THE EXPANDED DEFINITION OF ACCREDITED INVESTOR: A (FIRST) STEP IN THE RIGHT DIRECTION

For all the ink spilled wondering and worrying how the SEC might change the definition of accredited investor, yesterday’s announcement seems almost anti-climactic.

Perhaps the main story is what the SEC didn’t do. It didn’t limit the definition of accredited investor in any way. Everyone who was an accredited investor yesterday is an accredited investor today. In that sense the SEC continues to demonstrate its support for the private investment marketplace and give the lie to those who believe otherwise.

On the other hand, the SEC didn’t break much new ground expanding the definition, at least for now.

The principal expansion, as expected, was in adding to the list of accredited investors individuals who hold Series 7, Series 65, or Series 82 licenses. The SEC also added investment advisers registered with the SEC or any state and, more surprisingly, venture capital fund advisers and exempt reporting advisers. I say “more surprisingly” because neither venture capital fund advisers nor exempt reporting advisers are required to pass exams or otherwise demonstrate financial knowledge or sophistication.

The list of accredited investors was also extended to include:

  • Entities, including Indian tribes, governmental bodies, funds, and entities organized under the laws of foreign countries, that (1) own “investments” (as defined in Rule 2a51-1(b) under the Investment Company Act of 1940) in excess of $5 million, and (2) were not formed to invest in the securities offered;
  • Rural business development companies;
  • Family offices with at least $5 million in assets under management and their family clients, as each term is defined under the Investment Advisers Act of 1940; and
  • Knowledgeable employees of a private fund, but only with respect to investments in that fund.

Finally, the SEC clarified that existing provisions of the accredited investor definition that refer to spouses also includes “spousal equivalents,” meaning someone who has gotten under your nerves for at least seven years (actually “a cohabitant occupying a relationship generally equivalent to that of a spouse”).

While a modest first step, these additions are welcome and a harbinger of bigger things to come. The new rule explicitly invites FINRA, other industry self-regulatory authorities, and accredited education institutions to develop “certifications, designations, or credentials” that the SEC would approve for accredited investor qualification. I imagine FINRA and professional organizations will jump at the chance. If this leads to millions or tens of millions of Americans learning about securities and participating in the Crowdfunding market, well, that’s a very good thing for everyone.

The new definition will become effective 60 days after being published in the Federal Register.

SEC ISSUES EMERGENCY RULES TO FACILITATE TITLE III CROWDFUNDING DURING COVID-19 CRISIS

With credit markets tightened and 30 million Americans newly out of work, the SEC has adopted temporary rules to make Title III Crowdfunding a little easier from now until August 31, 2020.

The temporary rules are available here. They aim to make Title III a little faster and easier in four ways:

#1 – Launch Offering without Financial Statements

An issuer can launch the offering – go live on a funding portal – before its financial statements are available. (But investment commitments aren’t binding until the financial statements have been provided.)

#2 – Lower Standard for Some Financial Statements

An issuer trying to raise between $107,000 and $250,000 in a 12-month period doesn’t have to produce financial statements reviewed by an independent accountant, only financial statements and certain information from its tax return, both certified by the CEO.

#3 – Quicker Closing

An issuer can close the offering as soon as it has raised the target offering amount, even if the offering hasn’t been live for 21 days, as long as the closing occurs at least 48 hours after the last investment commitment and the funding portal notifies investors of the early closing.

#4 – Limit on Investor Cancellations 

Investors can cancel within 48 hours of making a commitment, but can’t cancel after that unless there’s a material change in the offering.

CAVEAT:  These rules are not available if the issuer:

  • Was organized or operating within six months before launching the offering (e., this is not for brand-new companies); or
  • Previously raised money using Title III Crowdfunding but failed to comply with its obligations.

I’m not sure how much difference these rules will make in practice. But that’s not the main point as far as I’m concerned. The main point is that with about a million other things on its plate, the SEC took the time to think about and draft these rules. The SEC must believe that equity Crowdfunding can play an important role in our capital markets.

On that basis, I predict that the proposals the SEC made on March 4th will be adopted soon after the public comment period expires on June 1st. And after that, who knows.

