Tag: Entrepreneurs

Beware Of Fraud In The Crowdfunding Market

On By poc-1@evil.testIn Crowdfunding, Crowdfunding Fraud, Crowdfunding Portals, Entrepreneurs, Investing, Investor, JOBS ActLeave a comment

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.

JOBS Act Crowdfunding – The Latest News & Information

On By poc-1@evil.testIn Crowdfunding, Crowdfunding Speaking Engagements, JOBS Act, SEC, Securities Exchange CommissionLeave a comment

I have been asked by the Pennsylvania Bar Institute (PBI) to lead a Crowdfunding breakout session at their annual Business Lawyers’ Institute in Philadelphia on November 13th.

I will discuss the latest news and information on JOBS Act Crowdfunding, including: Proposed Title III Crowdfunding Rroegulations; Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

For additional information on this event, or to register, click here.

Questions? Let me know.

MARK RODERICK

Proposed Title III Crowdfunding Regulations: Better Late than Never

On By poc-1@evil.testIn Crowdfunding, Crowdfunding Portals, Entrepreneurs, Investing, Investor, JOBS Act, Securities Exchange Commission, Securities Laws, Title III CrowdfundingLeave a comment

On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.

There are two extremely important things about the proposed regulations:

  • That they were issued. After a 90 day public comment period, it seems likely that Title III Crowdfunding will finally come into effect in the first quarter of 2014.
  • That they run to almost 600 pages. Given the complexity, there is some question whether, in the end, a company trying to raise money will find Title III Crowdfunding worthwhile.

Recall that the JOBS Act provides for two kinds of Crowdfunding:

  • Title II Crowdfunding allows companies to raise an unlimited amount of money from an unlimited number of accredited investors using general soliciting and advertising. That kind of Crowdfunding came into effect on September 23, 2013 and is now in full swing.
  • Title III Crowdfunding is a different animal. It allows companies to:
    • Raise up to $1 million per year;
    • On an SEC-registered internet portal;
    • From a unlimited number of investors who do not have to be accredited;
    • But with strict limits on the amount each investor can invest.

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 company can use only one portal at a time.
  • The company must file information via EDGAR, the SEC’s electronic database.
  • The $1 million-per-year limit applies only to money raised in Title III offerings. Thus, a company could raise $3 million in a traditional private placement (or a Title II offering) while still raising $1 million in a Title III offering.
  • Investors can change their minds up to 48 hours before the investment deadline, in all circumstances, and must also be given the right to terminate in the event of a material change in the investment opportunity.
  • The company must disclose not only its own prior offerings, but the prior offerings in which its directors and other principals were involved.
  • The SEC has created a new Form C to report Title III offerings.
  • The company may advertise, but only to direct potential investors to the portal’s website. The company may not use general solicitation and advertising, as it can in a Title II offering.
  • “Bad actors” are excluded from Title III Crowdfunding, as they are from Title II Crowdfunding.

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.

SEC Proposes For Title III Crowdfunding

On By poc-1@evil.testIn Entrepreneurs, Investing, Investor, JOBS Act, SEC, Securities Exchange Commission, Securities Laws, Title III CrowdfundingLeave a comment

Today, at long last, the SEC issued proposed regulations implementing Title III Crowdfunding, which will allow companies to raise up to $1 million per year in small increments from non-accredited investors.

With commentary, the proposed regulations run to almost 600 pages. We’ll be posting a summary soon.

Title II Crowdfunding has been live since September 23, 2013. The era of Crowdfunding is now.

Stay tuned for more updates…

Questions? Let me know.

Free Seminar – Smart Talk: Crowdfunding 101

On By poc-1@evil.testIn Crowdfunding, Crowdfunding Speaking Engagements, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the University City Science Center in Philadelphia, PA to be the featured speaker on Crowdfunding at the “Smart Talk – Crowdfunding 101” seminar on October 24, 2013.

