Tag Archives: SEC

The State of Reg A Plus. What’s Next?


Blaine McLaughlin is the Chief Operating Officer of VIA Folio, an innovative IPO, private and alternative investment platform that makes it easy for online platforms, issuers, investors, brokers and advisors to engage with IPOs, private and alternative debt and equity offerings.

Parallels between ICO’s and the early days of Equity Crowdfunding

 Founder Raiseworth.

(Here is a post from 2015 when I started pushing for Crowdfunding to be moved to the Blockchain)

If I go back to 2008, in the very early days of Equity Crowdfunding, the ASSOB platform has already been operating for around four years. This meant there were plenty of learnings in place even before any other equity platforms had started.

There are parallels here with ICO’s as in the early days many people that approached us to raise capital on ASSOB had not much more than an idea or a sketch on paper. We learnt as the years went by that the existing regulatory structure was not detailed enough to protect investors so we put in place the ASSOB compliance framework. This stood the test of time as 300 odd raises later no evidence of fraud has emerged. This included an “offer document” not dissimilar to the “White Papers” that set out all aspects of the raise including:

  • OPPORTUNITY KEY DETAILS
  • KEY INVESTOR HIGHLIGHTS
  • EXECUTIVE SUMMARY
  • ABOUT THE COMPANY
  • CORPORATE OBJECTIVES
  • COMPETITION & RISK
  • ABOUT THIS OFFER
  • HOW TO APPLY FOR SHARES
  • OWNERSHIP STRUCTURE
  • STRATEGIC GROWTH PLAN
  • USE OF FUNDS
  • DIRECTORS DECLARATION
  • DISCLAIMER
  • GLOSSARY OF TERMS

This was not prescribed anywhere in regulations for documents that weren’t disclosure documents but over a period of time things like quarterly reporting, annual accounts and other things were added to the mix to strengthen the self-regulated compliance framework.

With ICO’s I see the same effort by early adopters in their documents. There is an eagerness to be transparent and provide valuable and essential information for prospective funding providers. However as these are early days there is a widely disparate level of transparency and disclosure by ICO promoters. This is to be expected but just as equity crowdfunding evolved around the world as players engaged with regulators, so will the ICO area.

The main difficulty at ASSOB from 2004 to 2010 was that entities often had no turnover, maybe not a product and no track record. The question was how do you assess these companies as potential investments. This same question is front and centre for ICO’s.

We solved this at ASSOB by using “Fundability Circles” to assess opportunities. Since 2015 a lot has changed, including the emergence of ICO’s so I thought it would be good to update this and do an ICO version.

Here it is!

Here is how you use it!

When you look at an ICO opportunity the three circles equal the main areas to assess a raise. I’ve listed some factors to assist you but basically each of the areas should have a total of 10 points with the total being 30. Obviously if you get 30 out of 30 for an ICO raise you are good to go. What happens though is usually one area is much lower than the other two. Often you can have a great idea with a very technical team but nobody in marketing or legitimisation. Or at other times the marketing team is great but the people are not around to build it.

Most ICO “White Papers” usually include Story, Team and Legitimisation but often they are weighted differently in each white paper. If you are involved in an ICO, or you are promoting one, you should yearn to get balance in the document so the three areas are equally reflected. (Note the intersecting areas between each circle)

  1. The Team must be capable of implementing the story
  2. The Team must appear credible to the potential partners and investors
  3. The Story must be relevant to potential partners and investors

Trust this assists you with your ICO. After seeing 300 odd raises go through this process it is indeed a great way to get an early grip on the possibility of success or as it says in the middle … the “Fundability Potential”.