SEC PROPOSES MAJOR UPGRADES TO CROWDFUNDING RULES

The SEC just proposed major changes to every kind of online offering:  Rule 504, Rule 506(b), Rule 506(c), Regulation A, and Regulation CF.

The proposals and the reasoning behind them take up 351 pages. An SEC summary is here, while the full text is here. The proposals are likely to become effective in more or less their existing form after a 60-day comment period.

I’ll touch on only a few highlights:

  • No Limits in Title III for Accredited Investors:  In what I believe is the most significant change, there will no longer be any limits on how much an accredited investor can invest in a Regulation CF offering. This change eliminates the need for side-by-side offerings and allows the funding portal to earn commissions on the accredited investor piece. The proposals also change the investment limits for non-accredited investor from a “lesser of net worth or income” standard to a “greater of net worth or income” standard, but that’s much less significant, in my opinion.
  • Title III Limit Raised to $5M:  Today the limit is $1.07M per year; it will soon be $5M per year, opening the door to larger small companies.

NOTE:  Those two changes, taken together, mean that funding portals can make more money. The impact on the Crowdfunding industry could be profound, leading to greater compliance, sounder business practices, and fewer gimmicks (e.g., $10,000 minimums).

  • No Verification for Subsequent Rule 506(c) Offerings:  In what could have been a very important change but apparently isn’t, if an issuer has verified that Investor Smith is accredited in a Rule 506(c) offering and conducts a second (and third, and so on) Rule 506(c) offering, the issuer does not have to re-verify that Investor Smith is accredited, as long as Investor Smith self-certifies. But apparently the proposal applies only to the same issuer, not to an affiliate of the issuer. Thus, if Investor Smith invested in real estate offering #1, she must still be verified for real estate offering #2, even if the two offerings are by the same sponsor.
  • Regulation A Limit Raised to $75M:  Today the limit is $50M per year; it will soon be $75M per year. The effect of this change will be to make Regulation A more useful for smaller large companies.
  • Allow Testing the Waters for Regulation CF:  Today, a company thinking about Title III can’t advertise the offering until it’s live on a funding portal. Under the new rules, the company will be able to “test the waters” like a Regulation A issuer.

NOTE:  Taken as a whole, the proposals narrow the gap between Rule 506(c) and Title III. Look for (i) Title III funding portals to broaden their marketing efforts to include issuers who were otherwise considering only Rule 506(c), and (ii) websites that were previously focused only on Rule 506(c) to consider becoming funding portals, allowing them to legally receive commissions on transactions up to $5M.

  • Allow SPVs for Regulation CF:  Today, you can’t form a special-purpose-vehicle to invest using Title III. Under the SEC proposals, you can.

NOTE:  Oddly, this means you can use SPVs in a Title III offering, but not in a Title II offering (Rule 506(c)) or Title IV offering (Regulation A) where there are more than 100 investors.

  • Financial Information in Rule 506(b):  The proposal relaxes the information that must be provided to non-accredited investors in a Rule 506(b) offering. Thus, if the offering is for no more than $20M one set of information will be required, while if it is for more than $20 another (more extensive) set of information will be required.
  • No More SAFEs in Regulation CF:  Nope.

NOTE:  The rules says the securities must be “. . . . equity securities, debt securities, or securities convertible or exchangeable to equity interests. . . .” A perceptive readers asks “What about revenue-sharing notes?” Right now I don’t know, but I’m sure this will be asked and addressed during the comment period.

  • Demo Days:  Provided they are conducted by certain groups and in certain ways, so-called “demo days” would not be considered “general solicitation.”
  • Integration Rules:  Securities lawyers worry whether two offerings will be “integrated” and treated as one, thereby spoiling both. The SEC’s proposals relax those rules.

These proposals are great for the Crowdfunding industry and for American capitalism. They’re not about Wall Street. They’re about small companies and ordinary American investors, where jobs and ideas come from.

No, the proposals don’t fix every problem. Compliance for Title III issuers is still way too hard, for example. But the SEC deserves (another) round of applause.

