect the issuers to be mature companies that are ready to trade on OTC or NASDAQ. This is completely misguided, of course, as Reg A is simply an “unrestricted (private) security” and should not be confused with an S-1 filing IPO. The fact that it “can” trade on OTC or NASDAQ doesn’t mean it should. Brokers need to view this as a private placement, not an IPO.
  2. FINRA treats Reg A’s like IPO’s. As such they are limiting broker compensation to the same caps as an S-1 of a less risky mature company backed by far more detailed disclosures and easy settlement mechanisms. We hear from many brokers that FINRA’s comp-caps make it impossible for them to justify the risk or work involved in handling a Reg A, so they pass on these; which leaves issuers (and investors) to fend for themselves.
  3. Compliance Education. The internal compliance depts at broker-dealers are not yet up to speed on this type of offering and so are quick to say “no” to deals their investment bankers bring to the table.
  4. Technology. Conducting an online offering is easy in concept, and challenging in execution. The transaction engine, the compliance requirements, the supervisory issues, and the fact that escrow has to manage potentially tens of thousands of individual investors are daunting issues. (of course this is FundAmerica’s primary business, our software makes all this very easy for brokers and escrow agents)

=> Unintended Consequence: this is a situation where issuers could really use the guidance of a regulated broker-dealer, and the market and investors would be better for it. But regulators and compliance issues have caused issuers to say “no thanks, too much hassle, I’ll do this on my own.” In an age of General Solicitation, brokers are an optional expense/luxury as far as many companies are concerned, and with unclear or oppressive regulations they often (83% of the time) just skip it altogether.

Tier 1 Offerings, 40%. Stunning really, considering people filing under Tier 1 almost always have to get audited financials (as some states require them, e.g. CA), they have to pay filing fees that they could avoid with Tier 2, and they subject themselves to what can be extraordinarily painful “merit review” by some states.

Equity/Debt, 97% to 13%. This is a misleading metric and doesn’t really explain what’s happening or what investors are buying (in successful offerings). For instance, the equity sold in the Reg A’s for Realty Mogul* and American Homeowners Preservation* pay investors a defined income stream and have articulated exit mechanisms; Brewdog* investors feel they are buying into a culture; Elio Motor’s* fans (oh, I mean “investors”) were passionate about the concept and the mission; Fig* investors are excited about the games and projects. So the vast majority of successful Reg A’s have some sort of defined returns and/or benefits for investors that make them more than just equity securities being bought based upon technical merits and potential market gains. It’s critical that issuers, brokers and others in this market grasp this essential point, as we’ve seen several Reg A’s fail that did not do a good job with this.
* note that all of these companies are customers of FundAmerica, I cite them here only to illustrate a general point and am NOT making a recommendation or providing advice as regards their securities.

Test The Waters, 20%. This isn’t surprising, as the current method of testing the waters is clearly broken. This will be fixed with technology and the number will increase.

In summary, it’s apparent that 2016 was a fantastic first year for Reg A+. At FundAmerica our technology was used in over $300M worth of online investment transactions, including tens of thousands of investments and millions of dollars from Reg A buyers. With continued education, with more issuers successfully raising funds, and with the new Reg CF now taking care of the smallest, least-prepared issuers, it seems clear that the use of Reg A will grow exponentially in the coming years.

Best Regards,

 Scott Purcell
CEO
FundAmerica, LLC

 

About the Author: Scott Purcell is the CEO of FundAmerica, a fintech services provider to the emerging equity and debt crowdfunding industry. His firm provides escrow, payment processing, and compliance technology for numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the  JOBS Act. FASTransfer is the only tech-driven SEC registered transfer agent focused on the crowd-industry. He is a founding Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. I am not advocating, advising or recommending anyone purchase any specific or general investment of any type, ever. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.

NextGen Crowdfunding Video Awards

Crowdfund Beat News Wire,

Public Will Vote on First Round of Contestants to Determine Winners of New Online Awards Shows

LOS ANGELES–(BUSINESS WIRE)–NextGen Crowdfunding®, the leading company that helps people explore new types of crowdfunding, announces the season one premiere of the Crowdfunding Video Awards (CVAs). This new, six-part series of online awards shows will showcase videos from both rewards-based crowdfunding campaigns featured on Indiegogo, Kickstarter and other platforms, as well as equity crowdfunding campaigns.

“The campaign videos we’ll be showing viewers over the course of this season showcase creativity, passion and the entrepreneurial spirit.”

winny-trophy-solo_ngsd_card_720a

Season one kicks off on Wednesday, January 25 with a live-online show at 3:00pm PT/ 6:00pm ET. Viewers will log on to NextGenCrowdfunding.com to watch and vote on their favorite crowdfunding campaign videos. The first season of the CVAs will include five preliminary awards shows, and will culminate in a final seasonal awards show highlighting the best videos of the season as voted on by the public.

“We received a wide variety of submissions from crowdfunding campaigns — spanning industries from technology to pets to wellness — to participate in the first season of the Crowdfunding Video Awards,” said NextGen founder Aubrey Chernick. “The campaign videos we’ll be showing viewers over the course of this season showcase creativity, passion and the entrepreneurial spirit.”

