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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.

“General Solicitation” With Accredited Investors: Another Kind of Crowdfunding

On By crowdfundattnyIn Crowdfunding, Financings, JOBS Act, SEC, Securities Laws, UncategorizedLeave a comment

In President Obama’s JOBS Act, Crowdfunding means a very specific thing:  raising money from lots of investors through a registered broker-dealer or a “portal.” That kind of Crowdfunding won’t come into effect until January 1, 2013 or such later time as the SEC issues regulations. 

But the JOBS Act made another important change to the way companies can raise money from investors, and in the scheme of things this change might turn out to be even more important.

Background:  When a company raises money from investors it becomes subject to the securities laws, administered by the SEC. Big companies like Facebook are required to go through a long and expensive process of registering their stock with the government, but long ago the SEC adopted a much simpler set of rules for smaller companies, often referred to as Regulation D, or Reg D for short. Reg D provides for three main varieties of raising money legally:  a Rule 504 offering, a Rule 505 offering, and a Rule 506 offering.

Of these the Rule 506 offering is the simplest and most streamlined, in part because it allows the company to avoid state “blue sky” laws. Until now, however, Rule 506 has comes with one key limitation:  the company seeking to raise money could not engage in “general solicitation.” That means the company could look for investors through word of mouth, or from friends and family, or by using brokers, but it could not run a television advertisement or ask for money on the internet.

The JOBS Act changes that rule. As long as a company is willing to limit its investor pool to accredited investors – generally meaning institutional investors or investors with high incomes or high net worth – it may conduct a Rule 506 offering using general solicitation, and thereby reach a much larger audience than it could before.

By definition, accredited investors have more money than non-accredited investors. By definition, startup companies (and other companies) are looking for investors with money. It stands to reason that the market for “crowdfunded Rule 506 offerings” could become much larger than the market for Crowdfunding itself. In a true Crowdfunding offering, for example, the company can raise no more than $1 million and will likely end up dealing with many, many investors. In a crowdfunded Rule 506 offering, on the other hand, a company could raise $10 million from one investor that it found through the internet.

The SEC was required to issue regulations about “general solicitation” within 90 days after enactment of the JOBS Act. The regulations have been delayed, but probably not for too much longer. Within the next month or so we expect the ban on general solicitation to be lifted, allowing at least one form of “crowdfunding” to spring to life.

Crowdfunding – What It Is And How You Can Benefit

On By crowdfundattnyIn Crowdfunding, JOBS Act, UncategorizedLeave a comment

The Internet has changed many things, and now it is about to change the way companies raise money.

Since the 1930s, a company that wanted to raise money from investors had two choices: go through a very long and expensive public offering of the kind Facebook completed recently; or conduct a private offering, a prominent feature of which was the inability to reach a large number of prospective investors.

The JOBS Act signed by President Obama offers a third choice, called “Crowdfunding.” In its simplest form, a company seeking capital will register with a special kind of Internet site created for this purpose, referred to in the law as a “portal.” Prospective investors will also register with the portal. If a registered investor likes a registered company then a marriage is made—all through the portal and all online.

Probably the most important change to the securities laws in 80 years, Crowdfunding offers rich new opportunities:

    • Because the Internet portal is accessible all the time, the company looking for money can be exposed to many more investors than through a traditional private offering.
    • By registering with more than one portal, an investor on the lookout for growing, entrepreneurial companies can see many more companies than available at present.
    • The portal business is a new creature entirely, offering entrepreneurs the opportunity to get in on the ground floor of legitimate Internet-based fundraising.

The Securities Exchange Commission (SEC) is writing the final rules for Crowdfunding right now. Here are some of the most important rules and limitations you should know:

    • Crowdfunding will not begin officially until January 2013, when the SEC finishes writing the final rules. But that isn’t stopping companies and entrepreneurs from figuring out how to do business.
    • If a company raises money using Crowdfunding, it may raise only $1,000,000 from all sources during any 12 month period.
    • The law limits how much any investor can invest: for those whose income or net worth is less than $100,000, the limit is the greater of $2,000 or 5%; for those earning more, the limit is 10% of annual income or net worth, with an upper limit of $100,000. These limits refer to the total invested in all Crowdfunding investments during any 12 month period.
    • The company seeking investors will be allowed to advertise, but only to direct potential investors to the portal.
    • The company seeking investors will be required to provide fairly extensive information to potential investors. The kind of financial information—whether merely certified by the principal officer, reviewed by a CPA firm, or audited by a CPA firm, depends on the size of the company.
    • The portal will be required to register with the SEC, become a member of a national securities organization (probably FINRA), and will be responsible for many aspects of the compliance process.
    • The portal may not offer investment advice, recommendations or compensate its employees based on the volume of sales on its site.
    • Offerings conducted through Crowdfunding are exempt from the registration and disclosure requirements of state laws (so-called “blue sky” laws).
    • An investor who acquires stock through a Crowdfunding offering is subject to some restrictions on disposing of the stock.

Crowdfunding, and more generally, the ability to raise money through the Internet, is in its infancy. If Crowdfunding is the success that many expect, it seems very likely that these rules will be changed, allowing more money to be raised from additional investors in more ways. Surely, there will someday be an “app” for that.

There will be many traps along the way. To avoid the traps and discuss the opportunities, please contact me.