Why I’m Grateful This Thanksgiving

William Bradford leader of the pilgrims

My 10th-great grandfather was William Bradford, the leader of the Pilgrims. I’m grateful that he and his band of religious refugees made the trip and were saved from starvation by the native population.

I’m grateful for the wisdom of the American people and the resilience of their institutions.

I’m thankful for a culture that rewards risk-taking and innovation and that is slowly, haltingly, inexorably freeing itself of the prejudices of our collective past.

I’m grateful for American entrepreneurs who endlessly question the present and invent the future.

I’m grateful I declined an invitation to sit on OpenAI’s Board.

I’m grateful – I’m not joking – to the SEC for providing oversight for the most complex, dynamic, trusted capital markets in the world.

I’m grateful that FINRA. . . .

I’m grateful to my colleagues at Lex Nova Law for helping to build a flexible, modern law firm.

I’m grateful to live in a diverse, changing, sometimes-chaotic country where it often seems we disagree about everything (we don’t). Like others, I worry that so many Americans have chosen alternative realities and conspiracy theories, but I have faith that these afflictions, like others in our history, will prove temporary.

I’m grateful that even while the voices of hate are the loudest, those who yearn for peace – the majority – refuse to be drowned out.

I’m grateful that people can change their minds.

I’m grateful to participate in the fundamental rethinking of capitalism called Crowdfunding, making capital available where it has never been available before and making great investment opportunities available to more and more Americans.

I’m grateful to everyone in the Crowdfunding ecosystem, especially to Doug Ellenoff and others who worked to make the JOBS Act a reality.

I’m grateful for my clients, a diverse, energetic, endlessly-creative group of entrepreneurs who are making America better and in the process making my life infinitely more rewarding.

While complaining that my health insurance premiums went up again, I’m grateful they have not dropped to zero.

Thanks for reading everyone! I hope you enjoy your Thanksgiving as much as I intend to enjoy mine. As always, contact me if you have any questions.

MARK

Republican Dysfunction Could Benefit Crowdfunding

Republican Dysfunction Could Benefit Crowdfunding — REALLY

During my lifetime we’ve never seen political dysfunction like the dysfunction we’re seeing among House Republicans. Coming just as American leadership could be most helpful, the dysfunction is dangerous, a national embarrassment, all that and much more. Yet it might prove good for Crowdfunding.

An ally of Representative Kevin McCarthy, Representative Patrick T. McHenry of North Carolina was designated “interim Speaker” when McCarthy was dethroned. Nobody knows what “interim Speaker” means or what he or she can do, but now, with Republicans unable to agree on an actual Speaker and no other way out of the cul-de-sac, the idea is circulating to give Rep. McHenry some real power and try to run the place. 

Unprecedented? Sure. But so is the dysfunction among Republicans.

Well, it just so happens that Rep. McHenry was the leading proponent of the JOBS Act, the 2012 law that launched Crowdfunding in all its current forms. Ever since, he has also been a leading proponent of improving the law, making it easier for entrepreneurs to raise capital and for ordinary Americans to participate.

Crowdfunding isn’t exactly high up on the list of priorities for either party. But when you’re Speaker of the House of Representative, or “interim Speaker with special powers,” you get to do stuff. If Rep. McHenry holds his position, I wouldn’t be shocked to see changes to the JOBS Act attached to other legislation, even a bill to help Israel and Ukraine.

To quote someone else, there are two things you never want to see being made:  sausage and law. If the dysfunction among Republicans can help Crowdfunding and the American economy, so be it.

Questions? Let me know.

Advocating for Intellectual Honesty in the Legal Sphere With Mark Roderick

In this episode… Why is intellectual honesty important for lawyers? By prioritizing what is morally correct over personal gain, lawyers strengthen the lawyer-client relationship and contribute to a fair and just society. Upholding the integrity of the legal profession and ensuring that justice is served depends on attorneys’ commitment to ethical principles — even when they don’t benefit from what they advocate.

As a math major, Mark Roderick was exposed to the world of math proofs and abstract thinking. Realizing he desired to work with people and help solve problems in the real world, he applied to law school. Unlike other professionals in the industry, Mark has a passion for doing what is right at all times — and seeks out others who value intellectual honesty over financial gain. Respecting your integrity, both in your profession and personal life, strengthens your relationships as individuals grow to trust you have their best interest in mind.

In this episode of 15 Minutes, Chad Franzen sits down with Mark Roderick, Principal Partner at Lex Nova Law, to discuss how sharing the same values impacts your work environment. Mark also talks about what inspired him to pursue a career in law, how his background in math has contributed to his career, and how he started his crowdfunding blog.

Resources mentioned in this episode:

Chad Franzen on LinkedIn – https://www.linkedin.com/in/chadfranzen

Gladiator Law Marketing – https://gladiatorlawmarketing.com

Mark Roderick on LinkedIn – https://www.linkedin.com/in/markroderick/

Lex Nova Law – https://www.lexnovalaw.com/

Crowdfunding & FinTech Law Blog – https://crowdfundingattorney.com/

Watch Out For Oregon’s Securities Laws

Oregon is a beautiful state and its people among the friendliest and most caffeinated in the country. But watch out for its securities laws.

A New York law firm found out the hard way in a case called Houston v. Seward Kissel, LLP. The firm prepared offering documents for a company that was later sued by an Oregon investor claiming fraud. The unhappy investor sued the law firm under ORS 59.115(3), which imposes liability on anyone who “participates or materially aids” in the sale of a security. The judge allowed the case to go forward without even requiring the plaintiff to show the law firm knew about the alleged fraud. 