The contestants that will be showcased during the first round of the Crowdfunding Video Awards include:

  1. Codeybot by Makeblock: Makeblock is an open-source Arduino robot building platform to turn ideas into success.
  2. Cowin Ark by Cowin Music: Innovative audio company pioneering revolutionary Bluetooth speaker design.
  3. Flash Porter by DFiGear: Flash Porter lets you quickly and easily backup your precious digital photos and videos from any device – smartphones and digital cameras.
  4. FlowMotion by FlowMotion: FlowMotion ONE – Capture smooth cinematic videos with your smartphone. Auto-follow tracking, motion time-lapse, and so much more.
  5. High-End Theater by XGIMI H1: High-end Theater with 5 minute setup | 1080p LED Projects Up To 300″, Transform 2D Film Into 3D, Android OS.
  6. Limitless Phone Case by Mous: Whether you drop your iPhone from your pocket or from 45ft, Limitless cases will protect your phone from breaking.
  7. Modobag by Modobag: Modobag is the World’s First Motorized, Rideable Luggage and is changing the way people travel.
  8. Piqapoo by Piqapoo: A team of dog lovers that love their dogs but not picking up after them.
  9. PowerFilm: The revolutionary solar panel with an integrated battery to charge your devices anywhere, anytime.
  10. ZEEQ Smart Pillow by REM-Fit: REM-Fit is a team of dedicated individuals who believe in a restful night’s sleep. We all know that sleep is often put to the wayside in our busy lives.

Supporters of NextGen’s CVAs include the Crowdfunding Professional Association (CFPA), an organization supporting the growth of the crowdfunding industry, as well as the crowdfunding portals OurCrowd, SeedInvest, StartEngine, Republic and WeFunder and media companies Crowdfund Beat and Crowdfund Insider.

To learn more about the contestants participating in the first CVAs show, please click here.

About NextGen Crowdfunding

NextGen Crowdfunding helps people explore the new era of equity crowdfunding. With unique in-person events and live streaming video content, NextGen enables individuals to discover, research and support specific companies launching crowdfunding campaigns. NextGen’s unique Ignition Events showcase the companies and emerging businesses presenting equity crowdfunding campaigns. NextGen also provides educational content, including online webinars, boot camps and videos, to inform the public about equity crowdfunding. NextGen also provides education to, and visibility for, companies with crowdfunding campaigns. As a purpose-driven company, NextGen aims to encourage entrepreneurship and help spark a new economy. Visit http://www.nextgencrowdfunding.com.

Contacts

Media
For NextGen Crowdfunding
Jason Feldman, 212-319-3451, ext. 644
jason@goldin.com

Targeted IRRs in Crowdfunding

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

 

Closeup sad young man with worried stressed face expression and brain melting into lines question marks. Obsessive compulsive, adhd, anxiety disorders
Closeup sad young man with worried stressed face expression and brain melting into lines question marks. Obsessive compulsive, adhd, anxiety disorders

Targeted internal rate of return, or IRR, is used widely to advertise deals on Crowdfunding sites, real estate and otherwise. While target IRR means something to sophisticated sponsors and investors, its widespread and uncritical use makes me a little uneasy, for the following reasons:

  • If pressed, many people don’t know what IRR really means. Investors assume that a higher IRR is better than a lower IRR, but many couldn’t explain exactly why or how.
  • IRR can be misleading. For example, a bond purchased for $100 that pays interest of $10 at the end of each of the first four years and $110 at the end of the fifth year has an IRR of 10%. A bond purchased for $68.30 that pays nothing for four years and $110 at the end of the fifth year also has an IRR of 10%. But those two investments are very different. The IRR calculation assumes that the $10 interest payments on the first bond can be reinvested at 10%, which is probably not true.
  • The IRR of a real estate deal (or any deal) increases when the asset is refinanced and the proceeds distributed to investors. But refinancing the asset doesn’t necessarily make for a better investment.
  • There being no such thing as a free lunch in capitalism, a higher IRR generally coincides with higher risk. For example, I can usually increase my IRR by borrowing more money. That relationship is not typically highlighted.
  • For a typical startup outside the real estate industry, IRR has no meaning. Or to put it differently, a 28% target IRR for a startup plus $2.75 gets you on the New York subway.
  • The term “target IRR” tends to mask what’s really important:  the factual assumptions concerning sales and asset appreciation. To say “We expect a target IRR of 18%” is somehow easier to sell than “We expect the property to appreciate at 6% per year.”
  • Under FINRA Rule 2210, offerings conducted through a broker-dealer may not advertise target IRRs. FINRA also prohibits Title III Funding Portals from advertising target IRRs, and the SEC prohibits new issuers from advertising a target IRR in Regulation A offerings, even for sponsors with extensive track records. Hence, target IRR cannot be used to compare offerings across all platforms and all deal types.

What can we do better as an industry? Here are a few ideas:

  • We can explain internal rate of return better, maybe with examples and a standardized presentation and graphics.
  • We can develop other apples-to-apples metrics for comparing deals.
  • We can make clear that higher IRRs generally come with higher risks.
  • In Regulation A offerings, and even in Rule 506(b) offerings where non-accredited investors are involved, the issuer is required to provide extensive information about the sponsor’s track record. Some version of that concept, applied consistently and allowing for side-by-side comparison, might be the most valuable information for investors.

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.

New to Crowdfunding? Here’s What to Expect.

40Billion.com, Crowdfund Beat Guest Post.

With the popularity and success of crowdfunding as a new way to fund new projects, it’s easy for other aspiring entrepreneurs to believe that sites like Kickstarter are their golden ticket to launching a business. But the reality is, crowdfunding isn’t always as simple as it seems.

