The Liability Of Issuers In Crowdfunding (Parental Discretion Advised)

On By crowdfundattnyIn Crowdfunding, Crowdfunding Liabilities, Crowdfunding PortalsLeave a comment

You’re thinking about raising money using Crowdfunding, but are concerned about legal liability. Here is a non-exclusive list of ways you can be liable as an issuer.

When I say “Exchange Act” I mean the Securities Exchange Act of 1934, and when I say “Securities Act” I mean the Securities Act of 1933. The “CFR” is the Code of Federal Regulations.

Rule 10b-5

17 C.F.R. §240.10b-5, issued by the SEC under section 10(b) of the Exchange Act, makes it unlawful, in connection with the purchase or sale of any security, to:

(a)  To employ any device, scheme, or artifice to defraud,

(b)  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, in the light of the circumstances under which they were made, not misleading, or

(c)  To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

Back in 1946, courts established a “private right of action” under Rule 10b-5, meaning that an investor who has been damaged by a violation of Rule 10b-5 can sue the person who made the misstatement. That often means the issuer, but can also mean an officer or other representative.

Rule 10b-5 applies to all Crowdfunding offerings.

Section 12(a)(2) of Securities Act

Section 12(a)(2) of the Securities Act imposes liability on an issuer or other seller of securities who:

Offers or sells a security. . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

Rule 12(a)(2) applies to Title IV but not to Tile II or Title III.

Section 17(a) of Securities Act

Section 17(a) of the Securities Act makes it unlawful for any person, including the issuer, in the offer of sale of securities, to:

(1) employ any device, scheme, or artifice to defraud, or

(2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light

of the circumstances under which they were made, not misleading; or

(3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Section 17(a) applies to all Crowdfunding offerings.

Special Liability Provision of Title III

New section 4A(c) of the Securities Act extends a similar concept into Title III. A Title III issuer is liable if:

The issuer makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading, provided that the purchaser did not know of such untruth or omission; and does not sustain the burden of proof that such issuer did not know, and in the exercise of reasonable care could not have known, of such untruth or omission.

This new provision defines “issuer” broadly:

As used in this subsection, the term “issuer” includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 4(a)(6) of this title, and any person who offers or sells the security in such offering.

The SEC says that even funding portal itself would likely fall within the definition of “issuer” and thus be subject to statutory liability under section 4A(c).

Section 4A(c) applies only to Title III.

NOTE: Rule 10b-5, section 12(a)(2), section 17(a), and section 4A(c) are very similar, but with a few key differences, including these:

  • A plaintiff making a claim under Rule 10b-5 must prove the defendant acted knowingly or was reckless.
  • A plaintiff making a claim under section 12(a)(2) or section 4A(c) must show only that the statement in question was false, leaving the defendant to prove that it did not know, and with the exercise of reasonable care could not have known, that it was false.
  • Section 12(a)(2) allows claims against the person who sold the security to the plaintiff. Section 4A(c), on the other hand, could impose liability on the issuer even in the case of a “secondary” sale, meaning a sale by an existing stockholder.
  • Section 12(a)(2) applies only to misstatements or omissions in a prospectus or made orally. Section 4A(c), on the other hand, applies to misstatements or omissions anywhere.
  • Section 17(a) does not provide a private right of action, meaning it’s about a penalty imposed by the SEC, not a lawsuit brought by an investor.
  • In making a claim under section 17(a), the SEC need show only negligence on the part of the defendant.

Failure to Register Offering

Section 5 of the Securities Act generally requires all offerings of securities to be registered with the SEC. All Crowdfunding offerings rely on statutory or regulatory exemptions from the registration requirement. Rule 506(c), Regulation A, intrastate Crowdfunding, Title III – these all provide exemptions from the registration requirement of section 5.

But all those exemptions are conditioned on satisfying certain requirements. To qualify for the exemption under Rule 506(c), for example the issuer must take reasonable steps to ensure that every investor is accredited and form a reasonable belief that every investor is accredited. If an issuer fails to satisfy all the requirements of an exemption, then the issuer has engaged in an illegal, unregistered offering and is liable under section 12(a)(1) of the Securities Act.

