Category: Crowdfunding Laws

SEC Subcommittee Reports On Accredited Investor Definition

On By crowdfundattnyIn Accredited Investor, Crowdfunding, Crowdfunding Laws, Dodd-Frank Act, Entrepreneurs, JOBS ActLeave a comment

The Dodd-Frank Act instructs the SEC to evaluate the definition of “accredited investor” and, if it sees fit, to modify the definition “as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.”

As regular readers of this blog know, I’ve been optimistic that the SEC would not take this opportunity to kill Title II Crowdfunding and every other kind of Rule 506(c) private placement (which includes most angel investing as well) by creating an onerous new definition. The report issued recently by a SEC subcommittee, while surprising in some respects, doesn’t dent my optimism.

The subcommittee report makes two important, though obvious, points:

  • The Committee does not believe that the current definition as it pertains to natural persons effectively serves this function in all instances.
  • The current definition’s financial thresholds serve as an imperfect proxy for sophistication, access to information, and ability to withstand losses.

The existing definition is imperfect, yes. The question is, what to do about it?

Although the report does not provide a clear answer to that question, the good news, from my perspective, is that the report does not suggest merely indexing the current thresholds ($200,000 of income, $1 million of net worth) to inflation, which would disqualify most accredited investors and send the private placement market into a tailspin. Instead, the report seeks a standard that will address both financial sophistication and the ability to withstand loss.

The report suggests two specific measures of financial sophistication: the series 7 securities license and the Chartered Financial Analyst designation. Following the lead of the United Kingdom, the report also suggests that those with proven investment experience – for example, a member of an angel investing group – might qualify. Finally, the report suggests, as others have before, that the SEC could develop an examination for the purpose of qualifying investors.

Declining a suggestion from several quarters, the report does not include lawyers or accountants as investors who should be deemed to have financial sophistication.

The reports veers a little off track, in my opinion, when it speculates that, in conjunction with changing the definition of accredited investor, the SEC could limit the amount invested by each investor – following the 10% limit of Regulation A+, for example. That kind of limitation would be new to Rule 506 offerings.

In my Model State Crowdfunding law, I use a definition of accredited investors that includes lawyers, accountants, and anyone with the license from FINRA, as long as the lawyer, accountant, or license-holder has income of at least $75,000. Recognizing the imperfection of any definition, I think that strikes about the right balance. Bolt on an SEC-administered examination option and we’re right there with the subcommittee report.

All in all, it’s good to see the SEC, once again, thinking through the issues carefully. We can see the light at the end of the tunnel.

Questions? Let me know.

SEC On Intrastate Crowdfunding: Relax

On By crowdfundattnyIn Crowdfunding, Crowdfunding Laws, Intra-State Crowdfunding, Rule 147, UncategorizedLeave a comment

I think the SEC has done a terrific job with Crowdfunding, all things considered. In its latest contribution, the SEC just told issuers how to navigate a bumpy stretch of highway in intrastate Crowdfunding.

The bumps start with Federal Rule 147, written long before the Internet was a glimmer in Al Gore’s eye. Among other things, Rule 147 provides that an intrastate offering must be offered only to residents of a single state. That rule makes sense in a paper-only world, but how to comply when an offering is on the Internet, visible to everyone with a browser?

To get past the bumps, the SEC drilled down on the technology and realized that a user’s IP address reveals the state where his or her computer is located. Taking the logical step, the SEC confirms that as long as the offering can be viewed only by users with in-state IP addresses, it satisfies that piece of Rule 147.

I’d like to say the SEC got that idea from my blog, but I’m sure that’s not true.

From the 2013 no-action letters to the flexible regulations under Rule 506(c) to the proposed regulations under Regulation A+, the SEC has shown that it “gets” Crowdfunding. Now, if Congress would just give us a workable Title III. . . .

Questions? Let me know.

A Model State Crowdfunding Law

On By crowdfundattnyIn Crowdfunding, Crowdfunding Laws, JOBS Act, UncategorizedLeave a comment

Model State CFI was asked recently to draft a Crowdfunding statute for Texas, to augment the proposals made by the Texas State Securities Board. Having done that, I have turned my Texas statute into a model law that could be used by any state, including the handful that have already adopted Crowdfunding in one form or another. The model law is a PDF here.

I drafted the model statute with these goals:

  • To balance the interests of investors, entrepreneurs, and state securities regulators;
  • To reflect the lessons I’ve learned over more than 30 years in the capital formation business;
  • To capture the current best practices of states and the Federal government;
  • To introduce new concepts that will allow Crowdfunding to flourish; and
  • As a Jeffersonian believer in Federalism, to leave space for state-by-state experimentation.

These are some of the key features:

  • The statute relies on portals that will be registered with state securities regulators. The same portal could be registered in more than one state and, indeed, could male offerings at the Federal level as well.
  • The statute imposes disclosure requirements that mirror the disclosures typically made in private placement transactions.
  • The statute expands the concept of “control persons.”
  • The statute requires that state securities regulators have 24/7 real-time access to any material shown to prospective investors.
  • The statute introduces and expands the Federal “bad actor” concept.
  • The statute raises investment limits for truly local projects, to encourage local investing.
  • The statute expands the definition of “accredited investor.”
  • The statute allows issuers to raise up to $2 million per offering.
  • The statute prohibits issuers from seeking to limit their liability for fraud or misrepresentation.
  • The statute gives state regulators broad latitude to modify in accordance with local conditions.

Everything is about balance. Without overwhelming issuers with bureaucracy, the statute protects investors and creates an ecosystem where capitalism can flourish.

I’m going to be reaching out to states with the model law. I would love to hear your input and advice.

Questions? Let me know.