Whether you’re looking to raise a small amount of startup cash or acquire a larger sum through equity crowdfunding, there are a few challenges you might face during the process that you may not have expected.

cartoon concept for crowdfunding, businessman hand with light bulb and with money. vector illustration in flat design on blue background
cartoon concept for crowdfunding, businessman hand with light bulb and with money. vector illustration in flat design on blue background

Choosing the right platform

The first step is to choose the right platform. Not all of them are created equal. Platforms like Kickstarter or Indiegogo are great for raising smaller amounts of money, but equity crowdfunding portals are best for entrepreneurs looking for large sums of money. If you’re interested in the latter, it’s important to do your research and find the platform that meets your needs. Also, find an experienced attorney who specializes in equity financing.

Establishing a realistic goal amount and time frame

Many entrepreneurs, especially those new to the crowdfunding scene, tend to think that they will be able to quickly raise all the money they need and then more by the time their campaign ends. It’s important to be realistic about time and money when it comes to planning your campaign.

Consider how much capital you would need to take your business to the next major milestones, and don’t rely solely on crowdfunding sites for your fundraising.

Creating a buzz

Having a great business idea that is supported by friends and family is good, but it does not mean that the donations will come pouring in once you launch your crowdfunding campaign. Doing a lot of prep work before your campaign will help create and maintain interest in your project.

Before starting the project, gauging level of interest for your investment opportunity or project is a critical part of the process. Even though supporters have told you that they would support the campaign, it gets lost in their email inbox. Without specific requests, it’s difficult for people to actually pull the trigger on an investment or funding opportunity. Make sure you have personalized outreach to your first degree networks, and remember to ask for assistance in spreading the word.

When you’re ready to spread the word and create a buzz around your crowdfunding campaign or project, sites like 40Billion.com make this easy. They broadcast and promote your campaign to their large network of several million users across the most popular social networking sites for businesses – including Twitter, LinkedIn, 40Billion, and even Facebook. Innovative services like tweet ads and promoted company listings were created for crowdfunders to tap into a growing, active network online without spending thousands on pay-per-click ads or traditional advertising.

The risk factor

Everyone knows that there’s risk involved in any business venture. What investors want to know is, exactly how much of a risk will they be taking by offering you a large sum of money? Even small venture funds express interest in investing, but ask the entrepreneur to come back to them when they have an investor who is leading the round of funding. Everyone wants to know the amount of risk.

A lot of investors at the early stage simply want to de-risk investing by being the last money in the round once a lot of other sophisticated investors have already committed. This often creates a scenario where founders have a few hundred thousand dollars in “commitments” for months without any way to actually close on anything. Using a reputable equity crowdfunding platform with accredited investors can help solve this problem.

While the “lead investor” issue most commonly affects startups seeking large-scale investors, the same basic principle can apply to a smaller Kickstarter campaign: If potential funders see that no one is backing the project or that people are only contributing a few dollars, what incentive do they have to donate a large amount of money? This is where building interest and spreading the word become critical to raising the funds you need.

Even if you aren’t launching a crowdfunding campaign at this time, it’s important to learn about the industry, as well as what it takes to succeed.

Source:

http://upflow.co/l/5cIW/2017/01/02/new-to-crowdfunding-heres-what-to-expect-2

HR 3784 – SEC Office of Small Business Advocate – Is Now the Law of the Land

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

On December 16, 2016, President Barack Obama Signed into Law HR 3784 – SEC Office of Small Business Advocate, creating an independent Office of Small Business Advocate at the SEC, reporting directly to the full Commission and Congress. This legislation was first introduced into Congress in October 2015, where it was originally co-sponsored by former House Representative John Carney (D-Del) (now Governor-Elect of the State of Delaware) and Congressman Sean Duffy (R-Wisc) and was passed unanimously by the House of Representatives in 2016. It was passed unanimously by the U.S. Senate on December 9, 2016, as part of a flurry of year-end bills passed by the Senate before it recessed for the year.

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The bill had broad industry support upon its introduction in October 2015, including the U.S. Chamber of Commerce, the National Venture Capital Association, National Small Business Association, Small Business Investor Alliance, SBEC, and the Crowdfunding Professional Association (CfPA), of which I served as its Chair and President at the time.

Remarkably, this Bill passed Congress unanimously without the support of the SEC. In testimony from SEC Chair Mary Jo White before the Senate Banking Committee in June 2016 she was asked by the Senate bill co-sponsor, Heidi Heitkamp (D-ND), whether she supported this legislation. Her response:

 “We currently have the Office of Small Business Policy within the Division of Corporate Finance. I am an advocate for small business.” 

A roundabout way of saying “no” – it seems to me.

In the past I have referred to this bill as the missing title of the JOBS Act of 2012. Though it parallels to a large extent to the SEC Office of Investor Advocate – part of the Dodd Frank Act of 2010 – the need for this legislation goes back decades.

The successful passage of this law was the result of the participation and support of many individual and groups. However, I am proud to have had a major role in initiating this legislation, among other things:

  • I was the first person to publicly advocate for this legislation, in Feb 2014, in an article published on Crowdfund Insider.
  • I met with former SEC Commissioner Daniel M. Gallagher in June 2014 to advocate for this bill.
  • I was cited by Commissioner Gallagher in a public address (Note 36) by Commissioner Gallagher given at the Heritage Foundation in September 2014 where he advocated for the need for a permanent Office of Small Business Advocate.
  • I worked with the original sponsor, Rep. John Carney (D-Del) (now Governor-elect of Delaware) in drafting this legislation prior to its introduction in Congress.
  • I assisted in procuring the initial Republican co-sponsor – Rep. Sean Duffy (R-Wis).

A special thank you is in order for SEC Commissioner Gallagher. Without his public and vocal support for this legislation it might have taken many more years for this historic legislation to become a reality.

A copy of the Bill can be found here.

