Tag: Crowdfunding Portals

Choosing And Protecting A Name For Your Crowdfunding Business

On By crowdfundattnyIn Crowdfunding, Crowdfunding Articles, Crowdfunding Real Estate, Investing, Investor, LLCs, Real Estate, Technology PlatformsLeave a comment

Names matter, even for a local business, but they matter a great deal for a Crowdfunding business, where your customers know you only from a distance.

Generally speaking you can choose three kinds of names:

  • A name that describes what you do, e.g., Real Estate Crowdfunding Portal, LLC.
  • A name with no inherent meaning, e.g., Xeta, LLC.
  • A name somewhere in between, e.g., Lifelong Investments, LLC.

Each category has advantages and disadvantages:

  • A name that describes what you do…well, it describes what you do. When a consumer sees the name she knows what you’re selling. On the other hand, a name that describes what you do is often not very memorable.
  • The strongest names are those that start out with no inherent meaning. Amazon, Starbucks, E-Bay. When consumers think of Amazon they think about the gigantic online retailer, nothing else. The name is worth a billion dollars! On the other hand, Amazon had to spend more than a billion marketing dollars to give meaning to a name that otherwise belonged to a river.
  • A name somewhere in between is somewhere in between. It might be sexier than a name that is merely descriptive and require a lot less marketing fuel than a name with no meaning, but with the associated disadvantages as well.

In the Crowdfunding industry to date, most portals have chosen the more descriptive over the more powerful. Poliwogg is an exception. Fundrise might be another.

With two well-known Crowdfunding companies – Crowdentials and VerifyInvestors – we see two different approaches to choosing a name. And we can’t say for certain whether one is better than the other. That will depend on what each company does with its name.

Having chosen a name, how do you protect it?

To start with, a business acquires “common law” rights to a name merely by using it, without filing anything with the government and without involving lawyers. If another real estate Crowdfunding portal tried to use the Fundrise name today they couldn’t do it, even if the Miller brothers had never done anything to protect their name (they have).

Contrary to common belief, merely registering a company name with the state by forming a corporation or other entity provides no real protection. State filings are simply a matter of bureaucracy – the state wants to make sure that no two names are confusingly similar on its own records.

For the best protection, however, the business owner should obtain a Federal trademark from the U.S. Patent and Trademark Office. A Federal registration provides important benefits, including:

  • The registration constitutes “constructive notice” to all later users in all locations.
  • The registration permits the owner to get an injunction against a trademark infringer and sue for damages, including profits, costs, treble damages and attorneys fees.
  • The registration can strengthen the value of the name as a corporate asset.
  • The registration demonstrates your right to use the name to the owners of other websites, such as Google, Facebook, and Twitter, which are often called on to “officiate” disputes over names.

The trademark application process normally takes about a year, assuming no significant problems. Once granted, a trademark registration can last forever if continuously used and renewed.

NOTE: Not every name can be trademarked. A name like “Real Estate Crowdfunding Portal,” which merely describes the product or service, probably cannot be registered by itself. But it might be registered with a distinctive logo.

Finally, don’t forget to acquire the domain name.

Questions? Let me know.

Title III And The Evolution Of Business Law

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, JOBS Act, SECLeave a comment

I’m not optimistic about Title III for the usual reason:  I think the cost of complying with the statute will prove too high. I’ve even proposed my own fix to the statute. But there are plenty of smart people who think otherwise, including Ron Miller of StartEngine, and ultimately opinions don’t matter. The market will decide whether Title III can work in its current form.

The SEC proposed regulations last October 23rd and the comment period ended long ago. Rather than wait for the statute to improve, I’m ready for the SEC to consider the comments, make changes to the proposed rules as it sees fit, finalize the regulations, and let the market do its job.

Whatever the defects of current Title III, and there are many, chances are they will be fixed over time. Time after time, almost from the beginning of time, the legal system has responded to the needs of the business community. Examples:

  • Hundreds of years ago, governments created corporations in direct response to the need of traders and investors to limit liability on foreign adventures.
  • With the advent of income taxes in the 20th century, business people had to choose between the limited liability of a corporation and the pass-thru tax treatment of a general partnership. But not for long. Soon legislatures created limited partnerships and S corporations, providing the best of both worlds.
  • When defects were discovered in limited partnerships and S corporation – for example, the risk that limited partners could face unlimited liability – legislators fixed them and fixed them until, lo and behold, Wyoming created an even better entity, the limited liability company we all know and use today (which, in turn, has already been improved).
  • Private placements have always been legal, regulated by the SEC through no-action letters and other guidance. But the private placement market needed clear rules. Hence, Regulation D in 1982. And now Title II of the JOBS Act has improved Regulation D by adding Rule 506(c).
  • Since I have been practicing law (less than a century) the corporate laws of most jurisdictions, including Delaware, have improved dramatically, as state legislatures respond to the needs of businesses large and small.