REPORT: Crowdfunding meets Blockchain

 

 

 

 

By Navroop Sahdev

Centre for Blockchain Technologies, University College London, UK
Centre d’Économie de l’Université Paris-Nord, France
June 2017

Table of Contents
1. Introduction
2. The Advent of Crowdfunding
3. Market design and Liquidity Considerations for CFE Trading on the
Blockchain
3.1. Liquidity and Price Discovery
3.2. A game of Information
3.3. Asset Servicing and Voting
3.4. Market Making versus Tokenization
3.5. The impact of Transparent Holdings
4. Concluding remarks
5. Endnotes
6. References

CLICK HERE FOR FULL REPORT 

Abstract

Blockchain, the technology behind Bitcoin, promises to be nothing less than Internet 2.0. The
financial services industry, in particular, is preparing for the disruption blockchain/distributed
ledger technology promises to cause. In the current business environment, the majority of
startups and small businesses have to look for alternative sources of funding given that ‘going
public’ is increasingly expensive. The crowdfunding space has seen tremendous growth as an
alternative way to raise capital by businesses. However, these crowdfunded shares cannot be
traded for 7 – 10 years on average on any given platform in the U.S. currently.
To build a trading platform on the blockchain which is completely P2P, immutable, fully
transparent and low-cost presents some key design issues. In particular, the issue of liquidity – and
price discovery – on the blockchain continues to be a puzzle. At the same time, the proposition of
removing middlemen from equities trading is a very attractive one, streamlining the process of
capital formation with higher market efficiency.

The current paper addresses the following key questions: How can a DLT trading platform ensure
adequate liquidity? What would be the process of price discovery? While some recent studies hail
blockchain technology as a boom for market liquidity, it is not immediately clear what the impact
of P2P trading would be on the prices of various stocks. There are no ‘solutions’ just yet. At the
same time, the lack of regulation around trading on the blockchain creates an environment of
uncertainty for all players.
In particular, the implementation of such a platform can revolutionize capital formation and build
robust markets in both developing and developed countries where crowdfunding has proven to
be a successful model. While my research is targeted at solving a very specific pain point for both
researchers and companies working on distributed ledger technology, ultimately, it would be a
significant step forward towards onboarding underserved communities across the world who
don’t have access to financial services.

List of Abbreviations

1. DLT: Distributed Ledger Technology
2. CFE: Crowdfunded Equity
3. EC: Equity Crowdfunding
4. CFP: Crowdfunding Platform
5. ECP: Equity Crowdfunding Platform
6. CETP: Crowdfunded Equity Trading Platform
7. MVP: Minimum Viable Product
8. POC: Proof of Concept
9. P2P: Peer to Peer

Introduction

These days, ‘blockchain’ inspires a degree of reverence in the fintech industry. Set to become the
defining technology of the current day – Internet 2.0. – The industry is aggressively testing POCs
and figuring out which processes should be moved to a blockchain architecture in the short to the
medium term. Of course, revamping the monstrous infrastructure of the financial services industry
is no easy task and unlikely to be undertaken overnight. The way forward is to test specific use cases
and find ways to integrate these as well as integrate the new blockchain infrastructure with the
old centralized infrastructure. The shift is expected to be gradual, as is the regulatory catch-up.
And yet, the activity that blockchain – along with other vertical technologies – has inspired is
unprecedented along with the regulatory participation in co-creating this brave new world.
The story of the blockchain can have many starting points. It can be a technology-driven one,
where a foundational technology can potentially provide a more secure and robust digital
infrastructure and with the current days being the early days of the technology. Alternatively, it
can a story of demand-driven factors – where small businesses need to find ways of raising capital
along with new opportunities of financial intermediation. Or we can pick an even more interesting
story – that of a crisis-driven market – desperately in need of a breakthrough technology, that can
lower costs and provide a more robust digital infrastructure. Indeed, it’s probably no coincidence
that the Bitcoin blockchain came into existence right after the 2007-08 banking crisis. Or it can be
the familiar story, of an archaic regulatory regime, that piles up-regulation designed for securities
trading from a century ago; this is the story of fragmented markets which are an outcome of such
a regulatory structure. With the advent of any new financial activity – crowdfunding, for example
– new regulation is introduced, which only seems to add to the existing regulatory burden.
Whatever the chosen entry point, we are here now.

