Category Archives: women

2017 Real Estate Crowdfunding: Surveying the Landscape

125

 

 

 

 

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

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

What is Crowdfunding?

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

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

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

Securities-Based Crowdfunding

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

Investing Under Rule 506(c)

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

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

Investing Under Regulation A

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

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

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

Regulation CF

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

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

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

Surveying the Landscape

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

Peer Street

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

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

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

Real Crowd

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

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

Realty Mogul

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

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

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

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

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

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

Realty Shares

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

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

Residential Real Property Sites

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

LendingHome

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

Roofstock

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

Patch of Land

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

Fund That Flip

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

The Future of Real Estate Crowdfunding

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

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

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

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

 

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

 

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

 

[4]           www.peerstreet.com.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

Retire1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Originally published on Dara Albright Media.

hqdefault

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

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

 

2017 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

IPO Fintech Startup ClickIPO Will Bring Initial and Secondary Public Offerings to Main Street Investors 

By Jorge Sanchez, Crowdfund Beat Guest Editor,

 

The Initial Public Offering(IPO) has long been one of the most honored and revered business milestones. For entrepreneurs, early employees and investors IPOs are seen as the ideal liquidation event. But it is also seen by many as more, the IPO represents the ultimate validation of a business: a metamorphosis of a private company into one subjected to the democracy of the public equity market.

AAEAAQAAAAAAAAgmAAAAJDUzYzliMGExLTE1NjgtNDEwNi05NGExLTI0OWNkNWI5ZDU4ZA

As monumental as an IPO is, both for the company and members of the public which support the business, investing in an IPO is anything but public or democratic.

ClickIPO Securities, a FINRA registered broker dealer, is a financial technology startup that is changing the way underwriters allocate shares in public offerings by inviting individual investors into the IPO market with an easy to use app and creating the infrastructure to facilitate the process from the underwriter to the investor.

Based in Scottsdale, Arizona, Click IPO Securities is led by finance leaders Scott Coyle and James Farrelly, while development efforts are lead by tech startup veterans Jerrod Bailey and Vann Gutierrez.

To bring individual investors back into the IPO market, ClickIPO has created a technology pipeline that connects the underwriting investment bank to the retail investor. Underwriters are provided with a dashboard that makes the process transparent. The turnkey platform provides syndicate managers a single point of contact through which they can allocate shares through dozens of broker-dealers to thousands of investors with one simple allocation. A broker-dealer dashboard complete with compliance and regulatory automation technology allows online brokerage firms to integrate their clients into the IPO pipeline. To give retail investors access to IPOs and secondary offerings, ClickIPO has created a mobile app with a scoring system that minimizes the risk to issuers and underwriters of IPO flipping. The app allows a user to research available IPO and secondary offerings, choose a company they like, and place an order, all through the app. Once the shares are purchased, they will be placed in the customer’s existing brokerage account.

The significant account minimums at large investment banks that underwrite public offerings have limited the investment in IPOs to institutional investors and the wealthy. The only way for an individual investor to gain access to an IPO is through a broker-dealer or a relationship with the investment bank underwriting the offering, this route is limited, based on connections, and suffers from difficulties that arise due to compliance and technology issues.

There is also another risk inhibiting the entry of individual investors into the IPO market; All too often when a syndicate manager allocates shares of an IPO, some of those shares end up in the hands of an IPO flipper disguised as an individual investor. A flipper is someone who through a broker-dealer is allocated shares of an IPO and quickly sells them (any time in the first 30 days is considered flipping) once the shares start trading on an exchange. With the intent to sell early regardless of the price, the IPO flipper creates downward pressure on the share price. The IPO flipper does not add any value in this process but instead diminishes value for everyone else. Once a syndicate manager allocates the shares of an IPO, they don’t have an effective way to track which investors held shares and which investors flipped(sold) shares . They can only minimize flipper risk by limiting IPO flippers from getting shares in the first place, which has proven to be difficult in the current model for syndicate managers.

The team at ClickIPO has developed a solution to mitigate the risk of IPO flipping. At one end of the ClickIPO pipeline is a mobile app that is incredibly frictionless: the ClickIPO app is connected directly to an investor’s existing brokerage account. This mobile app may likely partner with every major brokerage firm and create a pure network of buy-and-hold IPO and secondary offering investors.

