Category: Title II Crowdfunding

SEC Answers Questions On Title II Crowdfunding

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Investing, Investor, JOBS Act, Rule 506, Securities Exchange Commission, Title II CrowdfundingLeave a comment

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.

What IS REGULATION A, AND WHAT’S IT GOT TO DO WITH CROWDFUNDING?

On By crowdfundattnyIn Crowdfunding, Investing, Investor, JOBS Act, Regulation A, Title II Crowdfunding, Title IV of the JOBS ActLeave a comment

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:

  • They would create a new kind of Regulation A offering – already referred to as Regulation A+.
  • In a Regulation A+ offering, an issuer could raise up to $50 million during any 12 months.
  • The issuer could use general solicitation and advertising to find investors, e.g., the Internet.
  • The issuer could sell to non-accredited investors, subject to a maximum investment of 10% of the investor’s income or net worth in Regulation A+ offerings.
  • Regulation A+ offerings would be exempt from registration or qualification under state blue sky laws.

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:

  • Regulation A+ offerings require a mini-registration statement filed with the SEC before any sales are made, including audited financial statements.
  • Regulation A+ offerings require significant ongoing reporting to the SEC.

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.

SEC Takes Different Approaches On Title II And Title III

On By crowdfundattnyIn Investing, Investor, JOBS Act, SEC, Securities Exchange Commission, Title II Crowdfunding, Title III CrowdfundingLeave a comment

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:

  • Title II Portals are required only to take “reasonable steps” to ensure that investors are accredited.
  • Issuers are not required to provide any particular information to prospective investors, not even any particular financial information.
  • Title II Portals are not obligated to register with the SEC.

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:

  • Title III portals are required to register with the SEC.
  • Title III portals are required to perform detailed background checks on every issuer and its directors, officers, and significant shareholders.
  • Title III portals must deny access to any issuer if the portal believes the issuer “presents the potential for fraud or otherwise raises concerns regarding investor protection,” or if the portal is unable to adequately or effectively assess the risk.
  • Title III issuers are required to provide reams of information to the investing public, including:
  • The business and employment history of all its directors and officers for the previous three years.
  • The reasons why the investment is risky.
  • How the securities were valued.
  • The names of everyone who owns more than 20% of the stock.
  • An explanation how investors could be affected by the exercise of rights by the principals.
  • An explanation of the capital structure.
  • How the money from investors will be used.
    • Detailed information must be provided not only up front, but on an annual basis.
    • After subscribing, Title III investors are given the right to change their minds up to 48 hours before closing.

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.