CLICK HERE FOR FULL REPORT 

The Best industries for Regulation Crowdfunding

 

 

 

By: Sherwood Neiss and Jason Best, Principals Crowdfund Capital Advisors, LLC

Into the second year of Regulation Crowdfunding there are now over 475 companies that have filed offering documents with the Securities and Exchange Commission (SEC) to raise up to $1,070,000 from their customers, communities, friends and family. But in which industries are these investors most interested in deploying their capital? The good news for companies considering using Regulation Crowdfunding, is that these online investors have a diverse appetite. While software/gaming application companies receive the most commitments, breweries, entertainment companies, personal transportation vehicles, restaurants and personal services (i.e. fitness training, veterinary, grooming, etc) aren’t far behind. They key data points for potential issuers to understand are: 1) How much money do you need to raise for your business in relation to the average amount raised for your industry? 2) Where is the crowd is engaged in deals and dollars? Meaning is there enough interest in your business (industry) to crowdfund. And 3) what is the crowd’s average check size – to determine how much you can realistically raise from your network compared with what you need?

At Crowdfund Capital Advisors, we track all Regulation Crowdfunding offerings across the entire industry. Our team of analysts maps each company to Morningstar’s Global Equity Classification Structure©. There are 148 industries in Morningstar’s classification. Once the data from each offering is on-boarded and cleansed, each offering is tagged with this Morningstar classification so we can track not only the progress the offering is making towards its funding target but which industries are receiving the most interest, and ultimately, which offerings close successfully.

Now that the market is over a year old, we can begin to see signs of where the crowd has an appetite and hence where prospective Regulation Crowdfunding companies should be considering this an attractive funding mechanism for at least a portion of your capital needs. The following Tree Map visually displays all the data to date. Each leaf measures an industry the number of commitments and the number of backers. The larger the leaf the greater the number of commitments the darker the leaf the greater the number of backers.

Source: Crowdfund Capital Advisors, LLC

By Number of Campaigns
Digging into the data, Application Software (i.e. Electronic Gaming and Software) had the most number of offerings (n=94). This was followed by Breweries, Wineries & Distilleries (n=29), Entertainment companies (i.e. movie studios, theatre, music, sports league, entertainment parks, n=29), Personal Service companies (i.e. spas, barber, kids activities, photographers, clubs, pet services, rideshare, wedding services, n=28), Restaurants (n=28), Consumer Electronics (n=25), Personal Transportation Vehicles (i.e. electric bicycles, cars, boating, etc., n=23), Apparel (n=21), Consumer Packaged Goods (n=19) and Retail (n=18).

However, when we filter for only those campaigns that hit their Minimum Funding Target and hence were successful, we see an interesting outcome. Electronic Gaming and Software drops to 40, a 43% success rate; Breweries, Wineries & Distilleries companies falls off but not as much to 23, a 79% success rate), Restaurants (n=18 or 64% success), Personal Service companies (n=17 or 61% success rate), Personal Transportation Vehicles (n=15 or 65% success rate), Entertainment companies (n=14 or 48% success rate), and Apparel (n=12 or 57% success rate). So, while the Gaming industry had the most offerings, the greatest success was with Brewers, Wineries & Distilleries who enjoyed 79% success followed by Personal Transportation Vehicles, 65%, Education 63%, Personal Services 61% and Restaurants with a 61% success.

By Dollars Committed

Table 1: Committed Dollars by Industry

Source: Crowdfund Capital Advisors, LLC

Where is investor money going? When we filter by total amount of capital committed (table to the right) we see that Software and Gaming companies received the most commitments. (Keep in mind, until a campaign closes and is funded those dollars are just pledges and not actual investments). This is followed by Breweries, Wineries & Distilleries and Personal Transportation Vehicles. These Top 10 industries received 71% of all the capital committed to Regulation Crowdfunding campaigns.
By Dollars Funded

Table 2: Funded Dollars by Industry

Source: Crowdfund Capital Advisors, LLC

However, Committed Dollars don’t mean much unless a campaign hits its Minimum Funding Target. So, we again filter for campaigns that did so and hence were “Funded.” The table at the right shows that nine of the Top 10 industries that received the most commitments also received the most Funded dollars – Computer Hardware fell off the list and Medical Devices was added. Pay close attention to the conversion rate of Committed dollars to Funded dollars. The higher the conversion means that if you are in any of these industries your chances of receiving the money that is pledged is greater than some of the other industries. It will be interesting to see if this trend holds over the next few months.