For those of you who want to dig deeper on this subject, here is some background material on the Bill and my role in its journey:

http://www.crowdfundinsider.com/2016/12/93592-sec-small-business-advocate-moves-closer-reality-senate-passes-bill/

http://www.crowdfundinsider.com/2016/11/92607-unstacking-deck-smes-washington-call-sec-small-business-advocate/

This entry was posted in Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments and tagged , , , . Bookmark the permalink.

OTC Markets Group and CrowdFund Beat to Host Regulation A+ Bootcamp in New York City

facebook_regabootcamp-1 NEW YORK, Oct. 26, 2016 /PRNewswire/ — OTC Markets Group Inc. (OTCQX: OTCM), operator of financial markets for 10,000 U.S. and global securities, and CrowdFund Beat, a news and information source for the crowdfunding market, today announced they will co-host a Regulation A+ Bootcamp on November 10 at OTC Markets Group’s headquarters in New York City.

 

The one-day workshop will provide startup companies and entrepreneurs with expert guidance on how to raise capital under Title IV of the Jumpstart Our Business Startups (JOBS) Act, also known as “Regulation A+,” which allows small companies to raise up to $50 million annually in crowdfunded offerings from accredited and unaccredited investors.  Speakers will include legal, accounting and other crowdfunding industry experts, including:

  • Kim Wales, Founder and CEO of Wales Capital, who will provide an overview of the state of the Reg A+ market
  • Doug Ellenoff, Partner at Ellenoff Grossman & Schole LLP, who will discuss legal considerations involved in a Reg A+ offering
  • Ron Miller, CEO of StartEngine Crowdfunding, Inc., and Darren Marble, CEO of CrowdfundX, who will discuss equity crowdfunding portals and marketing an offering
  • Craig Denlinger, Managing Partner of Artesian CPA and CrowdfundCPA.com, and attorney Mark Roderick of Flaster Greenberg PC who will provide an overview of the numbers, valuation and legal structure to be considered in a Reg A+ filing
  • Scott Purcell, Founder and CEO of FundAmerica, LLC, who will talk about the escrow process
  • Crowdfunding industry expert Dr. Richard Swart, Chief Strategy Officer of NextGen Crowdfunding, who will address how Reg A+ has evolved
  • Attorneys Seth Farbman and Yoel Goldfeder of VStock Transfer, LLC who will discuss selecting a transfer agent and depositing shares into brokerage accounts
  • Jason Paltrowitz, Executive Vice President of OTC Markets Group, who will discuss investor considerations and how and where a company’s Reg A+ securities can become publicly traded.

The event will conclude with a group discussion and question-and-answer session with Jonathan Frutkin of The Frutkin Law Group, Sam Guzik of Guzik & Associates, Brian Korn of Manatt, Phelps & Phillips, LLP, Blaine McLaughlin of VIA Folio™, a division of FOLIOfn Investments, Inc., and Jonathan Wilson of Taylor English Duma LLP.

Attendees will be able to ask questions and schedule one-on-one meetings with the speakers.

“It has been over a year since Reg A+ became effective, yet still there are questions about how it works and what is needed to make a Reg A+ offering successful,” said Jason Paltrowitz, Executive Vice President of Corporate Services at OTC Markets Group.  “Our boot camp is designed to answer some of those questions and provide small businesses and entrepreneurs with step-by-step instructions on how to conduct a Reg A+ offering and take their company public.  We are thrilled to partner with CrowdFund Beat on this initiative and look forward to an exciting event.”

“What’s most important is we have data over the past year on Reg A+ that will be shared by the conference’s panel who are the who’s who of the crowdfunding industry.  This boot camp is really about trends and where things are going forward,” said Sydney Armani, Publisher of CrowdFundbeat.com.

To register for the event or for more information, visit http://www.regapluslist.com/.

About OTC Markets Group Inc.
OTC Markets Group Inc. (OTCQX: OTCM) operates the OTCQX® Best Market, the OTCQB® Venture Market, and the Pink® Open Market for 10,000 U.S. and global securities.  Through OTC Link® ATS, we connect a diverse network of broker-dealers that provide liquidity and execution services.  We enable investors to easily trade through the broker of their choice and empower companies to improve the quality of information available for investors.

To learn more about how we create better informed and more efficient markets, visit www.otcmarkets.com.

OTC Link ATS is operated by OTC Link LLC, member FINRA/SIPC and SEC regulated ATS.

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About CrowdFund Beat

CrowdFund Beat is the Crowdfunding Industry’s go-to source of Smart Content for all news and trends Crowdfunding related.  With an extensive online video library, CrowdFund Beat is the Worldwide source of information.  The company also produces two marquee Industry Conferences: The Silicon Valley Fintech Conference in Silicon Valley and The Fourth Annual Conference and Workshop, held at the National Press Club in Washington.  This year CrowdFund Beat is commissioning a robust written and Video Report of where the Industry is heading called 2020 Outlook Crowdfunding Industry Report, to be Published in January, 2017.

Media Contacts:
OTC Markets Group Inc., +1 (212) 896-4428, media@otcmarkets.com
CrowdFund Beat, LLC, +1 (888) 580-6610, news@crowdfundbeat.com

Logo – http://photos.prnewswire.com/prnh/20110118/MM31963LOGO

SOURCE OTC Markets Group Inc.