At the core of the mobile app is the ClickIPO Investor Score. Something akin to a credit score for IPO and secondary offering investors, the ClickIPO Investor Score takes into account the investor’s behavior and generates a metric representative of the desirability of that investor to an underwriting firm. The allocation algorithm awards priority to those on the platform who have proven they do not engage in IPO flipping behavior through the development of an attractive ClickIPO Investor Score. While the proprietary algorithm takes into account many factors that make an investor desirable to an underwriting firm, the most highly weighted factor is the average duration that an investor holds shares. Holding shares for more than 30 days will reward the investor with a higher score, the longer an investor holds his shares, the more significant the positive impact will be; Those that exit their position prior to the 30 day mark will receive a negative impact on their score, however, if the price of the offering has a significant increase, the negative impact of selling shares in the first 30 days will be less.

ClickIPO also provides value for broker-dealers offering their customers access to IPOs. The burden and risk associated with regulatory and compliance issues has diminished the broker-dealer benefits of offering IPOs to investors until now. The ClickIPO broker-dealer dashboard comes complete with regulation and compliance automation technology, allowing the broker-dealer to provide access to IPOs to their customers while mitigating the risks associated with regulation and compliance. There is also a monetary incentive for broker-dealers to join the network; When ClickIPO places shares into the accounts of broker-dealers, they receive a commission from the underwriter. ClickIPO allots a portion of this commission to the broker-dealer, often making it a more profitable transaction for the broker-dealer than a traditional marketplace transaction.

The deal flow provided by underwriters (major investment banks) is critical to the ClickIPO business model, ClickIPO has developed a powerfully simple process on top of a sophisticated technology infrastructure to assist underwriters. Where the ClickIPO Investor Score eliminates most of the risk of IPO flippers to an underwriter, ClickIPO delivers additional value with an automated, compliant, and secure process with their syndicate manager platform. Because ClickIPO aggregates thousands of investors onto a single platform, syndicate managers will  have a single interface through which they can allocate millions of shares efficiently to these individual investors. After determining how many shares will be allocated to ClickIPO Securities, the ClickIPO allocation algorithm automatically distributes the shares throughout the broker-dealer network and directly into the accounts of the end users based on their priority set by the ClickIPO Investor Score. Additionally, the ClickIPO pipeline generates a great deal of data that is not available today. These data points are presented on the platform and give underwriters insight into the behavior of investors.

The waitlist for the app is live and can be found on ClickIPO’s website where interested investors can sign up to access IPOs and secondary offerings when the app goes live during the second quarter of 2017.

ClickIPO has integrated a series of complementary tools that allows individual investors to access IPOs. With such a deeply integrated and efficient distribution system, it seems ClickIPO may have an infrastructure capable of conducting all non-institutional IPO allocations for any offering and any underwriter. Non-institutional allocations represent approximately 20% of most offerings. I spoke with Scott Coyle, CEO of Click IPO Securities and asked about the ambitions of the company, he said, “we intend to become the premiere retail aggregation pipe by providing access to hundreds of IPO and Secondary offerings every year, to millions of individual investors”.

 

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.

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.

aaeaaqaaaaaaaafcaaaajgm2ndy3mdbkltqzn2mtngfmmi04ytrhlty2zdbkmzhlnzfiza

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.

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.

Worried About Fraud with your Self Directed IRA? SEC says, Ask a Financial Advisor

By  Wealth Manager and Principal at Innovative Advisory Group (IAG), CrowdFund Beat Guest post,

If you are worried about the risks of fraud when using a self-directed IRA, then do as the SEC recommends in their Fraud Alert, “Ask a professional”.

In their September 2011 Investor Alert, Self-Directed IRAs and the risk of fraud , the SEC outlined typical fraud risks when using a self-directed IRA. The top three self directed IRA fraud risks that they focus on are:

  1. Misrepresentations regarding custodial responsibilities
  2. Exploitation of tax-deferred account characteristics
  3. Lack of information for alternative investments

While these may be common fraud risks that the SEC sees with their enforcement efforts, the risks attributable toalternative investments inside self-directed IRAs expand beyond just fraud risks. There are other risks which are important to consider when using a self-directed IRA. Investors should also consider:

  1. Illiquidity risk
  2. The risk of incomplete or incompatible documentation for the investment when using a self-directed IRA
  3. Risks of creating a prohibited transaction
  4. Risks of inaccurate or incomplete tax filings

Is it worth using a self-directed IRA with all these risks?