By Total Investors

Table 3: # of Investors per Industry

Source: Crowdfund Capital Advisors, LLC

Finally, we answer the question, what industries are driving the most investor interest? The table at the right answers this. Again, Software and Gaming had the most backers, followed by Entertainment, Breweries, Wineries & Distilleries and Personal Transportation. The Top 10 here represented 74% of all the individual backers. So if you aren’t in one of these industries it doesn’t mean you won’t attract the crowd, it just might be more challenging.
Source: Crowdfund Capital Advisors, LLC

But perhaps most important is what’s the average check size for industries where campaigns are funded? Here are the current results: Entertainment $2,448, Personal Transportation, $2,375, Personal Services, $1,292, Breweries, Wineries & Distilleries, $1,231, Software and Gaming: $1,196, Apparel $979, Computer Hardware $857, Restaurants $598. This seems to indicate that that so far, crowd investors are willing to more money individually into things that benefit them or they consume directly. Seems they are investing in brands, experiences, and people they trust.

Conclusion

While we talked extensively about the “Top 10’s” as we analyzed the data, it is very important to understand that there have now been successful campaigns in 56 of the 148 industries in the Morningstar classification system, and the geographic distribution of campaigns is also expanding (now at 44 states). Investors are deploying capital across a significant and growing number of industries across the country. They are especially investing in companies that deliver a direct benefit/relationship with the product, in addition to the desire for long term appreciation of their capital. We estimate that over $100M will be committed to Regulation Crowdfunding campaigns by the end of 2017. All from a standing start 18 months prior. This is a strong early signal of the long-term success of this funding channel.

Into the second year of Regulation Crowdfunding there are now over 475 companies that have filed offering documents with the Securities and Exchange Commission (SEC) to raise up to $1,070,000 from their customers, communities, friends, and family. But in which industries are these investors most interested in deploying their capital? The good news for companies considering using Regulation Crowdfunding, is that these online investors have a diverse appetite. While software/gaming application companies receive the most commitments, breweries, entertainment companies, personal transportation vehicles, restaurants and personal services (i.e. fitness training, veterinary, grooming, etc) aren’t far behind. The key data points for potential issues to understand are: 1) How much money do you need to raise for your business in relation to the average amount raised for your industry?  2) Where is the crowd is engaged in deals and dollars? Meaning is there enough interest in your business (industry) to crowdfund. And 3) what is the crowd’s average check size – to determine how much you can realistically raise from your network compared with what you need?

At Crowdfund Capital Advisors, we track all Regulation Crowdfunding offerings across the entire industry. Our team of analysts maps each company to Morningstar’s Global Equity Classification Structure©. There are 148 industries in Morningstar’s classification. Once the data from each offering is on-boarded and cleansed, each offering is tagged with this Morningstar classification so we can track not only the progress the offering is making towards its funding target but which industries are receiving the most interest, and ultimately, which offerings close successfully.

Now that the market is over a year old, we can begin to see signs of where the crowd has an appetite and hence where prospective Regulation Crowdfunding companies should be considering this an attractive funding mechanism for at least a portion of your capital needs. The following Tree Map visually displays all the data to date. Each leaf measures an industry the number of commitments and the number of backers. The larger the leaf the greater the number of commitments the darker the leaf the greater the number of backers.

Crowdfund Capital Advisors (CCA) delivers strategic insights to government agencies, financial institutions, regulators and multilateral organizations seeking to both create and implement innovative strategies to utilize crowdfund investing (CFI) technologies to drive innovation, job creation and entrepreneurship. We also study and invest in the emerging ecosystem of crowdfunding and the new solutions being created that will impact the broader private capital markets. We are passionate about creating innovation, entrepreneurship, and jobs through the use of crowdfunding.  CCA delivers strategic services and implementation programs that create, proprietary deal flow for professional investors, better access to capital for businesses and policy and regulatory innovation for governments.