Related Links

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

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

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

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

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

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

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

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

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

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

 

samuel guzik

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

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

Guzik & Associates

1875 Century Park East, Suite 700

Los Angeles, CA 90067

Telephone: 310-914-8600

www.guziklaw.com

www.corporatesecuritieslawyerblog.com

@SamuelGuzik1

Dara Albright Media Announces New FinTech Video Channel and Broadcast of its Upcoming FinTech Revolution Symposium

Crowdfund Beat NewsWire,

FinTechREVOLUTION.tv will feature the leadership, ingenuity and technologies that are shaping the future of personal finance

ATLANTA, GA (PRWEBOCTOBER 11, 2016

Dara Albright Media, known for its trendsetting FinTech articles and acclaimed industry conferences that helped birth the crowdfinance movement, is pleased to unveil FinTechREVOLUTION.tv, a new FinTech video channel supported by BrightTALK technology. BrightTALK is a leading provider of financial webinars and videos and the producer of the highly praised Digital Banking Summit which continues to garner widespread views from financial industry professionals across the globe.

FinTechREVOLUTION.tv will stream both live as well as on-demand video programming aimed at helping investors of all sizes, businesses in all stages of growth, and financial services providers of all echelons stay on the forefront of the FinTech revolution.

“Especially as FinTech democratizes the financial landscape and gives rise to a new generation of alternative investment products for micro-investors, it is imperative that we create video content that is not only informative and useful, but programming that is as appreciated by investing novices as it is by financial experts. Our mission is to produce innovative and entertaining financial content that makes personal finance and retirement planning not only easy to comprehend, but alluring to the average consumer. Only by truly engaging the populous can we even begin to narrow the national wealth gap and thwart a looming retirement crisis,” stated Dara Albright, Founder of Dara Albright Media.

FinTechREVOLUTION.tv will officially launch on November 15, 2016 in conjunction with Dara Albright Media’s next FinTech Revolution cocktail event being held in New York City.

The November 15th program will include cutting-edge discussions such as: how non-exchange traded alternatives are becoming the mutual funds of yesteryear; what is driving retail’s demand for non-exchange traded alternatives; using micro-investing technology to diversify across and within online marketplaces; how legislation is being used to engineer a new breed of alternative products; how innovations in self-directed IRAs will create new retail distribution channels for the entire alternative product universe; how technology will ensure the scalability of online platforms and enable traditional financial services providers to increase AUM; how millennials will fuel the growth of FinTech and redefine financial services; how FinTech will replace the 401k and transform the way Americans save for retirement; and how modernizing the Self-directed IRA is the trillion dollar FinTech opportunity. Featured retail alternative products will include consumer debt, small business debt and a groundbreaking new equities Reg CF offering.

“I’m thrilled to expand our partnership with BrightTALK which began nearly 4 years ago when we broke new ground in the finance industry with the launch of the world’s first crowdfinance webinar channel. Through this new initiative, BrightTALK enables us to significantly augment the interactive experience of our online viewers. Now virtual participants across the globe will be afforded the same unprecedented opportunities as our physical event attendees to not only see some of the latest financial tools, technologies, investment products and apps that are coming down the pike, but to interact with FinTech experts through live Q&A during our conferences, seminars, roadshows and other “physical world” events,” concluded Albright.

Those interested in participating virtually can register at https://www.brighttalk.com/webcast/9407/228383.

Those joining us in person will, of course, get the added benefit of rubbing elbows with FinTech leaders in an informal setting over cocktails and hors d’oeuvres. Those wishing to join us in person in New York City on November 15th can register athttp://fintechrevolutionnyc.eventbrite.com using the special complimentary code obtained by joining the guest list athttp://www.daraalbright.com/events/ or by emailing guestlist@daraalbright.com. Although there is no attendance fee, admittance is available only on a first-come first-serve basis. The networking event will begin at 4pm EST.

Credentialed members of the media are also welcome to join us for a pre-event press conference that will give journalists a sneak peek into some of the latest micro-investing technologies, non-exchange traded retail alternative investment products and retail investing tools that will transform personal finance and retirement planning. For details on the press conference, please email press@daraalbright.com.

About Dara Albright Media 
Since 2011, Dara Albright has been helping set the direction of the financial services industry through trendsetting articles, white papers, acclaimed conferences, roadshows and influential webinars that introduce new digital financing techniques and modern alternative asset classes such as equity crowdfunding and p2p notes to the financial ecosystem. Over the years, Dara Albright Events have connected thousands of investors, issuers and financial services providers – while helping them capitalize on the incredible transformation in financial services resulting from regulatory overhaul and the progression of FinTech. Additional information can be found at http://www.daraalbrightmedia.com.

Issuer-Dealer and Agent Registration Requirements for Issuers Not Utilizing a Registered Broker-Dealer for Offers and Sales of Securities under Tier 2 of Regulation A

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

The Securities and Exchange Commission’s (“SEC”) amendments to Regulation A went into effect on June 19, 2015. Those amendments provided companies not just with greater access to capital through the ability to raise up to $50 million, but also a greater ability to communicate with investors through novel communication rules previously unavailable to issuers in a public offering of securities. Whereas previously, communications for public offerings were limited to the information contained in an offering prospectus or offering circular, the amendments to Regulation A instead allow issuers to freely communicate before any filing or qualification with the SEC under the Testing the Waters provision (Rule 255), and after qualification (Rule 251(d)(iii)).

These communication rules can help companies go it alone, so to speak, without the assistance of a registered broker-dealer. In a traditional offering, a broker-dealer acts as an intermediary bringing investors to the issuer for a fee. For a company seeking investors among the general population, a broker-dealer may not be necessary to have a successful Regulation A offering. Issuers are able to publish their own marketing material about the offering, create their own online campaign pages, and generally solicit their targeted investor base. This may be especially relevant for consumer-facing companies interested in engaging customer-investors.

