Category: Title III Crowdfunding

What “Solicit” Means Under Title III

On By crowdfundattnyIn Title III CrowdfundingLeave a comment

Before the JOBS Act came along, listing a security on a public website would itself have been treated as an act of “solicitation.” That’s the odd thing: Title III portals aren’t allowed to “solicit,” yet in the traditional sense of the term that’s the most important thing Congress created them to do.

The fact is that Congress was ambivalent when it created Title III portals. They are allowed to list offerings of securities, but are not allowed to do other things often associated with the sale of securities, including holding investor funds or offering investment advice. They are regulated by the SEC and FINRA, but with a light touch compared with other regulated entities. They are privately-owned, but are required to provide educational materials to investors, police issuers, provide an online communication platform, and ensure that investors don’t exceed their investment limits – in short, they are required to assume a quasi-governmental role.

Title III portals are a new animal, part fish, part bird. Which makes it that much more difficult to decide what “solicit” means when they do it.

Based on the statute, the SEC regulations, the legislative background of the JOBS Act, and the history and overall context of the U.S. securities laws, I think a Title III portal engages in prohibited “solicitation” anytime it tries to steer an investor to a particular security. If it’s not trying to steer an investor to a particular security, then it’s probably okay.

I’ve included some practical guidelines in the chart below. Although there are plenty of gaps, I hope this helps.

Click the following for a print ready version of the complete chart: Rules for Title III Portals

Rules for Title III Portals

 

 

Using Title III Disclosures In Title II Crowdfunding

On By crowdfundattnyIn Title II Crowdfunding, Title III CrowdfundingLeave a comment

Title III requires all these disclosures, reported on the new Form C:

  • The name, legal status, physical address, and website of the issuer
  • The names of the directors and officers of the issuer and their employment history over the last three years
  • The name of each person owning 20% or more of the issuer’s stock
  • The issuer’s business and business plans
  • The number of employees of the issuer
  • A statement of risks
  • How much money the issuer is trying to raise
  • How the money will be used
  • The price of the shares or the method for determining the price
  • The capital structure of the issuer, including the rights of all security-holders, restrictions on transfer, and how the securities are being valued
  • A description of the portal’s financial interests
  • A description of the issuer’s liabilities
  • A description of other offerings conducted within the past three years
  • A description of “insider” transactions
  • A discussion of the issuer’s financial conditionimpossible possible
  • Financial statements or their equivalent
  • Any other information necessary in order to make the statements made not misleading

As I write this, a lot of very smart entrepreneurs and software engineers are working to automate these disclosures. They have to:  to make money running a Title III portals, you’re going to have to automate everything that can be automated.

Now look at Title II. As a write this, the disclosures for almost all Title II deals are prepared the old-fashioned way, with a lawyer writing an old-fashioned Private Placement Memorandum. The PPM for Deal 1 on Portal X might or might not include the same information as the PPM for Deal 2 on Portal X, and almost certainly doesn’t include the same information or look the same as the PPM for deals on Portal Y. An investor trying to compare apples to apples would go, well, bananas.

That situation is ripe (sorry) for change and I think it will change as Title III comes online, for three reasons:

  1. As someone argued recently, investors couldn’t care less about the distinction between Title II and Title III. They are going to want to see the same information in the same format.
  2. Using the tools developed for Title III, Title II portals will be able to provide more information than they are currently providing, cheaper and more effectively.
  3. There is no law that dictates what information must be provided in a Title II offering. But we still think about 17 CFR §240.10b-5, which makes it unlawful to “. . . .make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made. . . .not misleading. . . .” As the industry develops, it seems at least possible, if not likely, that the disclosures required by Title III could be viewed as the standard for avoiding Rule 10b-5 liability.

Questions? Let me know.

How To Operate A Title II Portal And A Title III Portal On The Same Platform

On By crowdfundattnyIn Crowdfunding, Title II Crowdfunding, Title III CrowdfundingLeave a comment

crainsMost Title II and Title IV portals will also want to operate Title III portals, and vice versa. Can they do it?

The Title III regulations issued by the SEC appear to contemplate that a Title III portal – a “funding portal” – will do more than operate a Title III portal. For example, 17 CFR §227.401 provides that “A funding portal. . . .is exempt from the broker registration requirements of section 15(a)(1) of the Exchange Act in connection with its activities as a funding portal.” If a Title III portal couldn’t do anything else, that extra language at the end wouldn’t be necessary.

The same is true for of the regulations issued by FINRA. FINRA prohibits Funding Portals from making false or exaggerated claims, implying that past performance will recur, claiming that FINRA itself has blessed an offering, or engaging in other misconduct, but a well-behaved Title II or Title IV portal would have no trouble meeting those standards.