 

 

 

Interact with FactRight’s Reg A+ Database

According to FactRight’s tracking, the SEC qualified 21 Reg A+ Tier 2 offerings in the second quarter of 2017, maintaining a brisk pace by the standards of Reg A+’s relatively short history. Approximately 45% of the 96 Tier 2 offerings qualified since late 2015 (not later withdrawn or used for merger purposes) have been qualified in just the first half of this year.

 

Three issuers made headlines in June 2017, when each listed common equity (that had been previously issued under Regulation A offerings) on a national securities exchange: Myomo, Inc. (NYSE: MYO), Adomani, Inc. (Nasdaq: ADOM), and ShiftPixy, Inc. (Nasdaq: PIXY). In the wake of successful public listings, it will be interesting to see whether a growing proportion of issuers will seek to use Regulation A as a stepping stone to becoming a fully public company.

Interact with FactRight’s database through the charts below to glean additional insights about the state of the Regulation A space through the second quarter of 2017. The charts below are dynamic; if you click on a single data point in any chart, it will filter the data displayed on the sidebar at left and in the remaining charts. (For instance, if you click on the bar for Tier 2 offerings qualified in the second quarter of 2017, all of the refreshed data in the sidebar and throughout the charts will only pertain to offerings qualified in the second quarter.) Hover your cursor over a chart for additional information.

 

Is the Party Over? SEC Concludes Cryptocurrency Offering Required Registration

By Trudy-Anne McLeary, Associate, Corporate and Finance | Benjamin T. Brickner, Associate, Corporate and Finance

In an investigative report and investor bulletin, the SEC concludes that offers and sales of cryptocurrency coins and tokens may be subject to federal securities laws.

On July 25, 2017, the Securities and Exchange Commission (the Commission) released an investigative report with important implications for issuers and sponsors of initial coin offerings (ICOs) that raise funds for cryptocurrency ventures. The report, prompted by the recent proliferation of such activity, concluded that coins offered to purchasers in ICOs constitute securities regulated by the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). As a result, absent an exemption, such offerings must be registered with the Commission, similar to other public offerings.

The press release accompanying the report notably quotes the new Commission chairman and the new heads of the Corporation Finance and Enforcement divisions. This combined statement gives the report unusual weight and makes clear to Commission Staff that its contents describe senior officials’ current thinking on cryptocurrency regulation.

Background

In early 2015, The DAO, an unincorporated association, organized an IPO-style offering in which investors were offered DAO Tokens in exchange for Ether, a cryptocurrency similar to Bitcoin. The proceeds of the offering were intended to finance projects approved by a vote of DAO Token holders. Projects were to consist of investments in “smart contracts,” multiparty agreements encoded on a blockchain (a transaction ledger stored on a diffuse computing network). This arrangement enables transactions contemplated by such contracts to be self-executing by facilitating their verification and enforcement.

The offering presented investors with the opportunity to share in the earnings from these projects and, importantly, was marketed as such. In June 2016, however, hackers gained control over one-third of the Ether raised through the offering, then valued at about $50 million. Only by fundamentally altering the computing platform on which Ether is based was The DAO able to regain control of most of the stolen assets. Following this attack, the Commission launched an investigation into the applicability of the federal securities laws to DAO Tokens and similar offerings.

Securities Regulation of DAO Tokens and Implications for ICOs

In its investigation, the Commission sought to determine whether DAO Tokens and similar instruments constitute securities for purposes of the Securities Act and the Exchange Act. A security is broadly defined to include investment contracts.1 The Commission found that DAO Tokens met all three prongs of the 70-year-old Howey test for identifying investment contracts and, therefore, constituted a security. Specifically, the Commission’s analysis concluded that The DAO’s investors (1) invested money (2) with a reasonable expectation of gaining profits (3) that were derived from the efforts of The DAO.