The risks attributable to self-directed IRAs are mostly the same as with a non-IRA investment or a publicly traded investment. There is risk in any investment, whether it is a CD, Treasury bond, stocks, cash, or gold. Taking risks is part of why you get a return on your investment, so it is hard to imagine an investment without risk. While every investment holds some risk, with proper due diligence many risks can be mitigated.

The risk management or risk mitigation process may be a little different between publicly traded securities and non-traded alternative investments. In publicly traded markets, risk mitigation primarily consists of hedging through derivatives and proper research. With a publicly traded stock, most investors will not have a chance to discuss the direction of the company with the CEO or other management personnel of the company. When investing in alternative investments, you may have more access to people who are making the decisions inside the operations of your investment. For example, if you invested in your local dry cleaner, you would have an easier time meeting with him about your investment and potentially advising him on how to improve his business, than you would with the CEO of General Electric.

While there are some aspects of the self-directed IRA that can potentially cause additional risks to your retirement investments, there are also many benefits which may outweigh those risks. Ultimately this risk-reward balance comes down to the investment itself and your ability to do proper due diligence on it. As many professional investors found out in the 2008 global financial crisis, just because something says it is AAA rated, does not necessarily mean that it carries the same risk as other AAA rated investments. Each investment is different and deserves its own thorough research to determine its risks and suitability.

Ask a professional

I have to tip my hat to the SEC. Towards the end of their investor alert, they recommend that,

investors should consider getting a second opinion from a licensed and unbiased investment professional.”

Considering Innovative Advisory Group is one of only a few investment advisors who have a specialized and extensive understanding of alternative investments inside self-directed IRAs, I’ll have to send them a holiday cards thanking them for their recommendation.

Innovative Advisory Group is a wealth management firm that specializes in alternative investments held inside self-directed IRAs. We understand the regulatory, custodial, logistical, legal, tax and risk-related issues regarding these types of investments held inside an IRA. Innovative Advisory Group also has the capability of providing due diligence and strategic investment advice for assets which our clients either own or are interested in owning. These include: real estate, tax liens, private companies, hedge funds, non-traded REITs, Limited Partnerships, livestock, horses and more.

If you want to learn more about how Innovative Advisory Group can help you with professional investment advice in regards to your self-directed IRA, you can visit us online at www.innovativewealth.com

Additional Resources:

 


 

About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that they have an extensive understanding of the regulatory and financial considerations involved with self-directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.

For more information you can visit  www.innovativewealth.com  

About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.

Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.

 

Understanding Reg CF: Discussing financial results

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

As we have previously discussed, the Regulation CF disclosure requirement for thefinancial condition of the issuer has the potential to get inexperienced companies in trouble. It is in this section of the disclosure that optimistic entrepreneurs may provide misleading information by not providing the full details of performance measurements, or by not including information on the assumptions underlying any financial projections. Such statements may be misleading in their own right, or may omit information necessary to make the provided information not misleading – also known as securities fraud(link is external) (see paragraph (c)).

As we have also previously discussed, financial information presented to investors must be prepared in accordance with generally accepted accounting principles (“GAAP”). This applies even to financial statements that are merely certified by the management of the company.

The SEC recently articulated in a series of Compliance and Disclosure Interpretations(link is external) just why financial information should be presented according to GAAP. While the SEC’s interpretations are specifically applicable to public companies, the analysis applies equally to companies raising funds under Regulation CF. The short and sweet of it is that financial performance measures that are non-GAAP can be misleading unless steps are taken to ensure the information presented is done consistently and with a full explanation of the measurement.

For instance, the SEC cites the example of presenting a performance measure that excludes normal, recurring, cash operating expenses. Such a measure could be misleading to investors and result in liability to the company (and the intermediary).