However, companies issuing securities in a public offering without the involvement of a registered broker-dealer should be aware that the company may be required to register in certain states as an issuer-dealer, or have members of its management team register as agents of the issuer. This memorandum provides an overview of the registration requirements for issuers and agents of the issuer when making offers and sales of securities in specific states that require such registration. This memorandum will focus on offerings under Tier 2 of Regulation A, as Tier 2 provides for preemption of state review of the offering and securities sold under a Tier 2 offering are considered “covered securities” under Section 18 of the Securities Act.

What does preemption get you?

As part of its rulemaking, the SEC defined securities offered and sold under Tier 2 of Regulation A as “covered securities”. Under Section 18 of the Securities Act, covered securities are exempted from state review of the offering through the exercise of federal preemption of state authority on matters of interstate commerce. Specifically, Section 18 provides that, for covered securities, any state is prohibited from “requiring … registration or qualification of securities, or registration or qualification of securities transactions…”. As a result, a state may not deny an issuer the ability to offer sell a security in the state that is seeking qualification, or has been qualified by the SEC under Tier 2 of Regulation A.

However, this exemption is limited to the registration requirements for the offering of the securities. It does not impact the registration requirements for intermediaries in an offering or whether issuers are required to register themselves as dealers, should they decide to not utilize a registered broker-dealer in the offering. As a result, companies may find it advantageous to work with a broker-dealer merely to avoid the issuer-dealer registration requirements of the states that have such requirements.

Nevertheless, many issuers still may decide that moving forward without a broker-dealer is in their best interest, even with the issuer-dealer registration requirements. As of July 2016, its appears that Arizona, Florida, New York, North Dakota, and Texas all require issuers to register as dealers in the state if they are not using a registered broker-dealer in an offering of securities under Tier 2 of Regulation A. Additionally, Alabama and Nevada each require an agent of the issuer to register with the state.

States that require issuer dealer registration

The first thing that may stand out to you is that there are not that many states that require issuer-dealer or agent registration. This is due to the fact that most state securities laws exclude issuers from the definition of brokers or dealers that need to be registered, as well as excluding officers and directors of the issuer as “agents” requiring registration.

Many states have adopted some form of the 2002 Uniform Securities Act (the “USA”). In section 102(4)(B) of the USA, issuers are exempted from the definition of a broker-dealer. Additionally, under Section 102(2), officer and directors of the issuer are deemed not to be agents unless they otherwise qualify for agent registration. The USA clarifies further, in Section 402(b)(3), that any individual who represents an issuer in the offer or sale of the issuer’s own securities is not an agent so long as the person is not compensated in connection with the sale of securities. A similar exemption exists under Section 402(b)(5) for sales of covered securities of the issuer so long as the person is not compensated in connection with the sale of securities. The uniform law drafting committee goes on in its official comments to states that “[u]nder Sections 402(b)(3) and (5) an agent may be exempt if acting for an issuer and receiving compensation, as long as the compensation is not a commission or other remuneration based on transactions in the issuer’s own securities.” As such, regular salary and benefits should not trigger agent registration requirements.

The following states have not adopted the USA in regards to registration of issuers as broker-dealers, or officers and directors as agents of the issuer. In each case, except for New York, issuers can estimate the registration process taking approximately 30 to 60 days to complete, not including the time it takes to pass any required examination. New York requires that any filed paperwork be complete, but it does not review the filings.

Arizona

Under Arizona law, issuers making offers and sales of their own securities in the state are required to register with the Arizona Securities Division as “Issuer-Dealers”. Under Section 44-1801(9)(b) of the Arizona Revised Statutes, issuers are defined as dealers of securities. All dealers are subject to the registration requirements of Section 44-1941.

In order to register as a dealer in the state, an issuer must submit a Form BD to the Division along with a $100 registration fee, audited financial statements, CPA consent, an affidavit that no sales have been made in the state, as well as evidence that the principals of the issuer have taken securities exams or have equivalent business experience.

In Arizona, any officer or director responsible for making offers and sales of securities must also register as an agent of the issuer. Agents are required to submit certain information in the Form U-4, along with a $45 filing fee, proof of passage of a written examination to determine the business experience of the applicant, fingerprints, and proof of lawful residence in the United States. In some cases, the executive officers and directors identified in the Form BD will be considered to have sufficient business experience by virtue of their positions with the issuer.

Florida

Under Florida law, issuers making offers and sales of their own securities in the state are required to register with the Florida Division of Securities. Under Section 517.021(6)(a)(2) of the Florida Statutes, issuers are defined as dealers of securities. Florida law then goes requires, under Section 512.12(1) that “no … issuer of securities shall sell or offer for sale any securities … unless the [issuer] has been registered” with the Division of Securities as a dealer. While the statute exempts issuers from the registration requirements for the sale of certain securities, the exemption does not extend to public offerings of securities under Regulation A.

To register as an issuer-dealer in Florida, issuer must submit a Form BD through its electronic filing system, as well as the Form OFR-DA-5-91: Issuer/Dealer Compliance Form, financial statements, corporate governance documents, and a $200 filing fee.

The issuer must also register at least one associated person who must file a Form U-4 along with a $50 registration fee per associated person. Issuers are allowed to register up to five associated persons who are then exempt from the examination process typically associated with registration of associated persons as associates of a dealer. Those persons must still submit fingerprints.

New York

New York has always been an outlier when it comes to regulation of securities. Rather than being based on any uniform standards, New York securities regulation is governed by its Martin Act, first adopted in 1921, and codified as Article 23-A of the New York General Business Law.