There are two things you never want to see being made:  sausage and law. But over time, commercial laws do change, usually for the better. If Wyoming can invent limited liability companies, surely we and our Federal government can improve Title III as the need becomes apparent.

So with malice toward none, with charity toward all, let’s stop debating whether Title III can work and let the market figure it out.

Questions? Let me know.

Crowdfunding.Biz Interview

On By crowdfundattnyIn Crowdfunding, Crowdfunding Interview, Crowdfunding.Biz InterviewLeave a comment

CFBizJosef Helm runs a terrific site called crowdfunding.biz focused on the Crowdfunding industry. This week Josef interviewed me as part of his Crowdfunding Industry Spotlight series. He asked how I got into the Crowdfunding industry, my advice for those getting in today, my hopes and expectations for the future of Crowdfunding, and a bunch of other illuminating questions.

If you’re interested, my interview is here. But as long as you’re at the site, take a look at the eight other people Josef has identified as industry leaders, people like Richard Swart and Joy Schoffler. Responding to the same questions, you might find their answers more interesting.

I’m honored to have been selected. Josef, thank you for what you do in this space.

Questions? Let me know.

Our Experience With Regulation A – by Ben Miller, Co-Founder of FundRise

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Crowdfunding Real Estate, Guest Blog, JOBS Act, Regulation ALeave a comment

To improve the user experience, I am inviting guest bloggers. The first is Ben Miller, a Co-Founder of Fundrise, who explains how he and his brother Dan invented Crowdfunding through Regulation A.

Please let me know if you would like to post. I’m looking for content like Ben’s – interesting, informative, educational.

-MARK RODERICK

____________________________________________________________________________________

By: Ben Miller, Co-Founder of Fundrise.

My brother Dan and I were in the real estate business for a long time, developing commercial and residential projects in the Washington, D.C. area, before we thought about crowdfunding. We got some of our capital from the same place many real estate developers get their capital: from investment funds in New York or even outside of the country.

Most of them had little connection to the places we were building and often had never even heard of the neighborhood. On the other hand, our friends and neighbors, people with real connection to the projects, couldn’t invest with us.

fundriseWe started to imagine a world where everyone could invest in high-quality real estate deals, which were then limited to professional investors. We thought about ordinary people investing in their own communities, creating a win-win for the community and business owners. Like every other developer, we’ve had our share of battles with local zoning agencies. We imagined how that process might change if actual investors from the community showed up at council meetings to support the project.

This was before crowdfunding or the JOBS Act were on the table, and every lawyer we spoke to (and we spoke to plenty) told us that our idea was impossible.

Finally we discovered SEC Regulation A. Although Regulation A had been around since 1936, before we came along it had been used very rarely, which probably explains why the lawyers hadn’t heard about it. In all of 2012 fewer than a dozen companies had used Regulation A to raise capital across the whole country, as compared to more than 7,000 Regulation D offerings.

We soon found out why. Although Regulation A allows you to raise money from anybody, including from non-accredited investors, first you have to file a disclosure document with the SEC and with the state securities regulators in any state where you offer the security, and get the regulators to approve your offering. Regulation A is nothing like the new Crowdfunding under SEC Rule 506(c), which is simple and streamlined by comparison.

Once we figured out how to file the disclosure document, which is really like a mini registration statement, we learned that neither the SEC nor the state regulators had ever seen a real estate development project offered under Regulation A. We spent hundreds of hours and way too much in legal fees working through all of the issues. We were literally doing something that had never been done in the history of the U.S. capital markets, and at the same time paving the way for everyone else.

After lots of work, lots of frustration, and lots of conversations with regulators, we succeeded. Our Regulation A filing was approved and we raised $325,000 for the project. I won’t even tell you how much it cost to raise that $325,000, but we were okay with it because we saw the experience then, and still do, as an investment in our future.

We have completed three Regulation A offerings since then. Each time we’ve gotten better and faster, not to mention that the regulators have learned along with us.