I will discuss the basic changes to the JOBS Act and what this means for you and your company’s future, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

The seminar will take place on Thursday, October 24, 2013 at the Quorum at the University City Science Center in Philadelphia, PA from 8:30 – 10:00 a.m. This event is free, but space is limited, so you must register to attend. To register, email the University City Science Center to secure a seat. For additional information on the event, click here.

I hope to see you there!

MARK RODERICK

Crowdfunding – A Monumental Change in Securities Law

On By poc-1@evil.testIn Crowdfunding, Form D, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the New Jersey Institute of Continuing Legal Education to present a webinar on the recent change of Crowdfunding rules. The program will take place on Wednesday, October 9, 2013 and has been approved for CLE credits.  For additional information on the webinar, or to register, click here.

More info: Crowdfunding – A Monumental Change in Securities Law

Now, for the first time, small companies and entrepreneurs will be able to raise money directly from the public using newspaper advertisements, Facebook pages, and other means of “general solicitation,” without going through brokers or other middlemen.

My presentation, entitled “A Monumental Change in Securities Law: Crowdfunding is Now Open for Business,” will discuss the basic changes to the law, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

I concentrate my practice on the representation of entrepreneurs and their businesses. I represent companies across a wide range of industries, including technology, real estate, and healthcare. I am also spearheading my firm’s Crowdfunding Practice.

Check back frequently for information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business.

Questions? Let me know.

Technology Platform for Crowdfunding

On By poc-1@evil.testIn Crowdfunding, Entrepreneurs, Form D, Regulation D offerings, SEC, Technology PlatformsLeave a comment

A company raising money through Crowdfunding will face certain logistical challenges:

  • How to keep track of prospective investors
  • How to automate the due diligence process
  • How to execute documents electronically and securely
  • How to communicate with investors
  • How to securely handle the transfer of funds
  • How to satisfy the new SEC requirements regarding accredited investors
  • How to prepare and file the newly-expanded Form D with the SEC

These challenges have always been present in Regulation D offerings, but with a dozen investors, or two dozen, or three dozen, they were merely a manageable nuisance. In a Crowdfunding offering with 150 investors they could be overwhelming.

SeedInvest, a startup with offices in Manhattan, offers a technology platform that claims to do all these things and more. A company seeking to raise money through Crowdfunding, or a brokerage firm seeking to raise money for its clients, or an angel group seeking to manage multiple investments, would in effect “rent” the SeedInvest platform as an alternative to spending the time and money to build its own.

Today, thousands of entrepreneurs – perhaps some of them reading this blog – are planning to jump into the Crowdfunding space. One entrepreneur might be building a portal for biotech companies in the Northeast – a place where investors could find and invest in the best the research centers in the Northeast have to offer. Another might be doing the same for Manhattan commercial real estate, believing there must be many accredited investors around the country who would like to own a piece of New York. And on and on, in every industry and every region.

By using SeedInvest’s platform, or a similar platform offered by a competitor, the entrepreneur overcomes some of the most significant technological and logistical barriers to entry. In effect, the entrepreneur can focus on the business of attracting quality companies and investors while outsourcing the technological back office.

Crowdfunding is already creating new opportunities for entrepreneurs in many industries. SeedInvest is one example; there will be many, many more.

Questions? Let me know.

Will Crowdfunding Hurt My Company Later On?

On By poc-1@evil.testIn Crowdfunding, Entrepreneurs, JOBS ActLeave a comment

With bona fide JOBS Act Crowdfunding about to launch, many entrepreneurs wonder whether raising money through Crowdfunding will hurt their company in the future.

The simple answer: not if you do it the right way.

A company raises money for its current needs, naturally. But no matter where the money is coming from, Crowdfunding or otherwise, the company must have one eye on the future to ensure that nothing it does today will keep it from raising more money tomorrow.

Here are a few tips to avoid problems in the future:

  • The Crowdfunding investors should not have the right to veto later rounds of financing.
  • The Crowdfunding investors should not be able to control the company’s Board of Directors.
  • The Crowdfunding investors should have very limited liquidity rights, if any.
  • The company should be able to grant later investors economic and management rights – for example, a preferred return on sale – that are superior to the rights of the Crowdfunding investors.