Under the Martin Act, issuers of securities are defined as dealers under Section 359-e(a). All issuers of securities are required to register as dealers in the state, unless the sale of securities is made through a registered broker on a firm commitment basis. Issuers making offers or sales of securities under Tier 2 of Regulation A are required to file the Form 99, the State Notice and Further State Notice, Form U-2, as well as the statutory filing fee of $1,200. The State of New York provides a helpful information sheet here.

New York does not require the separate registration of officers and directors of issuers as salespersons so long as those officers and directors are identified in the Form 99. However, if the issuer utilizes any salespersons that are not officers or directors, those salespersons are required to file the Form M-2, pay a fee of $150, and pass the FINRA Series 63 or Series 66 exam.

North Dakota

North Dakota utilizes a very broad definition of “broker-dealer” under Section 10-04-02 of the North Dakota Securities Act. As a result, any person that effects transactions of securities in the state for their own account meets the definition of broker-dealer. This includes issuers in offerings occurring under Regulation A.

Under North Dakota rules, issuers are required to submit North Dakota Form S-4, the constitutive documents of the issuer, Form U-2, Form U-2A, an Affidavit of Issuer/Dealer Activity, and a filing fee of $200.

Officers and directors of the issuer are required to register as agents of the issuer in the state. To register, agents of an issuer-dealer must file the North Dakota Form S-5, and pay a filing fee of $60. North Dakota allows for two officers or directors of the issuer to register as agents without being required to pass a written examination. Additional agents are required to pass the Series 63, or Series 66 and Series 7 exams.

Texas

Section 4(C) of the Texas Securities Act provides for the registration of issuers as dealers when offers and sales are not made through a registered dealer. The specific language of the Act states, “any issuer … who, directly or through any person or company, other than a registered dealer, offers for sale, sells or makes sales of its own security or securities shall be deemed a dealer and shall be required to comply with the [dealer registration provisions].”

The specific registration requirements are found in Rule §115.2 of the State Securities Board. Issuers are required to file the Form BD, Form U-4 for a designated officer and each agent to be registered, copies of the constitutive documents of the issuer, audited financial statements, and a $100 fee.

A designated officer is required to be registered. The issuer may be required to register agents as well if other officers and directors of the issuer are undertaking any selling activity. Rule §115.3 of the State Securities Board provides for the requirements for registration of such persons. In addition to the Form U-4 filed with the Form BD, each of these people are required to have passed a securities exam accepted by the State Securities Board. For officers and directors or issuers selling their own securities under Tier 2 of Regulation A, passage of the Series 63 or Series 66 exam, or passage of a state administered exam is required. The filing fee for each person is $100.

States that require agent registration but not issuer-dealer registration

The following states provide for exemptions from the registration of the issuer entity as a dealer of securities, but may still require the registration of any officers and directors of the issuer as an agent. As mentioned above, states that have adopted some form of the USA provide for an exemption from registration for the officers and directors of the issuer in the instances of the person selling the securities of the issuer, and selling securities defined as covered securities under the Section 18 of the Securities Act. In the following states, registration as an agent is required of any officer or director undertaking selling efforts in the state, even if the officer or director does not receive transaction based

compensation. There is no exemption for an officer or director of an issuer selling the securities of the issuer, or those securities being covered securities.

It should be noted again that should any officer or director receive transaction based compensation for the sales of securities of the issuer, no exemption from agent registration is available. That person will likely be required to register as an agent of the issuer in any state in which offers and sales of securities are made.

Alabama

Alabama does not provide for an exemption from registration as an agent for officers and directors of the issuer selling the securities of the issuer. As such, under Section 8-6-2(2) of the Alabama Securities Act, any officer or director representing an issuer in effecting sales of securities is defined as an agent of the issuer. An officer or director not undertaking any selling activities is not an agent of the issuer merely by being an officer or director. The officer or director must undertake selling efforts to require registration as an agent.

Section 830-X-3-.02 of the Alabama Administrative Code provides what information is required to register as an agent in the state. An agent of an issuer is required to register as a Restricted/Issuer Agent. The registration filing includes the Form U-4, and evidence of passage of the FINRA Series 63 or Series 66 exam, and a fee of $60.

Nevada

Similarly to Alabama, Nevada does not provide an exemption from registration as a sales representative for officers and directors of the issuer selling the securities of the issuer. Under Section 90.285 of the Nevada Revised Statutes, any officer or director representing an issuer in effecting sales of securities is defined as sales representative of the issuer. An officer or director not undertaking any selling activities is not a sales representative of the issuer merely by being an officer or director. The officer or director must undertake selling efforts to require registration as a sales representative.

The registration requirement for sales representative of an issuer includes the filing of the Form U-4, evidence of passage of the Series 63 or Series 66 exam, and a fee of $125. While Nevada has a provision to request a waiver from the exam requirements for officers and directors of the issuer under Section 90.372 of the Nevada Revised Statutes, that waiver is only available for registered offerings and offerings under Rule 506 of Regulation D.

Consequences of not registering

In general, there can be severe consequences for an issuer not registering as a dealer or agent where required. These consequences include liability to state regulators and investors in any offering.

Regulatory enforcement consequences

State regulators have the authority to issue cease and desist orders, civil penalties, and criminal penalties. Some of these penalties may trigger “Bad Actor” disqualification provisions, hindering the issuer’s future capital raising activities.