Failure to Use Licensed Broker

Section 15(a) of the Exchange Act requires any person acting as broker to register with the SEC. If an issuer sells securities through a person who should be licensed as a broker but is not, the issuer could be liable under any of several legal theories:

  • Use of an unlicensed broker could cause the issuer to lose the exemption from registration.
  • The failure to notify investors that the issuer is using an unlicensed broker could give rise to liability under Rule 10b-5 or section 12(a)(2).
  • The issuer could be liable for aiding and abetting the unlawful actions of the unlicensed brokers.

Failure of Principals to Register as Brokers

Section 3(a)(4)(A) of the Exchange Act generally defines a “broker” as “any person engaged in the business of effecting transactions in securities for others.” The issuer itself is not required to register as a broker, because the issuer is effecting transactions in securities for itself, not for others. This is commonly referred to as the “issuer exemption.”

But the issuer exemption doesn’t protect employees of the issuer who engaged in selling the issuer’s securities, including the founder, the President, the CEO, the Marketing Director, and the Director of Investor Relations. A different SEC regulation, 17 CFR §240.3a4-1, provides a limited safe-harbor exemption for these so-called “associated persons.” However, it’s not hard for an issuer’s associated persons to fail to qualify for that exemption.

If an associated person should be registered as a broker but isn’t, not only is he or she personally liable, but the issuer itself now faces all the potential liabilities associated with using an unlicensed broker!

State Common Law Rules

Issuers can be liable to investors under a variety of state “common law” (as opposed to statutory law) theories, including:

  • Fraud
  • Misrepresentation
  • Breaches of fiduciary obligations
  • Breaches of contractual obligations (g., under an Operating Agreement)
  • Breach of the implied covenant of good faith and fair dealing

State Statutory Rules

States regulate the sale of securities as well. An issuer can be liable under state securities laws for:

  • The failure to register an offering under state law.

NOTE: Suppose you’re selling securities under Title II Crowdfunding (Rule 506(c)). The starting place is that sales of securities under Rule 506(c) are not subject to state registration. But if you fail to take reasonable steps to ensure that all your investors are accredited, not only do you lose your Federal exemption, you also lose your exemption form state registration as well!

  • The use of an unlicensed broker-dealer.
  • The use of deceptive offering materials.

Criminal Rules

If an issuer really screws up, it could even be subject to Federal and state criminal penalties, including:

  • Criminal penalties for intentionally violating securities laws
  • Criminal penalties for mail fraud
  • Criminal penalties for wire fraud
  • Criminal penalties for violating the Racketeer Influenced and Corrupt Organizations

Liability of People

Entrepreneurs sometimes are under the mistaken impression that operating through a corporation or other legal entity protects them from all personal liability. For example, an entrepreneur on her way to a business meeting swerves to run over a bevy of doctors and jumps from her car, laughing. “You can’t sue me, I operate through a corporation!” she says.

No. She did it, so she’s personally liable, corporation or no corporation. If her employee did it, the story might be different (unless he was drunk when she handed him the keys).

The same is true in securities laws. Assume that if you’re running the issuer, all the potential liability I’ve described applies to you personally as well.

Is Crowdfunding Too Dangerous?

No, definitely not.

With the exception of section 4A(c) of the Securities Act, which is limited to Title III, you’ll notice that all of the potential liabilities I’ve described apply to old-fashioned private placements and public offerings, not just to Crowdfunding. Crowdfunding introduces two new variables:   the number of investors and the anonymity of investors. But the legal framework is identical.

Did I ever mention that issuers should buy insurance?

Questions? Let me know.

Using Blockchain Technology In Crowdfunding

On By crowdfundattnyIn CrowdfundingLeave a comment

Guest Co-Author: Benjamin L. Roderick

What Is Blockchain?