What about the platform itself? The Title III regulations (17 CFR §227.300(c)(4)) define “platform” as:

A program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on section 4(a)(6) of the Securities Act.

Nothing there would prohibit Title II, Title III, and title IV securities from appearing on the same website.

The fly in the ointment is 17 CFR §227.300(c)(2)(ii), which provides that a Title III portal may not:

  • Offer investment advice or recommendations; OR
  • Solicit purchases, sales or offers to buy the securities displayed on its platform.

What does that mean, in the context of a portal offering both Title II and Title III securities? What it should mean is that a Title III portal cannot offer investment advice or recommendations concerning Title III securities, and cannot solicit purchases, sales, or offers of Title III securities. The idea of Title III is to protect Title III investors. Why should the SEC care whether the portal is offering investment advice concerning Title II or Title IV securities?

But we can’t be 100% sure that’s what it means. If it means that a Title III portal can’t offer investment advice about any securities and can’t solicit offers to buy any securities, then we need to steer clear.

I’ve spoken informally with the SEC and they’re not sure how to interpret 17 CFR §227.300(c)(2)(ii). They suggested I submit a request for a no-action ruling and I guess I will, unless one of my Crowdfunding colleagues already has.

Pending that guidance, there are several ways to operate a Title II portal, a Title III portal, and a Title IV portal on the same platform:

  • Operate the portals through a single legal entity. Avoid giving investment advice to anybody or soliciting purchases, sales, or offers of any securities.
  • Operate the portals through one legal entity. If you want to offer investment advice and/or actively solicit, do it through or more additional legal entities. For now, limit the investment advice and active solicitation to Title II and Title IV securities.
  • Create a separate legal entity to hold the Title III license. Create an arm’s length license agreement between that entity and the entity that owns the platform (a simple downloadable form is here). List all the deals on the same platform, but make sure that when an investor clicks on a Title III deal the Title III portal handles the investment process.

Finally, FINRA is a wonderful organization, but I’m not necessarily eager to have FINRA looking at everything my clients do. All other things being equal, I might choose option #3 just to keep a degree of separation between the regulated entity and my non-regulated activities. But that’s not necessarily the end of it – FINRA will want to explore the relationship between the funding portal and its affiliates.

Questions? Let me know.

Why Title II Portals Will Also Become Title III Portals, And Vice-Versa

On By crowdfundattnyIn Crowdfunding, Portals, Title II, Title II Crowdfunding, Title III, Title III CrowdfundingLeave a comment

CF Portal Mall

Why has Home Depot made local hardware stores a thing of the past? Partly price, but mainly selection. And I think the same forces will require most Crowdfunding portals to offer investments under Title II, Title III, and Title IV, all at the same time.

Crowdfunding portals are like retail stores that sell securities. They have suppliers, which we call “sponsors” or “portfolio companies,” and they have customers, which we call “investors.” They pick the market they want to serve – hard money loans, for example – then try to stock their shelves with products from the best suppliers to attract the largest number of customers. Think of DSW, but selling securities rather than shoes.

Now consider these situations:

  • You’re a Title II portal and have established a relationship with Sandra Smith, a real estate developer you’ve learned to trust. She informs you she’d like to raise $30 million to build a shopping center in Chicago and needs to attract investors from the local community. You could tell her you only do Title II and send her across the street, but maybe she’ll find a competitor where she can get Title II and Title IV under one roof. So you’d really like to offering Title IV as well, which means attracting non-accredited investors.
  • You’re a Title II portal raising money for biotech. A company approaches you with a new therapy for cystic fibrosis. They have 117,000 Facebook followers and wide support in the cystic fibrosis community, and have already raised $30,000 in a Kickstarter campaign. They want to raise $800,000 for clinical tests, then come back and raise $5 million if the tests are successful. Sure, you could tell them to go somewhere else for the $800,000 raise and come back for the larger (and more profitable) $5 million round, but once they leave they’re probably not coming back.
  • You’re a Title III portal with lots of investors signed up. Turned away by the portal she’s used to working with, Sandra Smith asks for your help in the $30 million Title IV raise. Any reason to turn her down?

Those of us in the industry see Title II, Title III, and Title IV as separate things, but to the suppliers and customers of the industry they’re all the same thing. The differences between Title II and Title IV are nothing compared to the differences between sneakers and 6-inch heels! Yet DSW sells them both and everything in between because in the eyes of customers, they’re all shoes.