Other examples of commonly used non-GAAP practices that could be misleading are when charges or gains are adjusted in one accounting period when that adjustment was not made in other accounting periods, as well as adjustments for non-recurring charges when there were no adjustments for non-recurring gains. These practices, identified by the SEC, are commonplace among early stage companies looking to publicize month-over-month growth figures, or other eye catching figures that are not fully supported by GAAP measurements.

For any company, when it comes time to discuss financial results in your Regulation CF disclosure, is the gain of disclosing non-GAAP measurements without complete disclosure worth the risk of securities fraud liability? Similarly, for any platform, is the risk of allowing these measurements worth it?

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?

“The Fix Crowdfunding Act”

BY Lauren LeibowitzPrincipal at 1st BridgeHouse Securities, LLC, Crowdfund Beat Sr. contributing editor,

The Evolving Crowdfunding Regulations: Now Presenting “The Fix Crowdfunding Act”

On April 5, 2012 the JOBS Act was passed. On October 30, 2015 Title III: Equity Crowdfunding final rules were passed which marked all 7 Titles of the JOBS Act were approved. Recently, the ‘‘Fix Crowdfunding  Act’’ was  introduced to Congress to improve Regulation Crowdfunding.  FINRA and SEC has taken an approach of letting the crowdfunding industry cultivate the business model and the regulators will oversee and implement regulations on an as needed basis. The integration of technology within the private capital markets is monumental since in the 21st century the internet is incorporated in every aspect of your daily life and business.

 9 Funding Portals have been FINRA approved as of May 16. A handful of previously interested business and FINRA member Broker Dealers announced they would not join the crowdfunding marketplace because the current crowdfunding regulations are not conducive to operate in but hope that the ‘Fix Crowdfundung Act’ will be passed in order for them to reconsider joining the crowdfunding marketplace.  Jeff Lynn, CEO and co-founder of Seedrs-a leading UK based investment crowdfunding platform, intended to expand its operations across the pond but believes the current crowdfunding regulations to be “not workable in its current form”, especially burdensome compared to FCA’s crowdfunding regulations that has made the United Kingdom a workable model of successful crowdfunding.  His full statement is below:

“Title III of the JOBS Act, which comes into force today, should have been one of the most important pieces of legislation to impact US fintech in recent years. But although Title III nominally makes it possible for non-accredited (regular) investors to invest in startup businesses and private firms in the US, the legislation’s considerable limitations and poor drafting means we believe it is simply not workable in its current form. Among other things, Title III:

  • Makes it likely that only lower-quality investment opportunities will use equity crowdfunding in the U.S. Title III places such significant burdens on companies seeking to raise capital—making crowdfunding far more expensive, time-consuming and difficult than raising money through other channels (such as institutional or private angel investors)—that businesses will only to turn to crowdfunding as a last resort after more efficient capital-raising methods have failed. The result will be that ordinary retail investors will have access only to those businesses that cannot raise capital elsewhere, which is an adverse selection phenomenon that has not occurred in Europe.
    • Gives insufficient protection given to investors. While Title III and the related regulations place significant focus on limiting the losses that may be experienced by investors, loss of capital is not the only risk in this asset class. Also important is that investors be protected in the case of a business’s success: a successful business can see its valuation increase 100-fold or more, but if the investment has not been properly structured or monitored, investors may receive nothing. Where restrictions interfere with crowdfunding platforms’ ability to provide those protections—which is precisely what Title III does—investors will be significantly worse off in the long run.
    • Reduces the likelihood of businesses succeeding raising capital. One of the key lessons from the growth of equity crowdfunding in Europe is that raising capital in this way is a dynamic process that requires the business to build momentum behind its campaign. Successful crowdfunding campaigns tend to require active outreach, ongoing and multi-modal engagement with prospective investors, and the participation of one or more “anchor” angel or institutional investors, all before the crowd investors start to commit capital in a meaningful way. Title III’s significant marketing restrictions mean that companies will be very limited in their ability to create momentum, which in turn will make it exceptionally difficult for their campaigns to succeed.

“What is particularly unfortunate in all this is that Europe, and the UK in particular, has shown how a regulatory system can facilitate a thriving equity crowdfunding environment, allowing the best companies to raise funds successfully and giving investors the protections they need. US lawmakers would have been well advised to look much more closely at the UK system when developing Title III.