Please reach out if you’d like to discuss.

Regulation A: What Country Do You See When You Wake Up?

sara palin

A company may use Regulation A (Tier 1 or Tier 2) only if the company:

  • Is organized in the U.S. or Canada, and
  • Has its principal place of business in the U.S. or Canada.

I’m often asked what it means for a company to have its principal place of business in the U.S. or Canada. The first step is to identify the people who make the important decisions for the company. The next step is to ask what country those people see when they wake up in the morning. If they see the U.S. or Canada, they’re okay. If they see some other country, even a beautiful country like Norway or Italy, they’re not okay, or at least they can’t use Regulation A.

Seeing the U.S. or Canada via Facetime doesn’t count.

A company called Longfin Corp. ignored this rule and suffered the consequences. The people who made the important decisions for the company saw India when they woke up in the morning. The only person who saw the U.S. was a 23-year-old, low-level employee who worked by himself in a WeWork space. In its offering materials the company claimed to be managed in the U.S., but a Federal court found this was untrue and ordered rescission of the offering, $3.5 million in disgorgement, and $3.2 million in penalties.

Harder questions arise if, for example, three of the directors and the CFO see the U.S. when they wake up, but two directors and the CEO see Ireland.

On the plus side, a U.S. mining company with headquarters in Wyoming definitely can use Regulation A even if all its mines are in South America. The “principal place of business” means the location where the company is managed, not where it operates.

Questions? Let me know.

The Cashflow Hustle Podcast: Crowdfunding Techniques to Level Up Your Business

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CLICK HERE TO LISTEN

Mark Roderick appeared on the Cashflow Hustle Podcast with Justin Grimes, where he discussed Crowdfunding Techniques to Level Up Your Business.

In this Episode, You’ll Learn About:

1. The Crowdfunding and its flavors
2. The deductions in Crowdfunding
3. The role of SEC
4. Blockchain technology in Crowdfunding
5. The Investor portals
6. Tokenized security in Crowdfunding

Questions? Let me know.

“Secondary Sales” of Private Securities (And Tokens) in Crowdfunding

We use the term “secondary sales” to refer to sales of securities by anyone other than the issuer, and the term “secondary market” to refer to a marketplace where those sales take place.

Suppose NewCo, LLC, a private (non-public) company, raises money by issuing limited liability company interests under Rule 506(c). One investor, Amanda Sakaguri, later sells her limited liability company interest to a third party. The sale by Ms. Sakaguri is what we refer to as “secondary sale.” If Ms. Sakaguri sold her limited liability company interest on a marketplace – as opposed to a private sale – we call that a “secondary market.”

The Basic Legal Rules for Secondary Sales

All offers of securities must be fully registered with the SEC, under section 5 of the Securities Act of 1933. If there were no exceptions to section 5, Ms. Sakaguri would have to register with the the SEC before selling her limited liability company interest. But of course, this being the securities laws, there are lots of exceptions. For example:

  • If Ms. Sakaguri bought her limited liability company interest in a Regulation A offering, she could sell it to anyone right away.
  • If Ms. Sakaguri bought her limited liability company interest in a Regulation CF offering, she could sell it to some buyers right away, and to anyone after one year.

Ms. Sakaguri bought her limited liability company interest under Rule 506(c), so she isn’t eligible for either of those exceptions. For Ms. Sakaguri and other owners of private securities, the most likely potential exception is in section 4(a)(1) of the Securities Act, which exempts “[Sales] by any person other than an issuer, underwriter, or dealer.”

We know Ms. Sakaguri isn’t the issuer. How about a dealer or an underwriter?

A dealer is “[A]ny person engaged in the business of buying and selling securities . . . .for such person’s own account. . . .” but does not include “. . . .a person that buys or sells securities. . . . but not as a part of a regular business.” Provided she isn’t buying and selling securities as a business, Ms. Sakaguri isn’t a dealer.

Whether she’s an underwriter is a harder question, believe it or not. We think of underwriters as big Wall Street firms in gleaming towers, but the definition is much broader than that:  “[A]ny person who has purchased from an issuer with a view to. . . .the distribution of any security. . . .” If Ms. Sakaguri expected to sell her limited liability company interest from NewCo when she bought it, she might be an underwriter, ineligible for the exception.