It doesn’t matter to suppliers and customers that Title II and Title III require different technology and business models. It doesn’t matter that one is more profitable than the other. Mercedes might lose money selling its lower-end cars but doesn’t mind doing so because customers who buy the lower-end Mercedes today buy the higher-end Mercedes 10 years from now. The Vanguard Group probably loses money on some of its funds but sells them anyway to keep customers in the fold. As the Crowdfunding market develops, I think the same will be true of the interplay with Title II, Title III, and Title IV.

For portals that have achieved success in Title II, it might be unwelcome news that Title II isn’t enough. But on the positive side, Fundrise has managed to leverage its reputation in Title II into a well-received REIT under Title IV. In any case, I think it’s inevitable.

Questions? Let me know.

Title III Crowdfunding

Title III Crowdfunding Is Here

On By crowdfundattnyIn Crowdfunding Portals, Title III, Title III CrowdfundingLeave a comment

The JOBS Act was signed into law by President Obama on April 5, 2012. The SEC was supposed to issue regulations under Title III 270 days later, by December 31, 2012. Instead, the SEC issued final Title III regulations last Friday, which will become effective around May 1, 2016, or about 1,466 days after enactment.

But better late than never! In its final regulations the SEC has again bent over backward to make Crowdfunding easier, for example:

  • Liberalizing the financial disclosures required of issuers
  • Clarifying that a Title III offering will not interfere with other exempt offerings
  • Allowing Title III portals to pick and choose among issuers
  • Allowing Title III portals to take financial interests in issuers

Hat’s off the to the SEC staff for doing excellent work with a flawed statute! I’ve written a Title III Primer: Outline for Portals and Issuers.

This is a brave new world, the transformation and democratization of the U.S. capital formation industry. I am very, very interested to hear what all of you think.

Thanks for reading.

Questions? Let me know. 

Markley S. Roderick
Lex Nova Law
10 East Stow Road, Suite 250, Marlton, NJ 08053
P: 856.382.8402 | E: mroderick@lexnovalaw.com

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The Federal Basis For Intra-State Crowdfunding

On By crowdfundattnyIn Intra-State Crowdfunding, JOBS Act, SEC, SEC Rule 147, Title III, Title III CrowdfundingLeave a comment

Texas is the latest of a half dozen states to propose an intra-state Crowdfunding law. Typically, these laws allow issuers to raise money from non-accredited investors, even before Title III of the JOBS Act comes into effect, as long as all the investors are residents of the state in question and the offering satisfies requirements that vary from state to state.

At the Austin event, an audience member asked a very good question: If I comply with the Texas law, do I also have to comply with a Federal law? The answer is a qualified Yes.

Federal law begins with the proposition that securities may not be issued unless registered under the Securities Act of 1933. However, section 3(a)(11) of the Act provides an exemption for:

Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.

Thus, Federal law includes an exemption for some purely intrastate offerings.

SEC Rule 147 (17 CFR 230.147) provides a “safe harbor” under section 3(a)(11). Where all the conditions of Rule 147 are satisfied, the SEC will assume that the offering is exempt from Federal registration:

  • The issuer may neither offer nor issue any securities within the six month period before the first offer or sale of the intrastate offering nor within six months after the last offer or sale of the intrastate offering.
  • The issuer must be incorporated in the state where the offering is made. (Caution: Many lawyers use Delaware entities as a matter of course. Unless you’re in Delaware, don’t.)
  • At least 80% of the issuer’s revenues must come from business within the state.
  • At least 80% of the issuer’s assets must be located in the state.
  • At least 80% of the money raised in the offering must be used in the state.
  • All of the investors in the offering must be residents of the state.
  • While the offering is being conducted and for nine months thereafter, all resales must be to state residents.
  • The issuer must place a legend on stock certificates referencing these restrictions, and take other steps to ensure that the offering remains intrastate only.

Rule 147 is just a “safe harbor.” An intrastate offering that does not satisfy all of these conditions might still qualify for the statutory exemption under section 3(a)(11), depending on all the facts.

Some State Crowdfunding exemptions, Texas included, require that that the issuer satisfies Rule 147. In those States, by definition, an issuer that satisfies the requirements of the State exemption satisfies the Federal requirements as well. In other States, an issuer that dots all the I’s and crosses all the T’s of an intrastate Crowdfunding offering has a very good chance of qualifying under the Federal statutory exemption as well, even if the State exemption does not refer to Rule 147 explicitly.

That’s why the answer is a qualified Yes. An issuer that complies with the Crowdfunding rules of a State still has to qualify for the Federal exemption, but that shouldn’t be hard.

Questions? Let me know.