Here’s what it took to complete our most recent Regulation A offering:

reg a breakdown

Our most recent filing:

fedex

Fundrise has branched out since those early days. As the leading real estate portal in the world we offer not only Regulation A projects but Rule 506(c) investments under the JOBS Act. And we’re very excited about the new Regulation A+. Regulation A+ improves on Regulation A by allowing us to raise up to $50 million of equity from non-accredited investors (subject to a limitation on how much each person can invest) and further streamline the process by filing only with the SEC, and not with state securities regulators. Fundrise has always been a pioneer, and we expect to pioneer the possibilities of Regulation A+ as well as soon as it becomes available.

Whatever the future holds for Fundrise, and we believe our future is unlimited, we’ll always remember that Regulation A allowed us to open the door into the world of crowdfunding and give unaccredited investors the chance to invest in real estate for the first time in history.

Follow @BenMillerise and @Fundrise on Twitter.

 

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 Solution For Title III?

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, JOBS Act, Title IIILeave a comment

Lots of smart people attended the CFGE Crowdfund Real Estate Summit in Austin last week. On Thursday, there was a wonderful and heated discussion about Title III of the JOBS Act.

Some thought that regular, non-accredited investors should be allowed to invest in whatever they want, whenever they want, without the protection of the government. Some of the more opinionated think that the word “protection” in the preceding sentence should be in quotation marks, or even preceded by the phrase “so-called.”

Title III tries to balance two competing interests: on one hand, giving ordinary people the chance to invest in private deals; and on the other hand trying to protect ordinary people from the risks inherent in private deals.

It does so using the tools of traditional securities laws – namely, disclosure, transparency, reporting, and regulation. These were the tools introduced back in the 1930s at the height of the Great Depression. The Securities Act of 1933 and the Securities and Exchange Act of 1934 cleaned up the cesspool that Wall Street and become, and that approach has served the country extremely well over the last 80 years.

But we’re finding that it doesn’t quite work in Title III. Those traditional tools, which have worked so well for so long, are too expensive, so expensive that they defeat the purpose of the JOBS Act. Specifically, the traditional tools make capital so expensive that entrepreneurs can’t afford it.

Over lunch I thought of a different approach, one that is more attuned to the times.

Suppose a deal sponsor is raising capital for Project X. I propose that regular, non-accredited investors should be allowed to invest under the following conditions:

  • Accredited investors unrelated to the sponsor invest at least 25% of the capital for the project.
  • Each non-accredited investor is limited to 10% of income or net worth.

That’s it. No cumbersome reporting or regulation.

Why does this work? The whole point of Title II is that accredited investors are smart and sophisticated enough to protect themselves. If accredited investors are taking 25% of the deal, it means that smart, sophisticated investors have decided that it’s an investable deal. Or to put it in modern terms, the Crowd, through accredited investors, have validated the deal. And by limiting the amount of the investment to 10% – borrowing a rule from proposed Regulation A+ – we ensure that regular investors don’t over-invest.

This is a modern solution to a modern problem. It balances investor participation with investor protection through a mechanism that relies on the Crowd, not the government.

I’m interested to hear what others think.

Questions? Let me know.

PPM Or No PPM: That Is The Question

On By crowdfundattnyIn JOBS Act, PPM, Private Placement Memorandum, Regulation D offerings, Title II, Title II CrowdfundingLeave a comment

Crowdfunding Image - XXXL - iStock_000037694192XXXLargeSome Title II Crowdfunding portals use a full-blown Private Placement Memorandum for each offering, while others do not. What’s the deal?

For readers unfamiliar with the term, a Private Placement Memorandum, or PPM, is usually a long document, often half an inch thick or more printed, that is given to prospective investors and used partly to describe the deal but mostly to explain the risks.

The PPM finds its origins in the lengthy prospectus required of companies selling securities to the public in a registered offering. Following suit, Rule 502(b)(2) of Regulation D requires an issuer to provide specified information to prospective investors in some offerings and in some situations – for example, where securities are offered to non-accredited investors in an offering under Rule 506(b).

But where securities are sold only to accredited investors under Rule 506(b) or 506(c), the issuer is not required to provide the information described in Rule 506(b)2) – or any other information, for that matter. The idea is that accredited investors are smart enough to ask for the important information and otherwise watch out for themselves.

Companies like Fundrise that offer securities under Regulation A or Regulation A+ are required to provide specific information to investors. But Crowdfunding under Title II of the JOBS Act involves selling only to accredited investors in transaction described in Rule 506. Therefore, the law leaves to the issuer and the portal what information to provide and in what form.

For them, what are the pros and cons of a full-blown PPM?

