Lawyer Monthly magazine has been following Crowdfunding developments, along with the
business community and media. The attached interview highlights a couple of hot button points, including the benefits and common legal implications of Crowdfunding. Click here to read more.
Questions? Let me know.
Crowdfunding now comes in multiple flavors:
All have one thing in common: the entrepreneur can use “general solicitation and advertising” to raise money.
But that’s all they have in common. They differ on such critical features as:
I’ve created a chart to keep it all straight – a Crowdfunding Cheat Sheet. The chart won’t
format properly here in the blog, so you’ll need to click here to view it. You might want to print it for future reference.
CLICK HERE TO VIEW THE CROWDFUNDING CHEAT SHEET
This is my takeaway from the chart:
Of the five flavors of Crowdfunding that will soon be available, only Title II Crowdfunding and Regulation A+ Crowdfunding are likely to play a major role. Title III Crowdfunding – ironically, the only thing the media talked about when the JOBS Act was passed in 2012 – seems doomed to a non-speaking part, at least as long as the $1 million limit remains in place. Those satisfied with raising money from only accredited investors will probably look to the simplicity of Title II while those needing to cast a wider net will likely take the plunge into Regulation A+. As for Rule 504 and the old version of Regulation A – they’re history.
But it’s a brand new world in the capital markets, and impossible to predict.
Questions? Contact Mark Roderick.
On January 23, 2014, the SEC issued two Securities Act Rules “compliance and disclosure interpretations” regarding Title II Crowdfunding. Both of the new C&DIs provide transition guidance for Rule 506 offerings that started before September 23, 2013, the effective date of the new Rule 506(c) exemption.
Question 260.33: An issuer commenced an offering in reliance on Rule 506 before September 23, 2013, the effective date of the new Rule 506(c) exemption. The issuer decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415 (July 10, 2013). In such circumstances, is the issuer required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c)?
Answer: No. For an offering that commenced before September 23, 2013 and that, pursuant to the Commission’s transition guidance, the issuer continues in accordance with Rule 506(c) after that date, the issuer must take reasonable steps to verify the accredited investor status of only investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c). The issuer must amend any previously-filed Form D to indicate its reliance on the Rule 506(c) exemption for its offering. See Securities Act Rules C&DI 260.05.
Question 260.34: An issuer commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415 (July 10, 2013), became Rule 506(b). The issuer now wishes to continue the offering in reliance on Rule 506(c). Can the issuer rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption?
Answer: Yes, as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers.
While these C&DIs are important for issuers caught mid-stream when Title II Crowdfunding came into effect, the more general message is that the SEC continues to be quite lenient toward Crowdfunding. On both of these questions the decision could have gone the other way, but the SEC chose to make life easier.
Questions? Let me know.
As if companies and investors didn’t have enough letters and numbers to remember, in December the SEC issued proposed new rules under Regulation A. We already have Title II Crowdfunding under the JOBS Act and Title III Crowdfunding under the JOBS Act – these new rules can be thought of as Title IV Crowdfunding under the JOBS Act.
Putting the new rules in context, Regulation A has always allowed companies to use general solicitation to find investors. But the drawbacks of Regulation A were very significant: a company could raise no more than $5 million; issuers were required to file a mini-registration statement with the SEC; and offerings under Regulation A were subject to the labyrinth of state securities laws, i.e., “blue sky” laws in every state where the securities were offered. As a result, Regulation A has been used very rarely.
But Title IV of the JOBS Act directed the SEC to liberalize Regulation A. The rules proposed by the SEC on December 18, 2013 would do just that:
That will be music to the ears of many issuers: finding investors through the Internet free of state regulation, selling to non-accredited investors, raising up to $50 million rather than the paltry $1 million allowed in Title III Crowdfunding.
The main drawbacks under the proposed rules:
Neither Title II Crowdfunding nor Title III Crowdfunding requires a registration statement, mini or otherwise, and Title II Crowdfunding in particular is free of most reporting requirements.
Nevertheless, the benefits of Regulation A+ – the $50 million limit and the ability to sell to non-accredited investors – will make it attractive for many issuers, certainly an option to be considered.
The proposed rules are subject to a 60 day comment period.
Questions? Contact Mark Roderick at Flaster/Greenberg PC.
If you didn’t know better, you might think the Title II Crowdfunding regulations and the Title III Crowdfunding regulations were written by two different agencies.