 

Alabama’s regulatory history also provides insight into enforcement against officers and directors of issuers that did not register as agents when required. In a 2010 enforcement action, Alabama issued a cease and desist order due to a director’s failure to register as an agent in the state. The cease and desist order notes that other potential administrative remedies could include monetary fines and a permanent bar from participating in any securities related activity in the state.

In Arizona, Section 44-1842 of the Arizona Revised Statutes makes the sale of securities by an issuer that did not register as a dealer in the state a class 4 felony. Class 4 felonies involve a minimum term of imprisonment of 1.5 years and a maximum of 3 years.

In applying the Martin Act, under Section 352-i, New York has determined that failure to register as a dealer of securities when making an offer or sale of securities in the state can be deemed a fraudulent practice. While considered a fraudulent practice, most orders involve a fine and instructions to register as a dealer in the state.1

Florida considers any act in violation of its Securities and Investor Protection Act to be a third degree felony under Section 517.302.2 The Florida Office of Financial Regulation has published a helpful overview of its disciplinary guidelines for non-compliance with statutes or rules governing the registration and operations of issuer-dealers. Based on the judgment of the severity of the violation, non-registration as an issuer-dealer may simply issuer a notice of non-compliance, or may include a fine of $2,000 to $10,000, suspension of the ability to register as an issuer-dealer in the state, or even a complete bar from registration as an issuer-dealer.3

Issuers should be aware that suspensions of the ability to register as an issuer-dealer or agent, or bans on registration are disqualifying events under the SEC’s Bad Actor Rule. This means that while the suspension or ban is in place, the issuer would be disqualified from the use of Rule 506 of Regulation D, Regulation A, or Regulation CF. Any selling activities continuing while the disqualification is in place would constitute a violation of Section 5 of the Securities Act, leading to additional liability and further disqualifications under the SEC’s Bad Actor Rule.

Further, a violations of New York’s issuer-dealer registration rules is defined as a fraudulent practice, which comes with a Bad Actor disqualification for 10 years.

Investor civil remedies

Additionally, issuers may be liable to investors for not registering as a dealer where required. Typically, an investor who purchases a security from an issuer that is required to register as a dealer or have an officer or director register as an agent, but did not so register, may sue for rescission or damages. A purchaser would seek rescission when that purchaser is still in possession of the security, and would seek damages if the purchaser had disposed of the security.

 

In the case of a Regulation A offering where there is limited liquidity, the liability is most likely to be rescission. Rescission requires that the issuer reset the entire transaction with the purchaser. Essentially, the investor has a two or three year put (depending on the statute of limitations) for receiving the return of their entire investment, plus interest. For a cash-strapped early stage company, retuning all of the invested funds could be a company terminating event.

Section 44-2001 of the Arizona Revised Statutes provides that transactions by unregistered issuer dealers and their agents are voidable at the election of the purchaser. Upon voiding the transaction, the purchaser is entitled to receive the return of all consideration paid to the issuer, plus interest, court costs, and attorney fees.

Similarly in Florida, Section 517.211 provides that any sale made when the issuer is in violation of its issuer-dealer registration requirements may be rescinded as the election of the purchaser, with interest and attorney fees.4 Florida goes further and provides that any control person of the issuer involved in making the sale is jointly and severally liable to the purchaser.

Section 33(a)(1) of the Texas Securities Act provides that any person who offers or sells securities in violation of Section 12, which requires issuer registration as a dealer for those offerings that are not exempted, is liable to the purchaser of the security.

Conclusion

The SEC’s recent amendments to Regulation A provide increased opportunities for companies to make offers and sales of their securities directly to investors without the utilization of a registered broker-dealer. This is primarily due to the Regulation A specific communication rules that allow for more open communication that can be accomplished in innovative ways.

Tier 2 of Regulation A also provides for preemption of state registration of the offer and sale of the security, but does not preempt state rules relating to the registration of the issuer as a dealer, or registration of officers or directors of the issuers as agents. While most states do not have such a registration requirement, the states of Arizona, Florida, New York, North Dakota, and Texas require registration of the issuer as a dealer of securities and corresponding agent registration. Additionally, the states of Alabama and Nevada require the registration of officers and directors undertaking selling activities as an agent of the issuer.

Failure to register where required comes with potentially severe consequences. States have the authority to make cease and desist demands, institute fines, or order suspensions or bars from participation from securities related activity in the state. Any suspension or bar qualifies as a Bad Act under the SEC’s Bad Actor Rule, thereby disqualifying the issuer from relying on Regulation D, Regulation A, or Regulation CF. Issuers also face liability to individual investors who would have the right to demand rescission of the investment.

 

1 See, e.g., People ex rel. Vacco v. World Interactive Gaming Corp., 185 Misc. 2d 852, 863-64, 714 N.Y.S.2d 844, 853 (Sup. Ct. 1999).

2 See, e.g., Robert Paul Murphy, Petitioner v. Board of Hearing Aid Specialists, Respondent, 2016 WL 349583, at *4.

3 See, e.g., Department of Banking and Finance, Division of Securities v. Boca Insurance Lenders, 1996 WL 636843, at *2.

4 See, e.g., Cifuentes v. Regions Bank, No. 11-23455-CIV, 2012 WL 2339317, at *1 (S.D. Fla. June 19, 2012).

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.images-10

 

For more information, contact:

Office: 703 548 7263

Sara Hanks

sara@crowdcheck.com

Andrew Stephenson

andrewstephenson@crowdcheck.com

CrowdCheck is not a law firm, the foregoing is not legal advice. The contents of this memo are subject to change as regulatory positions evolve and statutes are amended. Please contact your lawyer with respect to any of the matters discussed here.

©CrowdCheck, Inc., 2016