Whether the seller of a security is an underwriter once caused so much confusion that the SEC adopted a long rule on that topic. 

Rule 144

Rule 144 provides a “safe harbor” for sellers. If a seller satisfies all the conditions of Rule 144, the seller will definitely not be treated as an underwriter for purposes of section 4(a)(1). If a seller doesn’t satisfy all the conditions, it doesn’t mean she will be treated as an underwriter. It just means she’s taking her chances.

Rule 144 imposes different requirements on sellers depending on whether:

  • The issuer is a private or a publicly-reporting company;
  • The seller is an “affiliate” of the issuer (generally meaning under common control); and
  • How the seller acquired the securities in the first place.

We’re going to focus only on private companies, like NewCo, and situations where the seller acquired her interest directly from the issuer.

If Ms. Sakaguri were an affiliate of NewCo, she would be subject to four requirements:

  • She would have to provide current information about the issuer, including its name, its business, its CEO and Directors, and two years’ of financial statements.
  • She would have to hold the securities for at least one year.
  • She would be limited in the volume of securities she could sell.
  • She would be limited in the manner in which she sells the securities.

On the other hand, because Ms. Sakaguri isn’t an affiliate of NewCo, but just an ordinary investor, she’s subject to only one requirement:  she has must hold her limited liability company in NewCo for at least one year. That means:

  • She’s not required to provide any information about NewCo to the buyer.
  • She can sell as much of her limited liability company interest as she wants.
  • She can sell it to anyone, accredited or non-accredited.
  • She can sell it in any manner she want, including on a website.

(Remember, Rule 144 is a safe harbor, not a legal rule. If Ms. Sakaguri is a minority investor in a private company and sells her limited liability company interest after four months because she lost her job and needs the cash, nobody thinks she’s an underwriter. At worst, she’d be sentenced to a week of Fox News.)

Where are the Secondary Markets?

There are lots of investors in the same shoes as Ms. Sakaguri:  everyone who owns an interest in a real estate limited partnership, or a tech startup, or even a family business. If it’s so easy legally for them to sell their interests, why aren’t there lots of places where they can sell them?

A place – a website, for example – where investors could sell their privately-owned securities would probably be treated as an “exchange” under the Securities Exchange Act of 1934 (“[A]ny organization. . . .which. . . .provides a market place. . . .for bringing together purchasers and sellers of securities. . . .”). Section 5 of the Exchange Act makes it illegal for any exchange to operate unless it is either a registered “national securities exchange” under section 6 of the Exchange Act (like NASDAQ or the NYSE) or exempt from registration under SEC rules. The typical private security couldn’t qualify for listing on a national exchange, so Ms. Sakaguri and others in her shoes would be looking for something else.

Fortunately, that something else exists in the form of an “alternative trading system,” or ATS, authorized by the SEC in 17 CFR 240.3a1-1(a)(2) and defined in 17 CFR 242.300 – 303. Today there are dozens of alternative trading systems operating in the United States for many different purposes, including several operated by OTC Markets, Inc. Any broker-dealer can create an ATS without much difficulty, and for that matter anyone can create a broker-dealer.

All the legal pieces of the puzzle are in place:  Ms. Sakaguri is allowed to sell her limited liability company interest under Rule 144; and it’s not hard to create an ATS where she can sell it. So why does everyone complain about the lack of liquidity in private securities?

The answer is that the legal pieces of the puzzle turn out not to be the most important. Ms. Sakaguri is allowed to sell her limited liability company interest, but finding someone who wants to buy it is another story. We can create all the legal mechanisms we want, but a secondary market needs lots of buyers and sellers, especially buyers.