The cons are obvious. Nobody but a lawyer could love a PPM. A full-blown PPM is bulky and unattractive, repetitive and filled with legalese. Ostensibly written to provide information to prospective investors, PPMs have, through time and custom, become so daunting that prospective investors rarely even read them. From a business perspective, a PPM creates friction in the transaction.

However, the pros are also obvious. Although Regulation D does not require an issuer or portal to provide any information, an issuer that fails to provide information, or provides incomplete or inaccurate information, may be liable to disgruntled investors under 17 CFR 240.10b-5, the general anti-fraud rule of Federal securities law, or various state statutory and common law rules.

That’s why the PPM exists: to provide so much information to prospective investors (albeit in an unreadable format), and to describe the risks of the investment in such repetitive detail, that no investor can claim after the fact “I didn’t know.”

The question is whether the issuer and the portal can get the same benefit without all the disadvantages. And the answer, in my opinion, is a resounding Yes!

In fact, the trend in private placements over the last two decades has been away from the full-blown PPM and toward a simpler disclosure document. I have been representing issuers in private placements of securities for more than 25 years and never prepare a PPM except where required by law (e.g., with non-accredited investors). None of the issuers I have represented during those 25+ years has been sued for securities law violations – much less successfully – and in my anecdotal experience, claims arising from alleged failures to disclose material information rarely if ever hinge on the presence or absence of a full-blown PPM.

Not only are portals not required to provide a full-blown PPM, in my opinion the question presents portals with a great business opportunity. Given that information must be provided, the manner in which it is provided, in what format, with what visual effects, how clearly and with what explanation, could well distinguish a portal in the minds of prospective investors. With the technology inherent in the platform, not to mention the creative minds in the industry, I expect that the manner of providing information will become one of the key ways that individual Title II portals distinguish themselves from one another and that the Crowdfunding industry in general improves the process of capital formation. Someday we will look back on the thick PPM and ask “Can you believe we once did it that way?”

A portal that gets it right – and there will be more than one way to get it right – will also create some protectable intellectual property interests and the accompanying breathing space vis-à-vis its competitors and additional valuation on exit.

Questions? Let me know.

Marc Andreessen On The Future Of Title II Crowdfunding Portals (Sort Of)

On By crowdfundattnyIn Crowdfunding, Crowdfunding Articles, Crowdfunding Portals, New York Times, Title II CrowdfundingLeave a comment

On the Technology page of yesterday’s New York Times, Nick Bilton reports on an interview with famed tech guru Marc Andreessen.

Mr. Bilton asks Mr. Andreesen, can other cities compete with Silicon Valley?

“In Mr. Andreessen’s view, there shouldn’t be 50 Silicon Valleys. Instead, there should be 50 different kinds of Silicon Valley. For example, there could be Biotech Valley, a Stem Cell Valley, a   3-D Printing Valley or a Drone Valley.”

A different “Valley,” each specializing in a different vertical, with its own ecosystem of entrepreneurs, favorite tweetinvestors, and experts. I believe Title II Crowdfunding portals, now in their infancy, will develop in exactly the same way.

Carve out a niche vertical. Attract investors looking to place bets on the top companies in that vertical. Find the companies. Create the ecosystem.

Mr. Andreessen was talking about real cities, not virtual cities. But in my opinion the point is exactly the same.

 

Crowdfunding And The Life Sciences: An Evening With The Experts

On By crowdfundattnyIn Crowdfunding, Crowdfunding Speaking Engagements, Entrepreneurs, Investing, Investor, JOBS Act, Life Sciences, Portals, Technology PlatformsLeave a comment

Last night I had the honor of moderating an all-star panel hosted by Pharmaceutical Consulting Consortium International (PCCI) in Philadelphia, focused on Crowdfunding in the life science space.

Our panelists:

  • Don Skerrett, the President of PCCI and a serial entrepreneur, who spoke from the perspective of an early-stage life science CEO
  • Barbara Schilberg, an experienced life science investor, the CEO of BioAdvance, a leading life science fund that has invested in almost 60 companies – leading to $1.7 billion of additional financing – and a senior executive in four active life science businesses
  • Darrick Mix, a shareholder at Duane Morris and an expert in Federal and State securities laws
  • Samuel Wertheimer, the Chief Investment Officer at Poliwogg, a Title II portal devoted to the health care industry and one of the most exciting and innovative portals of any kind in the world

Among the issues discussed:

  • The advantages and disadvantages of Crowdfunding from the perspective of a life science company
  • The nuts-and-bolts mechanics of Crowdfunding
  • The role of portals
  • The due diligence process for life science companies
  • The legal liability of life science companies and portals
  • The effect of Crowdfunding on the life science market specifically and the capital formation industry generally

The panel agreed that while Crowdfunding in the real estate market is very active, with more than 100 real estate portals already in operation, Crowdfunding in the life science market is at a very early stage. How the market will develop, how much capital it will provide to life science companies, how existing capital sources like BioAdvance will coordinate with new capital sources like Poliwogg, whether the life science market will divide into sectors as the real estate market is doing – these questions are all unanswered. But the panel also agreed that Crowdfunding holds great opportunities for the life science sector even if the details have yet to be worked out.