The investment-of-money prong was met by investors’ exchange of the digital currency Ether. The expectation-of-profits prong was satisfied by how the offer was marketed. Statements made by promoters and on The DAO website marketed the offering as an investment. The Commission discussed at greater length whether the offering depended on the efforts of others. Here the Commission framed the “central issue” as whether the efforts made by those other than the investors were “undeniably significant” and “essential managerial efforts which affect the failure or success of the enterprise.” The Commission noted that the creators of The DAO “held themselves out to investors as experts in Ethereum,” the blockchain protocol on which The DAO operates. Moreover, they informed investors that they had selected key personnel to manage the enterprise “based on their expertise and credentials.”

The Commission provided extensive additional analysis of this prong of the Howey test, examining marketing factors specific to The DAO, suggesting that other platforms could be structured to avoid the inference that the profits were derived from the efforts of others, thereby avoiding the conclusion that securities were involved. For example, the Commission noted that DAO Token holders’ voting rights “did not provide them with meaningful control over the enterprise.” The Commission observed that the ability to vote for contracts was “largely perfunctory” and that token holders were “widely dispersed and limited in their ability to communicate with each other.”

The Commission proceeded to describe and examine these features at length. This emphasis is notable and suggests that technological innovation could provide token holders with voting rights and communication abilities sufficient to reach a different conclusion under the Howey test’s third prong. Implementing such a platform could be very difficult, especially where holders are numerous, because effective voting control may not be practical. However, the Commission’s detailed discussion on these points, and the issues it identified in The DAO’s offering, raise intriguing questions about how a different approach might ultimately be successful.

The report also noted that The DAO offering would not fall under the JOBS Act’s crowdfunding exemption because The DAO did not meet certain threshold criteria, such as being registered with the Commission and the Financial Industry Regulatory Authority as a broker-dealer or a funding portal. The DAO also raised more than the $1 million annual cap applicable to exempt issuers under Regulation CF.

The Commission’s report does not assert that all coins and tokens necessarily constitute securities, nor that all ICOs are “offerings,” but does emphasize the broad application of securities laws “regardless [of] whether the issuing entity is a traditional company or a decentralized autonomous organization” and “regardless [of] whether those securities are purchased using U.S. dollars or virtual currencies.” The Commission’s simultaneous issuance of an investor bulletin on ICOs explains that “depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities,” such that their offer and sale would be subject to securities regulation.

Until now ICOs have been organized on the theory that the coins and tokens being issued are currency and therefore exempt from securities regulation. The Commission rejected this argument, likely because purchasers of coins and tokens do so with intent to invest and for value appreciation, not to hold legal tender currency. Likely due to the novelty of the transactions involved and apparent good faith intentions of the participants, the Commission decided not to pursue an enforcement action against The DAO. Future ICO sponsors are unlikely to receive a similar free pass.

Important Takeaways

  • Although the Commission’s report is directly applicable only to DAO Tokens, it effectively puts other ICO issuers on notice that all cryptocurrency coin and token offerings are potentially subject to securities regulation. In particular, coins or tokens that meet the Howey test as applied in the Commission’s analysis are particularly likely to be regulated, as the offering of such tokens likely constitutes an investment contract and therefore will be subject to securities regulation. In addition, ICO platforms should be aware of the circumstances under which they might constitute an exchange, requiring registration as a broker-dealer, national securities exchange or alternative trading system in the absence of an exemption.
  • The Commission’s report raises the question of whether alternative approaches, with robust managerial control in the hands of holders, could be developed to avoid the third prong of the Howey test. Although significant caution is in order, the Commission’s analysis may offer hope to market participants who innovate in ways that carefully address the concerns articulated in the report. As the Commission itself noted, “[w]hether or not a particular transaction involves the offer and sale of a security—regardless of the terminology used—will depend on the facts and circumstances, including the economic realities of the transaction.” Nonetheless, we believe the Commission and Staff will be highly skeptical of conclusions that the federal securities laws do not apply to coin and token offerings.
  • The Commission’s report does not consider whether The DAO’s activities render it an “investment company” for purposes of the Investment Company Act of 1940, which generally requires investment companies to register with the Commission. Given the broad definition of “securities” under this act, and the Commission’s conclusion that cryptocurrency coins and tokens may constitute securities, ICO issuers should carefully consider the applicability of this act to their offerings, and the obligations this would entail.
  • The Commission’s message is clear: ICO issuers and brokers must tread carefully and fully consider the regulatory implications of offerings prior to launch. If the coins or tokens being offered are securities, registration with the Commission will be required, unless an exemption is available, such as in private placements and foreign offerings to accredited and overseas investors, respectively.