Remember, Ms. Sakaguri is allowed to sell her limited liability company interest under Rule 144 without providing any information about NewCo. That’s great, except there aren’t a lot of people willing to buy that limited liability company interest without information about NewCo. Other characteristics of NewCo, if it’s a typical privately-owned company, also make it unattractive:

  • It probably has a very limited business, possibly only one product or even one asset.
  • It probably has limited access to capital.
  • It probably lacks professional management.
  • Sakaguri probably has limited or no voting rights.
  • There are probably no independent directors.
  • The insiders of NewCo are probably allowed to pay compensation to themselves more or less free of limits, and have probably protected themselves from just about every kind of legal claim that investors could bring.

When Franklin Roosevelt and Sam Rayburn created the American securities laws in the 1930s, what emerged from all the new regulation was the most efficient, most transparent, most vibrant public capital market in the world. Eighty-five years later, you might say Americans have become spoiled by the safety of buying publicly-traded companies on national exchanges. When Ms. Sakaguri asks them to buy her limited liability company interest in NewCo on an alternative trading system, she’s asking for a lot.

To create a more vibrant secondary market for private securities we need greater standardization, greater protections for investors, and greater transparency. Some of these things the industry can do by itself – for example, by using blockchain technology. Other things will probably require regulation.

To create a vibrant market in automobiles we didn’t adopt laws protecting auto manufacturers. We adopted laws protecting consumers, e.g., lemon laws. My guess is that to create a vibrant secondary market for private securities the law should focus on buyers, not sellers.

What About Tokens?

More companies than I can remember have said they want to convert their limited liability company interests or preferred stock to token form because “There’s a secondary market for tokens.”

From a legal point of view that’s not true. The laws governing secondary sales of securities apply equally to the most boring share of common stock, represented by a paper certificate stored in a battered aluminum filing cabinet, and the most interesting token treated as a security under the Howey test, residing only in the cloud on a public blockchain.

But it is true in two other senses:

  • The rules I’ve talked about above apply only to tokens that are securities under the Howey test. A token that is a currency and not a security is not subject to those rules. I would also say that a true utility token isn’t subject to the rules, either, except a token being traded is probably a security under the Howey test, i.e., it probably isn’t a true utility token.
  • The reason there isn’t a vibrant market in private securities isn’t the legal restrictions, but the risk inherent in private securities. The frenzy over anything called a token in the last 12 months has overridden investor fears of private securities. Whether that frenzy will continue is impossible to predict (it won’t).

The same people ask “What about all those crypto exchanges?” There are two answers to that question as well. One, many or all of them have become alternative trading systems controlled by broker-dealers, or are in the process of doing so. Two, many got in trouble. Some are being sued privately, some are being sanctioned by the SEC, and three of the really bad ones had to watch Fox News for a month.

Questions? Let me know.

Using “Finders” To Sell Securities, Including Tokens

Selling securities is hard, and it makes perfect sense that an issuer or a portal would hire someone to help. And once you’ve hired someone, it also makes perfect sense business-wise to pay her a percentage of what she raises, aligning her interests with yours.

It’s perfect, but it might be illegal.

The Legal Issue

The Securities Exchange Act of 1934 generally makes it illegal for any “broker” to sell securities unless she’s registered with the SEC. The Exchange Act defines the term “broker” to mean “any person engaged in the business of effecting transactions in securities for the account of others.” That’s not a very helpful definition, but if you earn a commission from selling securities, like the helper above, you might be a broker.

So what? Well, if someone who’s a “broker” sells securities without registering with the SEC, lots of bad things can happen:

  • All the investors in the offering could have a right of to get their money back, and that right could be enforceable against the principals of the issuer.
  • The issuer could lose its exemption, g., its exemption under Regulation D.
  • By violating the securities laws, the issuer and its principals could become “bad actors,” ineligible to sell securities in the future.
  • The issuer could be liable for “aiding and abetting” a violation of the securities laws.
  • The issuer could be liable under state blue sky laws.
  • The person acting as the unregistered broker could also face serious consequences, including sanctions from the SEC and lawsuits from its customers.

What is a Broker?