 

 

 

 

 

Austin Roundup

On By crowdfundattnyIn Crowdfunding Real Estate, Crowdfunding Speaking Engagements, JOBS Act, Speaking Engagements, Title II, Title II Crowdfunding, Title III Crowdfunding, UncategorizedLeave a comment

Austin cityscapeHats off to the folks at Coastal Shows for making the Austin event – officially the CFGE Crowdfund Real Estate Summit – the best Crowdfunding event ever.

The event featured the leading players in the industry:

Title III of the JOBS Act may be flawed, and the final rules for Regulation A+ may be long overdue, but the speakers and panelists agree that Crowdfunding is here to stay, with Title II leading the way. Two days before the conference began, Fundrise raised $31 million of capital in a Series A round of financing. That served as a very useful background, illuminating the potential of a market that promises to transform the U.S. capital formation industry.

Over coffee during the day and beer in the evening, I spoke with dozens of real estate developers and entrepreneurs. Their message came through loud and clear: We’re tired of dealing exclusively with our traditional sources of capital and are eager to raise money through Crowdfunding channels.

Developers are eager for new sources of capital, and individual investors are eager to participate in a market that, until now, has been reserved for institutions and the very wealthy. That’s Crowdfunding, in a nutshell.

What happens in Vegas might stay in Vegas, but what happened in Austin is going to spread across the country. Thanks for a great event, Coastal Shows.

A Downpour Of #CrowdfundingRealEstate Advice And Ideas

On By crowdfundattnyIn Crowdfunding, Crowdfunding Real Estate, Entrepreneurs, Harvard Business School Club of New York, Investing, JOBS Act, Real Estate, SEC, Securities Exchange Commission, Title II Crowdfunding, Title III CrowdfundingLeave a comment

Thank you to the panelists and audience members who braved a biblical downpour to attend the SOLD OUT Harvard Business School Club Innovations in Real Estate: Crowdfund Investing program last night at the UJA Federation of NY Conference Center. Former New York Governor David Paterson kicked off the evening with his typical wit and insight before our panel of Crowdfunding industry experts shared their experiences and knowledge with an extremely engaged and thoughtful audience.

Our panelists:

  • Jason Fritton of Patch of Land and William Skelley of iFunding, two of the earliest Crowdfunding innovators and most successful Title II portals
  • Elvin Ames of Golden Eye Investments and Erin Wicomb of Mavrix Group, two experienced and successful real estate developers who have recently turned to Crowdfunding to raise capital
  • Scott Lichtman, a real estate investor who has himself invested in Crowdfunded deals and did a super job putting the conference together

Thus, all sides the Crowdfunding triangle were represented: portals, developers, and investors. And Jason, William, Elvin, Erin, and Scott – not to mention Governor Paterson – acquitted themselves with flying colors, demonstrated why they have been so successful generally and specifically why they have been leaders in Crowdfunding.

Some of the issues discussed:

  • The build-out of the Title II portal market, and how it is likely to segment into verticals
  • How portals successfully distinguish themselves
  • What investors look for in a portal and a project sponsor
  • The legal basis for Crowdfunding, and its significance in the marketplace
  • Why Crowdfunding is attractive to developers
  • How portals can participate in community development and “do well by doing good”
  • How portals market and price their services
  • How developers distinguish their projects
  • What due diligence means in a Crowdfunded environment

Judging by the number and quality of questions from the audience following the presentation, there are likely a few dozen more Crowdfunding entrepreneurs this morning than there were yesterday. Including one statistician, who asked about the standard deviation of Crowdfunding investments.

Thanks again to everyone. I hope to stay in touch with all of you. Questions? Let me know.

Legal Focus On Crowdfunding

On By crowdfundattnyIn Crowdfunding, Crowdfunding Articles, Crowdfunding Portals, JOBS Act, SEC, Securities Exchange Commission, Securities Laws, Title II Crowdfunding, Title III Crowdfunding, Title IV of the JOBS ActLeave a comment

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.

legal focus on crowdfunding

Questions? Let me know.

Crowdfunding Cheat Sheet

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Form D, Investing, Investor, JOBS Act, Regulation A, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Title II Crowdfunding, Title III Crowdfunding, Title IV of the JOBS Act, UncategorizedLeave a comment

Crowdfunding now comes in multiple flavors:

  • Title II Crowdfunding – Rule 506(c)
  • Title III Crowdfunding
  • Title IV Crowdfunding – Regulation A+
  • Existing Regulation A
  • Rule 504 of Regulation

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: 

  • Who is allowed to invest
  • How much money can be raised
  • Whether Internet portals can be used
  • How much each investor can investCFCS
  • The degree of SEC oversight
  • Whether foreign companies can participate

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.