Final Thoughts

The Commission’s detailed legal and factual analysis of the DAO Token offering suggests the Commission is closely monitoring cryptocurrency and ICO activities. The Commission observes that “virtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments such as DAO Tokens to raise capital.”

We expect the Commission will continue to examine the applicability of securities law to each iteration of ICO as this form of fund-raising evolves. Issuers considering an ICO should consult securities law and digital finance experts, including competent legal counsel, before undertaking such activities.

Related Links

Securities and Exchange Commission, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34-81207.pdf

Securities and Exchange Commission, Press Release, SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities (July 25, 2017), available at https://www.sec.gov/news/press-release/2017-131

Securities and Exchange Commission, “Investor Bulletin: Initial Coin Offerings” (July 25, 2017), available athttps://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings

SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities

Crowdfund Beat News Wire,

SEC issued an investigative report stating, “tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to the federal securities laws.”

U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations

FOR IMMEDIATE RELEASE
2017-131

Washington D.C., July 25, 2017—

The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issues of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, Director of the Division of Corporation Finance.

The SEC’s Report stems from an inquiry that the agency’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. The DAO has been described as a “crowdfunding contract” but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. 

Steven Peikin, Co-Director of the Enforcement Division added, “As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws.”

In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants:  the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.

The SEC’s Office of Investor Education and Advocacy today issued an investor bulletin educating investors about ICOs. As discussed in the Report, virtual coins or tokens may be securities and subject to the federal securities laws. The federal securities laws provide disclosure requirements and other important protections of which investors should be aware. In addition, the bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws.

The SEC’s investigation in this matter was conducted in the New York office by members of the SEC’s Distributed Ledger Technology Working Group (DLTWG) — Pamela Sawhney, Daphna A. Waxman, and Valerie A. Szczepanik, who heads the DLTWG — with assistance from others in the agency’s Divisions of Corporation Finance, Trading and Markets, and Investment Management. The investigation was supervised by Lara Shalov Mehraban.

Happy Birthday Regulation CF (shame about the compliance failures)

So, one year ago today, Regulation CF went into effect. Small companies can make offerings up to $1 million (recently increased to $1.07 million) and roughly 325 companies have made Reg CF offerings so far. Roughly 80 companies have filed Form C-U to notify the SEC of the conclusion of their offering (they can also use Form C-U to report progress of the deal, so the raw numbers need refining). Another 50 or so companies have taken advantage of the fact that the SEC tells us that multiple closings are permitted once a company reaches its target offering amount, and so have received funds but have ongoing offerings.

We’re talking about modest success so far. Companies are finding it takes a while to raise the funds they are seeking and many offerings are still in progress, so overall success rates are going to go up in time. And several companies have had million-dollar raises.

The less-encouraging story in in the area of compliance. By our calculation, by May 1 perhaps 100 companies should have filed annual reports under Form C-AR (all the companies which had filed C-Us by that date and all companies which had sold some securities but not finished their raise). Again by our calculations, only two-thirds of the companies that should have filed did so. Not too impressive.

And that’s just measuring whether those companies filed, not looking at the content of their filings. We’ve been reviewing all the filings made on Form C, and evaluating their compliance with the disclosure requirement of Rule 201. Later this summer we’ll publish more detailed findings. But in the meantime, we are sad to report that compliance is not particularly good. It seems to be improving, which is the good news. But there are a number of areas where the disclosure requested by the SEC is not being made:

  •          Only one in four companies is providing a discussion of the company’s financial performance since the end of the financial statements included in the Form C, which can be as old as sixteen months.
  •           Four out of five companies include no discussion at all about how the proceeds of the offering will affect their liquidity and how long the proceeds will last.
  •           One quarter of the companies filing don’t include a description of all the securities they have issued.