Blockchain is the term given to a highly sophisticated database tool that allows “distributed verification.” Most of us heard about blockchain because it is the technological backbone of Bitcoin, the alternative currency, but the possible applications go far beyond that.

To understand what “distributed verification” means, let’s look at a typical Bitcoin transaction, where Franchesca uses her Bitcoin currency to buy a TV from Herb.

On the surface, the transaction is simple: Herb gives Franchesca his TV and Franchesca gives Herb some Bitcoin. But how does Herb know that Franchesca actually owns Bitcoin? And how does he get it from her?  The answer is the blockchain. Distributed all over the world, the blockchain verifies that Franchesca owns Bitcoin, and then records the transfer from Franchesca to Herb, so Herb can use the Bitcoin to buy groceries from Janet.

Benefits of Blockchain

The primary benefits of the blockchain are:

  • It’s secure
  • It provides universal authentication
  • It provides trust for trust-less networks
  • It’s automated
  • It’s almost friction-free, drastically lowering transaction costs
  • It’s easy to audit
  • It’s decentralized
  • It can be (but doesn’t have to be) anonymous.

Here’s a table illustrating where and how blockchain technology can add value:

Ben Roderick Guest Blog Post image

Blockchain technology isn’t perfect yet; some might say it’s not even ready for prime time. Today, the primary drawback is how long it takes to authenticate transactions. A transaction today in Bitcoin takes about 10 minutes to clear, and Bitcoin is a microscopic market compared to, say, credit card transactions. Indeed, the Bitcoin community is engaged in a civil war as to how, or even whether, to change the technology to speed up transactions.

Application of Blockchain Technology

But you can understand why blockchain technology is attracting so much interest from government and private industry. For example, the music industry is plagued by uncertainty over ownership of rights. The title industry exists because of uncertainty as to the ownership of real estate. Credit card issuers spend tens (hundreds?) of millions of dollars processing and authenticating transactions. Airlines have yet to find a way to ensure that every plane is late.

Everyone wants a secure, decentralized, efficient network that can authenticate transactions or information, as long as the FBI gets a back door (no joke).

Here are some possible applications in the Crowdfunding industry:

  • In Title III, we need a centralized system that knows how much an investor has invested in Title III deals.
  • In Title III and Title IV, we need a way to verify the income and net worth of investors.
  • In Title II and Title IV, we could certainly use a way to verify that investors are accredited in some centralized way.
  • A blockchain: the ultimate aggregator and verifier of Crowdfunding deals.

Crowdfunding and blockchain are both pieces of the FinTech industry. We’re going to see blockchain startups raising money using Crowdfunding, and we’re going to see Crowdfunding companies using blockchain technology. A blockchain startup using a Crowdfunding company that uses blockchain technology – that’s not far down the road.

Ben Roderick is currently working on blockchain applications for his MBA Capstone project at Carnegie Mellon University, graduating in May 2016. His email address:  Broderic@tepper.cmu.edu.

Questions? Let me know.

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.

Crowdfunding Interview

On By crowdfundattnyIn Crowdfunding, Crowdfunding Interviews, Crowdfunding Speaking EngagementsLeave a comment

Last Thursday I joined Jack Miller, the host of “Down to Business” on 880 AM The Biz in Miami, for a discussion about Crowdfunding and what it means for entrepreneurs and investors. Jack is a terrific interviewer and an entrepreneur himself, and brings a great perspective to the subject.

We had a lot of fun and might have even shed some light on this brave new world for Jack’s listeners.

Caution:  material not appropriate for all ages.

Questions? Let me know.

Improving Legal Documents in Crowdfunding: New IRS Audit Rules

On By crowdfundattnyIn Crowdfunding, LLCs, TaxLeave a comment

In the Crowdfunding world, almost every equity investment involves a limited limited liability company. Because (1) limited liability companies are treated as partnerships for tax purposes, and (2) Congress has just turned the law governing tax audits of partnerships on its head, all those LLCs will need to revise their Operating Agreements. And all new LLCs will have to follow suit.

