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.
Questions? Let me know.
I have been asked by The Knowledge Congress to speak at the Crowdfunding Through Funding Portals: What You Need to Know Live Webcast.
The live webcast will take place on Wednesday, March 19, 2014 from 12:00 – 2:00 PM EST and has been approved for CLE credits. For more information, or to register, click here.
For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, check back here, or follow me on twitter @CrowdfundAttny.
John Mattera offered a great deal to his investors. Through special-purpose investment vehicles, investors could buy shares in well-known companies like Facebook and Groupon, which were then privately-owned. When the companies went public, investors would reap millions.
Mattera raised more than $13 million from more than 140 investors, some of whom invested their life savings.
The only problem was that Mattera didn’t use the money to buy shares in Facebook or Groupon. Instead, he used the money for the normal trappings of ill-gotten wealth, including a waterfront home in Fort Lauderdale, two Rolls-Royces, and a Lamborghini, according to the government.
Mattera was caught and sentenced to 11 years in prison. But his investors aren’t getting their money back.
Bernie Madoff, John Mattera. . . .there is no shortage of people trying to steal your money through investment scams. Why are thieves attracted to the securities industry? As “Slick Willie” Sutton said when asked why he robbed banks, “Because that’s where the money is.”
It doesn’t matter if you’re smart, sophisticated, and have seen it all. Mattera’s investors thought they had seen it all, too.
Be careful out there.
Questions? Let me know.
On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.
There are two extremely important things about the proposed regulations:
Recall that the JOBS Act provides for two kinds of Crowdfunding:
For a detailed outline of the Title III statute itself, click here.
Despite their length, the proposed regulations do not add much to the statute. There are just a few points worth noting for a company looking to raise money:
The proposed regulations are even more important for portals, or would-be portals. The portal is designated as the virtual policeman for ensuring compliance with the law. For example, the proposed regulations provide that the portal must have a reasonable basis for believing that company is complying with the law, and must deny access to the issuer under certain circumstances. In effect, the portal is required to act as an arm of the SEC itself.
Just as a company trying to raise money might decide that Title III is too onerous, an entrepreneur thinking about forming a Title III portal might decide that the fruit are a little too high and a little too green.
Questions? Let me know.
It’s official: Crowdfunding is now in effect and thousands of companies are about to start raising money under the new SEC regulations. If each company offers different deal terms for investors, it’s going to be that much more difficult for investors to make apples-to-apples investment decisions.
Meanwhile, some in the investment community are still concerned that a company raising money through Crowdfunding will be hobbled in raising more money afterward, e.g., from angel groups or venture capital funds.
The sooner the market adopts a standard investment structure, the better for all.
Here is a legal structure that would standardize the Crowdfunding market, satisfy SEC regulations, and ensure that the Crowdfunding round of financing does not preclude later rounds:
This structure should be acceptable to all of the constituents of the Crowdfunding market: the entrepreneurs who started MyCo; the broad investing public that will make Crowdfunding a success; the angel groups that help so many startups succeed and currently anchor the early-stage market; and the venture capital funds that provide additional funds for companies that need and deserve them.
Questions? Let me know.
Having just allowed the use of advertisements and “general solicitation” to raise money, the SEC now proposes several steps to protect investors and keep track of the explosion in Crowdfunding the new rules are certain to trigger.
Beefing Up Form D
Form D has been around for along time, but now the SEC proposes to beef it up significantly. The company raising money through general solicitation will now have to:
More Legends
The SEC also proposes a number of new legends that must appear in general solicitations, including that the securities can only be sold to accredited investors, that the SEC has not passed on the merits of the offering, that investing entails risk (!), and that past performance does not guaranty future performance.
Sending General Solicitation Material to the SEC
Finally, the SEC proposes that companies must submit their written general solicitation materials to the SEC, on a temporary basis, by no later than the date of first use of the materials. This rule would expire two years after its effective date, presumably giving the SEC enough time to see what is happening in the marketplace and issue a new or different rule as it sees fit.
* * *
Unlike the rules allowing general solicitation, these new rules are merely proposals, and could be revised or withdrawn after a 60 day public comment period.
Questions? Let me know.
Through “no-action letters” dated March 26, 2013, the Securities and Exchange Commission has just ruled neither FundersClub nor AngelList, both nationally-recognized equity-based Crowdfunding portals, is required to register as a broker dealer under Federal securities law.
But portals are structured as investment advisory services and are registered as investment advisors. When a company is funded by investors, the portals do not receive cash compensation, as a broker would typically receive, but instead receive compensation more customary for a fund advisor: an interest in the future profits of the company – a “carried interest.” The form of the compensation seemed to be the principal factor that convinced the SEC to rule favorably.
Other equity-based portals might register as broker-dealers to avoid the issue altogether. Because both of these coordinated decisions could have gone the other way, however, the larger lesson may be that the SEC is taking a relatively hands-off approach to the rapidly-evolving Crowdfunding industry. If you are a portal or company waiting anxiously for the SEC regulations later this year, that is good news.
Questions? Let me know.
Many young companies fail for lack of capital. With Crowdfunding making much more capital available, it seems plausible that more young companies will succeed. Even so, the nature of capitalism is that many will fail and investors will lose their money. And unfortunately, with so much money flowing through new channels, the nature of human beings is that Crowdfunding will attract its share of the outright unscrupulous.
You can never protect yourself completely, but here a few tips to reduce the risk.
If you are an Investor:
If you are a Portal:
If you are a Company:
Questions? Let me know.
As Crowdfunding gains traction, Crowdfunding portals are springing up and marketing themselves aggressively to entrepreneurs and prospective investors.
No, I take that back. Websites are springing up and marketing themselves aggressively to entrepreneurs and prospective investors, but technically there aren’t any “Crowdfunding portals” yet. Crowdfunding portals are a creature of the JOBS Act, and the JOBS Act hasn’t yet come into effect because the Securities and Exchange Commission (SEC) hasn’t yet issued regulations.
If the websites springing up today are not really Crowdfunding portals, then what are they? Are they legal? That matters a lot for entrepreneurs.
Background
The JOBS Act created two kinds of Crowdfunding:
But neither kind of Crowdfunding is available yet.
Today, we see websites that combine the concept of a “portal” with a traditional private offering of securities. At these sites, accredited investors sign up to review companies, and companies sign up to raise money from investors. If everything goes right you end up with a happy entrepreneur and a legal Rule 506 offering.
What Could Go Wrong?
By definition, these Internet sites are not Crowdfunding portals and what they do is not JOBS Act Crowdfunding. For the sites to be legal they must satisfy the securities law rules as they existed before the JOBS Act. And it turns out that it’s not easy to mesh the very fast, very public world of the Internet with the rules in place long before the Internet was a twinkle in Al Gore’s eye.
These are a few of the tough issues these sites face:
Some sites seem more aggressive legally than others. Entrepreneurs should pay attention.
Why Does It Matter to the Entrepreneur?
If a website raises money improperly, the website can find itself in hot water. The operators of the website may be fined, banned from the securities industry (thus missing out on Crowdfunding when the SEC finally issues regulations), even go to jail.
But it’s no picnic for the entrepreneur and his or her company, either. If the portal does something wrong it likely means the company engaged in an unregistered, and therefore illegal, public offering of securities. The entrepreneur can also be fined, banned from the securities industry, or even go to jail. Moreover, the entrepreneur could be forced to give all the money back to the investors.
Conclusion
Raising money has always been hard. The internet and the JOBS Act are making it easier, but in the Wild West version of Crowdfunding we live in today, entrepreneurs have to be picky about their portals.
Questions? Let me know.