The list goes on. I don’t think disclosure failure is an insurmountable problem; as discussed above there does seem to be some improvement. However, at a time when we are looking for more flexibility from the SEC, “please change the rules because we aren’t complying with the ones currently in effect” is not generally a winning argument. The answer to the issue of disclosure deficiency is clearly one is clearly education; the biggest areas of deficiency are where the SEC’s requirements may not be totally clear to issuers, and it’s an area where the intermediaries (funding platforms and brokers) can help. Filing deficiency may be a harder issue to address; often filing requirement only kick in when the intermediary is not longer involved.

But if we don’t solve both problems, as an industry it will be harder to get the regulatory flexibility we still need.

Source:

https://crowdcheck.com/blog/happy-birthday-regulation-cf-shame-about-compliance-failures?utm_campaign=buffer&utm_content=buffer3ae14&utm_medium=social&utm_source=linkedin.com

 

Open Letter to Real Estate Sponsors : Investors Deserve Better Quarterly Reports

By Mark Robertson CrowdFundBeat  Sr. Contributing Editor. President at CrowdDD, LLC,

This is an open letter to all real estate sponsors.  Investors want better reporting.  Concise, short, informative, and easy to read reports.  Unfortunately, most sponsors do poor job of communicating results with investors. I have over 50 equity crowdfunding investments and the quality of the quarterly reports varies wildly.

The poster child for good reporting is Praxis Capital lead by Brian Burke.  They have a one page report with graphs, relevant statistics, and a short write up of the past quarter’s results and commentary. They key features of their report are they inform the investor of the only 3 things investors truly care about.

  1. How much is MY distribution? What is the cash on cash return? What is it as a percentage of my investment? How does it compare to your projections for this quarter?
  2. The properties performance. Most importantly is the NOI. What is this quarters NOI compared to the projections made by the sponsor at the time of my investment?  What is occupancy compared to both last year’s quarter and compared to projections?
  3. If actual distributions are below projections or if NOI is below projections, we want to know why.  What we really want to know is how you plan to correct the shortfall and WHEN do you expect to get back on track.

Including the full income and balance sheet is great, but what we really want to know is the investment performing as you promised and where is MY DISTRIBUTION? In the end those two factors are all that really matter. Again, so it will sink in. How much money am I getting and are you meeting projections? We should know these 2 factors within 30 seconds of looking at the report.  The last thing we want to do is to dig and dig and hope to find this information.  

At the start of every update it should say: The project, life to date, is running xx% over/under to proforma.” and “For the last quarter the project was xx% over/under to proforma”. Unfortunately, I usually pull up the original offering materials and try to determine if the actual results are as projected.  Investors should not have to do this. That is the sponsors responsibility. Investors also appreciate guidance for the upcoming quarter or year based on market conditions. Be proactive and manage expectations.

Other Pet Peeves:

  1. It should never take longer than 45 days after a quarter to prepare the report
  2. Reporting that distributions for the quarter were $x00,000 with no context. I want to know what I am getting and if it’s what you projected. Don’t make me dig around to see if $x00,000 is good or not.
  3. Sending out the ach distribution without a clearly identifiable notation of who the ach is from. Email the report before the ach so we can expect the distribution.
  4. Justifying a quarters miss because of seasonality. Your projections should have accounted for seasonality. You knew the seasons were coming when you asked for my investment.
  5. Comparing results to budget and budget is not the proforma numbers or the projections at the time of the investment. Wrong on so many levels.

In informal poll of the 240 accredited members of the 506 Investor Group concur that inadequate reporting is one of the most vexing problems with investing in syndicated and crowdfunding real estate deals.  An industry standard like Praxis quarterly reports would go a long way to solving this issue. CrowdDD already has ratings reviews from actual investor.  We would be more than happy to host a sponsor template for investors to see how cash flow and NOI is tracking versus proforma projections.

Source:

https://www.crowddd.com/blog/view?id=Nzc=&ct=Open+Letter+to+Real+Esate+Sponsors++Investors+Deserve+Better+Quarterly+Reports

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