Because the Exchange Act does not define what it means to be “engaged in the business of effecting transactions in securities,” the SEC and the courts have typically relied on a variety of factors, including whether the person:

  • Is employed by the issuer
  • Receives a commission rather than a salary
  • Sells securities for others
  • Participates in negotiations between the issuer and an investor, g., helps with sales presentations
  • Provides advice on the merits of the investment
  • Actively (rather than passively) finds investors

More recently, in court cases and in responses to requests for no-action letters, the SEC seems to be moving toward a more aggressive position:  that if a person receives a commission she’s a broker and must be registered as such, end of story.

So far, courts are rejecting the SEC’s hard-line approach. In a 2011 case called SEC v. Kramer, the court stated:

[T]he Commission’s proposed single-factor “transaction-based compensation” test for broker activity (i.e., a person ‘engaged in the business of effecting transactions in securities for the accounts of others’) is an inaccurate statement of the law. . . . . an array of factors determine the presence of broker activity. In the absence of a statutory definition enunciating otherwise, the test for broker activity must remain cogent, multi-faceted, and controlled by the Exchange Act.

As reassuring as that statement sounds, it was made by a District Court, not a Court of Appeals and certainly not the Supreme Court. A District Court in a different part of the country might take the SEC’s side instead.

But I Know Someone Who. . . .

Yes, I know. There are lots of people out there selling securities, including tokens that are securities, and receiving commissions, and nothing bad happens to them.

There are so many of these people we have a name for them:  Finders. The securities industry, at least at the level of private placements, is permeated by Finders. I had a conversation with a guy who offered to raise money for my issuer client in exchange for a commission, and when I mentioned the Exchange Act he said “What are you talking about? I’ve been doing this for 25 years!”

I’m sure he has. The SEC would never say so publicly, but the reality is that where broker-dealer laws are concerned there are two worlds:  one, the world of large or public deals, where the SEC demands strict compliance; and the world of small, private deals, where the SEC looks the other way.

In my opinion, Crowdfunding offerings and ICOs fall in the “large or public deals” category, even though it’s hard to tell a Crowdfunding client they can’t do something the guy down the street is doing.

So What Can I Do?

If you’re selling securities in a Crowdfunding offering or an ICO, don’t hire that person who promises to go out and find investors in exchange for a commission, unless she’s a registered broker.

On the other hand, in an isolated case, if you know someone with five wealthy friends, who promises to introduce you to those friends, without participating in any sales presentations, you might be willing to offer a commission, relying on current law, as long as (1) you understand that a court might hold against you, adopting the SEC’s hard-line approach; and (2) you hire a securities lawyer to draft the contract.

The Future

Several years ago the SEC created an exemption for Finders in the mergers & acquisitions area. I am far from alone in suggesting that we need a similar exemption for Finders in non-public offerings. The current situation, where a substantial part of the securities industry operates in a legal Twilight Zone, is not tenable as online capital raising becomes the norm rather than the exception.

Questions? Let me know.

SEC Provides Guidance On Advertising By Title III Issuers

sec guidance

The SEC just provided guidance for Title III issuers in the form of Compliance and Disclosure Interpretations. You can read the CD&I’s themselves here.

Before Filing

Before filing Form C (the disclosure document used in Title III) and being listed on a Funding Portal, a Title III issuer may not take any action that would “condition the public mind or arouse public interest in the issuer or in its securities.” That means:

  • No Demo Days
  • No email blasts or social media posts about the offering
  • No meetings with possible investors

After Filing

Once a Title III issuer has filed Form C and been listed on a Funding Portal, any advertising that includes the “terms of the offering” is subject to the “tombstone” limits of Rule 204. The “terms of the offering” include the amount of securities offered, the nature of the securities, the price of the securities, and the closing date of the offering period.

Advertising that does not include the “terms of the offering” is not subject to Rule 204. Theoretically, for example, an issuer could attend a Demo Day after filing its Form C, as long as it didn’t mention (1) how much money it’s trying to raise, (2) what kind of securities it’s offering, (3) the price of the securities, or (4) the closing date of its offering.