Thanks to those who attended, to PCCI for making the event possible, and especially to our excellent panelists for making the event so informative and worthwhile.

Questions? Let me know.

SEC Rules 506(B) And 506(C): Clearing Up The Confusion

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Rule 506, Rule 506(b), Rule 506(c), SEC, Securities Exchange Commission, Securities LawsLeave a comment

Some Crowdfunding portals offer Rules 506(b) transactions in addition to, and sometimes even in lieu crowd funding word cloudof, Rule 506(c) transactions. Let’s clear up the confusion.

In the beginning. . . .

Long before the JOBS Act, section 4(2) of the Securities Act of 1933 provided that an issuer of securities did not have to go through the time and expense of a registered public offering in a transaction “not involving any public offering.” Recognizing the putting-the-rabbit-in-the-hat nature of that language and wishing to provide more clarity to the public, the SEC issued Regulation D in 1982, which provides a series of Rules guiding issuers through the shoals of private – as opposed to public – offerings.

One of the Rules in Regulation D, Rule 506(b), describes a kind of private offering that has been the favorite of issuers and their lawyers for many years:

  • An unlimited amount of money raised
  • An unlimited number of accredited investors plus 35 non-accredited investors
  • Exemption from state Blue Sky registration

Rule 506(b) provides great flexibility to issuers. However, consistent with the distinction inherent in Regulation D between private and public offerings, Rule 506(b) prohibited the use of “general solicitation and advertising” to find investors. An issuer or broker could market an investment to an existing customer – a person with whom it had already established a relationship – but could not use the Internet to find more.

2013 No-Action Letters

In the beginning of 2013, the SEC issued no-action letters to FundersClub and AngelList under Rule 506(b). These no-action letter provided that if an online portal merely “registered” a user with a name and email address, the portal could immediately show investments to the user. To many familiar with the history of Rule 506(b) that sounded a lot like general solicitation and advertising, but the SEC concluded that it was not.

With the two no-action letters, the SEC effectively launched the Crowdfunding industry even before the JOBS Act officially came into effect.

The JOBS Act

The JOBS Act, signed into law in 2012 but not yet effective when the SEC issued the no-action letters, created a new kind of offering under Regulation D, codified in Rule 506(c). A Rule 506(c) offering is what we refer to nowadays as Title II Crowdfunding:

  • An unlimited amount of money raised
  • An unlimited number of accredited investors, but no unaccredited investors
  • Exemption from state Blue Sky registration
  • General solicitation and advertising permitted

If Rule 506(c) sounds a lot like Rule 506(b), that’s because it is. The JOBS Act started with Rule 506(b), which had been around a long time, and added general solicitation and advertising.

Why Both?

Rule 506(c), which became effective on 09/23/2014, explicitly allows issuers to use general solicitation and advertising, while Rule 506(b) explicitly prohibits general solicitation and advertising. Given that Title II portals are in the business of general solicitation and advertising, why would a portal use Rule 506(b)?

There are a few reasons.

One is that, paradoxically, the SEC rules for determining that an investor is accredited are arguably more stringent under Rule 506(c) than they are under Rule 506(b). Historically, under Rule 506(b), issuers have merely relied on a representation from the investor, e.g., “I promise I am accredited.” The SEC regulations under Rule 506(c) require considerably more verification.

Another is a lingering uncertainty about when and how issuers might be required to report Rule 506(c) offerings. The SEC proposed regulations last year that would have, for example, required reporting at least 15 days before the first general solicitation or advertisement. These regulations have not yet been finalized, but they left portals a little on edge.

More broadly, with the two no-action letters in hand, portals may feel they have a clear road map to legal Rule 506(b) offerings, while they remain hesitant about Rule 506(c) pending more advice from the SEC. My own view is that portals are probably more comfortable with the no-action letters than they should be, but that is a story for another day.

The Future

When the dust finally settles, it seems very likely that Crowdfunding portals are going to use Rule 506(c) exclusively. Until then we will have a mix and maybe just a little confusion.

Questions? Let me know.