“However, I am hopeful about the future of Title III, and under revised legislation (a version of which is already being considered by Congress), I would love for Seedrs to use it to facilitate investments in the US.

“In the interim, Seedrs will launch stateside under Title II of the JOBS Act, which is limited to accredited investors, and which will offer a specific demographic of investor access to many of the European businesses seeking capital on our platform. Whilst it means that entrepreneurs will only have access to a portion of the American crowd, the opportunity for those investors who are accredited is really exciting. We believe Europe has the fastest-growing ecosystem of early-stage businesses in the world, and the combination of reasonable valuations and fast growth that many companies see on this side of the pond should make them highly appealing investment opportunities for accredited American investors.”

WHAT IS PROPOSED IN THE “FIX CROWDFUNDING ACT”?

 

QUALIFICATION FOR CROWDFUNDING EXEMPTION
  1. Increase the Issuer offering limit to $5,000,000 from $1,000,000.
  2. Take the “Greater of Approach” rather than the “Lesser of Approach” regarding the Crowd’s annual investing limitations.

An investor will be limited to investing: (1) the greater of: $2,000 or 5 percent of the lesser GREATER of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10 percent of the lesser GREATER of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more.

CLARIFICATION OF CERTAIN FUNDING PORTAL REQUIREMENTS AND EXCLUSIONS FOR REGULATION CROWDFUNDING.

EXCLUSION OF ISSUERS FROM FUNDING PORTALS

  1. CLARIFICATION OF CERTAIN EXCLUSION REQUIREMENTS FOR FUNDING PORTALS—Section 302 of the Jumpstart Our Business Startups Act

ADD (e) to “Under the rules issued pursuant to subsection (d), a funding portal shall have a reasonable basis for disqualifying an issuer from offering securities through such funding portal pursuant to section 4(a)(6) of the Securities Act of 1933 if the funding portal, through a background check of the issuer or other means, has found that such issuer, in connection with the offer, purchase, or sale of securities, has knowingly—

‘‘(1) made any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

‘‘(2) engaged in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.’’.

  1. CLARIFICATION OF OTHER OBLIGATIONS TO REDUCE THE RISK OF FRAUD.

Securities Act Section 4A(a)(5) requires an intermediary to “take such measures to reduce the risk of fraud with respect to [transactions made in reliance on Section 4(a)(6)], as established by the Commission, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person.”

Amend language to read as follows:

“(5) as a minimum to reduce the risk of fraud with respect to such transactions obtain a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;’’.

  1. CLARIFICATION OF LIABILITY OF FUNDING PORTALS FOR MATERIAL MISSTATEMENTS AND OMISSIONS

Securities Act Section 4A(c) provides that an issuer will be liable to a purchaser of its securities in a transaction exempted by Section 4(a)(6) if the issuer, in the offer or sale of the securities, makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of the untruth or omission, and the issuer does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. Section 4A(c)(3) defines, for purposes of the liability provisions of Section 4A, an issuer as including “any person who offers or sells the security in such offering.”

In describing the statutory liability provision in the Proposing Release, the Commission noted that it appears likely that intermediarieswould be considered issuers for purposes of the provision. Several commenters agreed that Section 4A(c) liability should apply to intermediaries noting that it “may serve as a meaningful backstop against fraud” and would create a “true financial incentive” for intermediaries to conduct checks on issuers and their key personnel.

However, a large number of other commenters disagreed that Section 4A(c) liability should apply to intermediaries. Some of these commenters stated their views that applying statutory liability to intermediaries would have a chilling effect on intermediaries’ willingness to facilitate crowdfunding offerings. Others cited the cost of being subject to this liability as overly burdensome on funding portals, to the extent that they may not be able to conduct business. Several commenters also explained that the nature of funding portals, as intended by Congress, is distinct from that of registered broker-dealers. According to these commenters, a funding portal’s role is not to offer and sell securities, but rather to provide a platform through which issuers may offer and sell securities. As such, these commenters asserted that it would not be appropriate to hold them liable for statements made by issuers.