On one hand, the Title II regulations take a decidedly hands-off approach to the Crowdfunding marketplace. For example:
Recall that in the first version of the Title II regulations, the SEC didn’t even include safe harbors for determining whether an investor is accredited. The safe harbors were added only after a public uproar demanding more rules from the SEC (and thus, from the government).
Even after the addition of the safe harbors, there are many, many questions that the Title II regulations don’t even address. Operating in laissez-faire mode, the SEC has left the answers to the marketplace and to the courts.
On the other hand, the Title III regulations – all 585 pages of them, including the preambles – impose stringent and detailed requirements on issuers and portals alike. For example:
The Title III regulations, in fact, create a regulatory scheme that has far more in common with the rules that apply to publicly-traded companies than with the laissez-faire approach of the Title II regulations. The main question about the Title III regulations is whether they are so burdensome that they will snuff out Title III Crowdfunding before it begins.
Did different government agencies create the Title II and Title III regulations? Obviously not. The chasm between Title II and Title III can be explained by one fact: Title II investors are all accredited (for individuals, income of at least $200,000 or net worth of at least $1 million) while Title III investors can be anyone. The assumption behind the regulations is that wealthier people can take care of themselves while those of modest means need the paternalistic protection of the government.
It’s a theme that has run through U.S. securities laws for a long, long time. We’ll see how well it works for Crowdfunding.
Questions? Let me know.
John Mattera offered a great deal to his investors. Through special-purpose investment vehicles, investors could buy shares in well-known companies like Facebook and Groupon, which were then privately-owned. When the companies went public, investors would reap millions.
Mattera raised more than $13 million from more than 140 investors, some of whom invested their life savings.
The only problem was that Mattera didn’t use the money to buy shares in Facebook or Groupon. Instead, he used the money for the normal trappings of ill-gotten wealth, including a waterfront home in Fort Lauderdale, two Rolls-Royces, and a Lamborghini, according to the government.
Mattera was caught and sentenced to 11 years in prison. But his investors aren’t getting their money back.
Bernie Madoff, John Mattera. . . .there is no shortage of people trying to steal your money through investment scams. Why are thieves attracted to the securities industry? As “Slick Willie” Sutton said when asked why he robbed banks, “Because that’s where the money is.”
It doesn’t matter if you’re smart, sophisticated, and have seen it all. Mattera’s investors thought they had seen it all, too.
Be careful out there.
Questions? Let me know.
I have been asked by the Pennsylvania Bar Institute (PBI) to lead a Crowdfunding breakout session at their annual Business Lawyers’ Institute in Philadelphia on November 13th.
I will discuss the latest news and information on JOBS Act Crowdfunding, including: Proposed Title III Crowdfunding Rroegulations; Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”
For additional information on this event, or to register, click here.
Questions? Let me know.
MARK RODERICK
On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.
There are two extremely important things about the proposed regulations:
Recall that the JOBS Act provides for two kinds of Crowdfunding:
For a detailed outline of the Title III statute itself, click here.
Despite their length, the proposed regulations do not add much to the statute. There are just a few points worth noting for a company looking to raise money:
The proposed regulations are even more important for portals, or would-be portals. The portal is designated as the virtual policeman for ensuring compliance with the law. For example, the proposed regulations provide that the portal must have a reasonable basis for believing that company is complying with the law, and must deny access to the issuer under certain circumstances. In effect, the portal is required to act as an arm of the SEC itself.
Just as a company trying to raise money might decide that Title III is too onerous, an entrepreneur thinking about forming a Title III portal might decide that the fruit are a little too high and a little too green.
Questions? Let me know.
Today, at long last, the SEC issued proposed regulations implementing Title III Crowdfunding, which will allow companies to raise up to $1 million per year in small increments from non-accredited investors.
With commentary, the proposed regulations run to almost 600 pages. We’ll be posting a summary soon.
Title II Crowdfunding has been live since September 23, 2013. The era of Crowdfunding is now.
Stay tuned for more updates…
Questions? Let me know.
I have been asked by the University City Science Center in Philadelphia, PA to be the featured speaker on Crowdfunding at the “Smart Talk – Crowdfunding 101” seminar on October 24, 2013.
I will discuss the basic changes to the JOBS Act and what this means for you and your company’s future, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”
The seminar will take place on Thursday, October 24, 2013 at the Quorum at the University City Science Center in Philadelphia, PA from 8:30 – 10:00 a.m. This event is free, but space is limited, so you must register to attend. To register, email the University City Science Center to secure a seat. For additional information on the event, click here.
I hope to see you there!
MARK RODERICK