Until now, tax disputes involving partnership were conducted at the partner level. That means the IRS had to pursue partners individually, based on each partner’s personal tax situation. With its budget cut and manpower reduced, the IRS was unable to pursue everybody.

Seeking to streamline partnership audits and ultimately collect more taxes, the (bipartisan) law just passed reverses that rule.  Now, the IRS conducts audits at the partnership level and no longer has to argue with all those partners and their accountants. In fact, even though partnerships are not normally subject to tax, under the new law the partnership itself must pay any tax deficiency arising from the audit, unless it makes a special election.

EXAMPLE: NewCo, LLC owns an apartment building. The IRS decides NewCo used the wrong method of depreciation, and adds $1 million to NewCo’s taxable income. Under the new law, NewCo itself is liable for tax on $1 million, calculated at the highest possible tax rate. However, NewCo may elect to make its members personally liable instead.

Under old law, every partnership had a “tax matters partner” with broad administrative responsibilities. The new law creates a much more powerful position, the “partnership representative,” with the power to bind the partnership and all of its partners on tax matters. The partnership representative doesn’t even have to be a partner, just a person or entity with a substantial U.S. presence:  an accounting firm, for example.

The law becomes effective in 2018. Between now and then, all existing limited liability companies should revise their Operating Agreements to:

  • Provide whether taxes due as a result of tax return audit will be paid at the partnership or partner level
  • If the tax is paid at the partnership level, how the economic cost will be shared by the partners
  • Designate a partnership representative
  • Describe the duties and powers of the taxpayer representative, within the statutory limits
  • Describe the obligations of the partnership and partners to share tax-related information

Obviously, all new limited liability companies should deal with those issues at the outset.

Questions? Let me know.

Intrastate Crowdfunding After Title III

On By crowdfundattnyIn UncategorizedLeave a comment

CF WordclouldOn one hand, the SEC just proposed several changes to Rule 147 that will make intrastate Crowdfunding easier:

  • We used to worry, at least a little, about the language in Rule 147 saying that you couldn’t offer securities to anyone outside the state. How does this work when your offers are made with the Internet, we wondered? The SEC just proposed eliminating that requirement.
  • If you were doing an intrastate offering in Texas, Rule 147 used
    to require using a Texas entity – not Delaware, for example. No more.
  • If you’re doing an intrastate offering in Texas, you have to show you’re doing business in Texas. The new proposals would make that easier.
  • The new proposals would also simplify and rationalize the rules around (1) the “integration” of offerings (combining an intrastate offering with other offerings), (2) verifying that investors are residents of the state, and (3) re-sales of securities purchased in an intrastate offering.

All that is great, and should really help the intrastate Crowdfunding market (although I take to heart Anthony Zeoli’s excellent caveat here.)

On the other hand, the SEC also proposed a $5 million cap on intrastate offerings, which seems very important in light of Title III.

Title III Crowdfunding allows any issuer anywhere to raise up to $1 million from non-accredited investors who live anywhere in the world. With Title III Crowdfunding available, why would an issuer use intrastate Crowdfunding? There are only two possible reasons:

  • You’re allowed to raise more money in the intrastate offering
  • The process of the intrastate offering is faster/cheaper/easier

Once the hi-tech folks get their hands around Title III, I think we’re going to see the process becoming faster, cheaper, and easier than it looks now, making Title III comparable (maybe even superior) to intrastate Crowdfunding from that perspective.

Then it just comes down to how much you can raise. If I am a small issuer – raising less than $1 million, for example – why would I use the intrastate law of my state when I can use Title III instead and appeal to the whole universe of investors? Case in point:  New Jersey enacted an intrastate Crowdfunding law just this week – with a $1 million limit. Why would a New Jersey business use that law, with Title III on the books and the gold and silver of Manhattan right across the Hudson River?

And if I’m a software developer wondering what kind of platform to build, isn’t the scale tipped in favor of Title III?

The scales will tip further that way when Congress increases the limit of Title III from $1 million to something higher. Although the SEC can always raise the limit for intrastate Crowdfunding as well, the future probably belongs to Title III.

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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