Accredited Crowdfunding — Why are people standing on the sidelines?

ByJoseph W. Bartlett, Co-Chair of VC Experts & Special Counsel, McCarter & English, LLP, As set out in a recent Buzz by Robert Fisher, [1] the activity on Title II of the JOBS Act, while not trivial, suggests that any number of players are standing on the sidelines of what we call accredited crowdfunding and waiting to see how the Title II activity and marketplace play out when the metrics have more or less come to rest. Which platforms are successful in attracting investors to online pitches? Are the institutions and investors in fact increasing their windshields on potential deal flow by paying serious attention to online pitches? Are the service providers adequately performing administrative functions (such as taking ‘reasonable steps to verify’ that the investors are accredited) and pricing their services at realistic dollar amounts given the size of the offering? As suggested in the referenced article, investors don’t like to be the first (as I put it) out of the LST on Omaha Beach. Hence, many if not most of the promising issuers and their agents are confining their fund raising efforts to Rule 506(b), sometimes using the two-step process, [2] meaning describing generically the type of deal flow which is available to accredited investors who sign up as interested parties, thereby creating a pre-existing substantive relationship (see the referenced article in the footnote), and then, after a “cooling off” period (30 days), the investors inside the fire wall, “privately” under Rule 506(b) vis-à-vis various deals. Under Rule 506(c) the pitch material is up online for all to see, not only those who have been admitted inside the firewall. Despite the crowd hanging back on the sidelines, nature abhors a vacuum. Some gifted parties are curating and chaperoning deal flow under Rule 506(c), the platform putting the deal up online, but expanding the census of potential investors by doubling up with efforts typified in the Rule 506(b) arena. To illustrate what is happening, an emerging growth company (“EGC”) contacts a Rule 506(c) platform and its affiliated broker dealer which is a service provider and arranges for its pitch material to go up online to the universe (and that is literally the universe, i.e., the Internet), soliciting investors willing to subscribe at the minimums set forth in the presentation. Coincidentally, the parties involved … the platform personnel; the broker dealer; the issuer; the founders and managers of the EGC and their counsel … undertake traditional Rule 506(b) placement activity, contacting a list of prospects known to their employees, advisers and agents. Once an interested party is located who or which expresses interest in the deal, its attention is directed to the Internet where much of the information is available online, with referrals to: a digital due diligence drop box, password protected: the form of the NDA; the solicitation agreement; the stock purchase agreement; and the like. The money raising is, in short, taking advantage of both methodologies, public and private. From a technical legal standpoint, the de facto Rule 506(b) solicitation must meet, de jure, the Rule 506(c) constraints; its notices and verification compliance etc., are applicable to users of both channels. What’s not to like about this two channel attack … fishing with both a rod and a net? P.S. On the question whether institutional investors will ever play in deals on the Internet, two anecdotes, building on the principle that the plural of anecdote is data. As a force of nature, the Internet is like the Mississippi River as described in John McPhee’s book on The Control of Nature. It finds its own way to the Gulf regardless, in the Mississippi’s case, of the Corps of Engineers’ attempt to influence the river bed with dikes, dams, channels, etc. So with the Internet … it will find a way. I remarked to a young friend recently that I didn’t think institutional investors would find trolling for deal flow on the web “dignified.” He laughed out loud: “Joe, you are so old. 20 years ago it was undignified to look for a spouse online. Nowadays, everybody does it.” [1] Fisher, “Where Are All the General Solicitation Deals?” [2] Bartlett, “Quiet 506: A Study in Irony,”; Joseph W. Bartlett, Special Counsel, Full Biography McCarter & English, LLP McCarter & English, LLP is a firm of over 400 lawyers with offices in Boston, Hartford, Stamford, New York City, Newark, Philadelphia and Wilmington. In continuous business for more than 160 years, we are among the oldest and largest law firms in America. Clients come first at McCarter & English. Their goals and priorities are what count. Our job is to listen to our clients, stay on top of the frequent changes that can affect their goals, and implement the strategies that will lead to success. Applying this approach effectively and consistently requires dedication and constant attention to many details. This client-centered philosophy has served our clients well and is responsible for our success and stability. We are honored to be the chosen law firm of clients ranging from Fortune 100 companies to mid-market and emerging growth companies to individual people. When our clients do great things, we are pleased to get the assist. Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Joseph W. Bartlett. This work reflects the law at the time of writing. Source @

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