These things and much more can be accomplished with the right legal structure for the company and the Crowdfunded investment. In fact, if Crowdfunding is done correctly, it should not interfere with subsequent rounds of investment at all.

Questions? Let me know.

SEC Finalizes “General Solicitation” Regulations: Full Steam Ahead

On By poc-1@evil.testIn Crowdfunding, Crowdfunding Portals, Entrepreneurs, FundersClub, General Solicitation, Investing, Investor, JOBS Act, Kickstarter, Rule 506, SEC, Securities Exchange CommissionLeave a comment

Since President Obama signed the JOBS Act into law on April 5, 2012, we have been waiting for the SEC to finalize the rules on Crowdfunding.

At long last the SEC has done just that, at least with respect to one of the two components of Crowdfunding. Sometime in mid-September, company will be allowed to use “general solicitation” in certain “Rule 506 offerings.” The rules governing the other component of Crowdfunding, where small issuers will be allowed to raise money through Internet portals from small, unsophisticated investors, will have to wait for later in the year.

Even so, these new regulations mark the largest change to the securities laws in almost 80 years. Companies will now be allowed to raise money from accredited investors (in the case of individuals, those with over $1 million of net worth or incomes over $200,000 per year) through social media, print materials, email, and other means. Not only will companies have greater access to the capital they need, but the new rules are likely to significantly disrupt the money-raising industry, displacing brokers, lawyers, and other middlemen just as the Internet has displaced so many middlemen before them.

Now the technical rules.

The rules allow general solicitation and general advertising where:

  • All purchasers are accredited investors; and
  • The company takes reasonable steps to verify that the purchasers are accredited investors; and
  • All of the requirements in Rule 501, Rule 502(a), and 502(d) are satisfied.

Whether the company has taken “reasonable steps” will be determined on a case-by-case basis. Among the relevant factors:

  • The type of accredited investor that the purchaser claims to be (e.g., the CEO of a Fortune 100 company or a store clerk).
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, including the manner of the solicitation.

When the regulations were proposed last August, many people complained about the absence of hard-and-fast rules and the resulting ambiguity. The final rules take a large step in the direction of certainty by providing that a company will be considered to have taken reasonable steps to verify that a natural person is an accredited investor if it does any of the following:

  • If basing the decision on the purchaser’s net income:
    • Reviews W-2s, 1099s, or other IRS documents that report the person’s income for the past two years; and
    • Obtains a written representation that the person reasonably expects to reach the income level required to qualify as an accredited investor in the current year.
    • If basing the decision on the purchaser’s net worth:
      • Reviews one or more types of documents dated within the past three months, including bank statements, brokerage statements, tax assessments, and a report from one of the national consumer reporting agencies concerning liabilities; and obtains a written representation that the person has disclosed all liabilities necessary to make a net worth determination; or
      • Obtains a written representation from certain third parties, including registered broker-dealers or investment advisors, that they have taken reasonable steps to verify the person’s accredited investor status within the past three months and have determined that the person is an accredited investor; or
      • Permits existing security-holders who had acquired issuer securities in a previous Rule 506 offering and had qualified as accredited investors at that time to certify his or her accredited investor status at the time of the sale.

These steps are neither exclusive nor mandatory. The final rules also discuss other factors and procedures.

In addition to taking reasonable steps to verify that purchasers are accredited, the company must also have a reasonable belief that they are accredited. This has always been part of Rule 506 and was not changed by the JOBS Act.

NOTE:  These new rules offer enormous opportunities for entrepreneurs seeking to raise money for their existing businesses or start new businesses. Please contact us if you would like to discuss your idea.

Questions? Let me know.

SEC: FundersClub, AngelList Not Required To Register As Broker-Dealers

On By poc-1@evil.testIn AngelList, Crowdfunding, Crowdfunding Portals, Entrepreneurs, FundersClub, Investing, Investor, LLCs, SECLeave a comment

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.