Three caveats:

  • Have you ever been to a Demo Day? It’s hard to imagine someone wouldn’t ask “How much money are you trying to raise?” or that the company representative wouldn’t answer. Theoretically possible, yes, but in practice highly unlikely.
  • Even the statements “We’re selling stock” or “We’re issuing debt” are “terms of the offering” and therefore cross the line.
  • There’s an interesting difference between the regulations themselves and the CD&Is. The regulations say “terms of the offering” means the items mentioned. The CD&Is, on the other hand, say “terms of the offering” include the items mentioned. Thus, if you take the CD&Is literally, maybe “terms of the offering” also include other things, like the start date of the offering.

Video

After filing, a Title III issuer can use video to advertise the “terms of the offering,” as long as the video otherwise complies with Rule 204.

Media Advertisements

After filing, if a Title III issuer is “directly or indirectly involved in the preparation” of a media article that mentions the “terms of the offering,” then the issuer is responsible if the article violates Rule 204.

EXAMPLE:  You attend a Demo Day, and the organizer announces how much money you’re trying to raise. You violated Rule 204.

EXAMPLE:  A reporter from your local paper calls. Eager for the free press, you tell her you’re raising $200,000 for a new microbrewery in town, which she repeats in her article. You violated Rule 204.

EXAMPLE:  A reporter from your local paper calls. Eager for the free press, but very savvy legally, you tell her about your plans for the microbrewery but carefully avoid telling her how much money you’re raising or any other “terms of the offering.” She goes to the Funding Portal and finds out herself, and reports that you’re raising $200,000. You violated Rule 204.

To be safe, you just can’t be involved, directly or indirectly, with anyone from the press who doesn’t understand Title III and promise, cross her heart and hope to die, not to disclose any “terms of the offering.”

Advertisements on the Funding Portal

Advertising a Title III offering outside the Funding Portal is a minefield. But inside the Funding Portal is a completely different story. Inside the Funding Portal is where everything is supposed to happen in Title III. Focus your attention there, where the minefields are few and far between.

Questions? Let me know.

 

 

 

 

 

A Regulation A+ Primer

Regulation A Plus Women GossipingNo disrespect to Kim Kardashian, but I think the SEC’s proposals for Regulation A+ have come closer to breaking the Internet than the photos I heard about last year – although that could be a function of the circles I travel in.

My contribution started as a blog post but got too long for a blog post. Hence, I’m providing this Regulation A+ Primer as a separate link. Within the Primer are links to:

I am trying to provide not just technical details in the Primer – which are important – but also practical advice about the cost of Regulation A+ offerings, the advantages and disadvantages, and examples.

If you have thoughts, as many of you will, I am eager to hear them and plan to supplement the Primer.

Questions? Let me know.

How to Present Investor Disclosures in Crowdfunding Offerings (And How Not To)

Title II Crowdfunding is often referred to, more or less accurately, as “online private placements.” It’s time the industry turned the online, digital, aspect of the offerings more to its advantage.

Remember when newspapers first came online? Remember how interesting they were visually? I’m being sarcastic. They were nothing more than photographs of the paper version, failing to take advantage of the digital platform and its unique capabilities.

Too many (not all) Crowdfunding portals take the same approach to providing investor disclosures. You click through the process and suddenly see an enormous PDF document that is nothing more or less than a paper private placement memorandum, complete with Schedules and Exhibits. You’reOnline document supposed to scroll down and “sign” at the bottom. On some platforms the investor actually has to click I’m Ready to Invest before he sees the disclosures!

There are at least three things wrong with this approach:

• Investors can’t be happy with it.

• It doesn’t convey information effectively.

• The disclosure might be legally ineffective. I think about a plaintiff’s lawyer cross-examining the portal operator, pointing to a disclosure on page 67 and asking “Did you really expect my client to read all that at the end of the click-through process?”

It doesn’t have to be that way! There are much better ways to provide information online. Take a look at today’s online version of the New York Times or Wall Street Journal to see how far we’ve come.

Crowdfunding portals can do the same thing. The first step is to move the mental image of that paper PPM into Trash or the Recycle Bin (depending on whether you’re Mac or PC) and start from scratch. What are we trying to accomplish here? What are the tools at our disposal? Pose that question to some creative people and you’ll get a whole range of possibilities, all of them better for investor, sponsor, and portal.

Questions? Contact Mark Roderick.