Section 4A(c) of such Act (15 U.S.C. 77d–1(c)) is amended by adding the end the following:

‘‘(4) LIABILITY OF FUNDING PORTALS.—For purposes of this subsection, an intermediary shall not be considered an issuer unless, in connection  with the offer or sale of a security, it knowingly—  ‘‘(A) made any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or ‘‘(B) engaged in any act, practice, or  course of business which operates or would operate as a fraud or deceit upon any person.’’.

EXEMPTION FROM REGISTRATION

  1. Amend Section 12(g)(6) of the Securities Exchange Act

Reader note- (The words in bold are new text)

(6 )Exclusion for persons holding certain securities.— The Commission shall, by rule, exempt, conditionally or unconditionally, securitiesSecurities acquired pursuant to an offering made under section 4(6)  of the Securities Act of 1933 [15 U.S.C. 77d(a)(6)] shall be exempt from the provisions of this subsection.

ALLOWING SINGLE-PURPOSE FUNDS.

  1. Amendment to Section 4A(f) of the Securities Act of 1933:

(f) APPLICABILITY.—Section 4(6) [8] shall not apply to transactions involving the offer or sale of securities by any issuer that—

(1) is not organized under and subject to the laws of a State or territory of the United States or the District of Columbia;

(2) is subject to the requirement to file reports pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934;

(3 2 ) is an investment company, as defined in section 3 of the Investment Company Act of 1940, or is excluded from the definition of investment company by section 3(b) or  paragraphs (1) to (14) of section 3(c) of that Act; or

(4) the Commission, by rule or regulation, determines appropriate.

  1. AMENDMENT TO THE INVESTMENT COMPANY ACT OF 1940 :

Add to Definition of Investment Company (Investment Company Act of 1940 Section 3(c))

(c) Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title:

ADD ‘‘(15) any issuer that holds, for the purpose of  making an offering pursuant to section 4(a)(6) of  the Securities Act of 1933 and the rules issued pursuant to such section, the securities of not more than one issuer eligible to offer securities pursuant to such section and such rules.’’.

  1. APPLICATION OF RULES.—Single-purpose funds that are excluded from the definition of investment company under paragraph (15) of section 3(c) of the Investment Company Act (15 U.S.C. 80a– 3(c))— (A) shall be allowed to sell and offer for sale securities under section 4(a)(6) of the Securities Act of 1933 (15 U.S.C. 77d(a)(6)) under the rules adopted on October 30, 2015, pursuant to title III of the JOBS Act (Public Law 112–106); and (B) shall be considered venture capital  funds for purposes of section 275.203(l)–1 of  title 17, Code of Federal Regulations.

SOLICITATION OF INTEREST

Section 4A of the Securities Act of 1933

  1. Add “(f) SOLICITATION OF INTEREST.—

(1) IN GENERAL.—At any time prior to the  filing of information with the Commission and the commencement of an offering made in reliance on section 4(a)(6), an issuer may solicit non-binding indications of interest from potential investors in a prospective offering using the same means and pursuant to the same regulations (other than the filing of information with the Commission) as if conducting an offering pursuant to such section if—

(A) no investor funds are accepted by such issuer; and

(B) any material change in the information provided to potential investors during the  actual offering pursuant to such section from  the information provided to potential investors  during such solicitation of interest are highlighted to potential investors in the information  filed with the Commission.

(2) STATUS.—Such solicitation of interest shall not be considered an offer or sale of securities under this Act or the Securities Exchange Act of  1934, regardless of whether or not the issuer actually conducts an offering pursuant to such section 4(a)(6).

GRACE PERIOD

Consistent with the effective date of the final rules on regulation crowdfunding adopted by the Securities and Exchange Commission on October 30, 2015, pursuant to title III of the JOBS Act (Public  Law 112–106), funding portals established under such Act shall make a good faith effort to comply with all such  rules. Notwithstanding such effective date, no enforcement action may be brought against a funding portal before May 16, 2021.

CONCLUSION

Regulation Crowdfunding is in its infancy stages. The crowdfunding industry, the SEC and FINRA will hopefully be able to work together to cultivate the crowdfunding marketplace to empower entrepreneurs while protecting the crowd. Crowdfunding today will continue to evolve as different funding models and Issuers use regulation Crowdfunding.