In another case under the same statute, Ainslie v. Spolyar, the court granted summary judgment against a junior associate in a law firm that prepared offering documents, where the issuer allegedly violated the terms of the offering documents.

How dare they sue lawyers!

But lawyers aren’t the only ones potentially on the hook. Other potential targets include finders, agents, funding portals, accountants, financial advisors, employees of the issuer, even banks that extend financing to investors. If you touch the offering, you’re potentially liable. And under the statute, everyone is “jointly and severally” liable, meaning everyone, even the lowly associate in Ainslie v. Spolyar is liable for 100% of the damages.

The only defense is to show that you didn’t know of the facts underlying the claim (e.g., the fraud or violations of Oregon’s securities laws) and couldn’t have known of them “in the exercise of reasonable care.” That’s a very tough burden for two reasons:

  • Suppose the issuer has committed fraud. Proving that you didn’t know about it is one thing. Proving that you couldn’t have discovered it is extremely difficult because there it is, in broad daylight today.
  • Because the burden is on the defendant, these cases will rarely be dismissed on summary judgment. That means you’re in for a long, expensive fight.

The Oregon statute doesn’t matter too much for issuers because issuers are always liable for fraud and other wrongdoing and know all the facts. But for third parties, including websites and funding portals, at least consider excluding Oregon investors from your offerings, if possible.

Questions? Let me know

WATCH OUT FOR RULE 10b-9 IN CROWDFUNDING OFFERINGS

Watch Out For Rule 10b-9 In Crowdfunding Offerings

Section 10(b) of the Exchange Act prohibits use of “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security.

The SEC has issued several regulations under section 10(b), prohibiting deceptive practices in various specific circumstances. By far the best-known and most-feared is 17 CFR §240.10b-5, aka Rule 10b-5, which makes it unlawful:

  • To employ any device, scheme, or artifice to defraud,
  • 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; and
  • To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

But Crowdfunding issuers and funding portals should know about another regulation issued by the SEC under section 10(b), Rule 10b-9.

On its face Rule 10b-9 is straightforward. It says (I’m paraphrasing) that if you set a minimum amount for an offering and don’t reach the minimum, you have to return everyone’s money. 

Back in the old days, pre-JOBS Act, when many educated Americans spoke a dialect that rarely included the phrase “100%,” almost every offering had a stated minimum. For example, say a developer wanted to buy a multifamily project for $5M, of which $3.5M would be financed and $1.5M would be raised as equity. In her equity offering the developer would state $1.5M as the minimum raise because without the full $1.5M the deal isn’t viable. If she didn’t raise the full $1.5m by the deadline everyone who had invested would get their money back.

Pretty simple, right?

Now suppose that the developer is three days from her deadline and has raised $1,490,000. To meet the $1.5M minimum she writes a $10,000 check herself. 

Under the language of Rule 10b-9 itself, as well as early SEC interpretations of the rule, that should be fine. The developer has reached the $1.5M minimum, albeit with $10,000 of her own money, so the project is viable and investors are getting the economic deal they thought they were getting.

But in a case called SEC v. Blinder, Robinson & Co., Inc. the court discovered a different rationale for Rule 10b-9. The purpose wasn’t just to ensure an offering was fully funded, but also to assure each investor that others had made the same investment decision:

“Each investor is comforted by the knowledge that unless his judgment to take the risk is shared by enough others to sell out the issue, his money will be returned.”

This language, which implicitly appealed to the “wisdom of the crowd” long before Crowdfunding was a thing, is now cited by the SEC, FINRA, and other courts interpreting Rule 10b-9.

Now we see the developer’s $10,000 investment in a different light. She wrote the $10,000 check not because she’s willing to take the same economic deal as other investors but because she’s entitled to fees from the deal and this is her livelihood. No other investors can take comfort from that!

If this is true for a multifamily real estate project it is true many times over for the local brewery raising money using Reg CF. Although Alfred is unrelated to the founder of the brewery, he invested mainly because he likes getting free beer on Thursday nights – one of the perks – and enjoys the comradery, not because he’s expecting a great financial return. No investor can take comfort from that! 

With little better to do, lawyers worry about this kind of thing. Although I think the risk of enforcement action by the SEC is small, out of an abundance of caution I would consider two disclosures in every offering:

  • A disclosure that investments made by the sponsor and its affiliates will count toward the offering minimum (the “target offering amount” in Reg CF); and
  • A disclosure that investors shouldn’t take comfort from investments made by others.

This is what makes the list of Risk Factors so long:  we keep adding things and rarely take anything out.

100%

Questions? Let me know

Think Twice Before Giving Crowdfunding Investors Voting Rights

I attend church and think of myself as a kind person, yet I discourage issuers from giving investors voting rights. Here are a few reasons:

  • Lack of Ability:  Even if they go to church and are kind people, investors know absolutely nothing about running your business. If you assembled 20 representatives in a room and talked about running your business, you would (1) be amazed, and (2) understand why DAOs are such a bad idea.
  • Lack of Interest:  Investors invest because they want to make money and/or believe in you and your vision. They aren’t investing because they want to help run your business.
  • Irrelevant Motives:  Investors will have motives that have nothing to do with your business. For example, an investor who is very old or very ill might want to postpone a sale of the business to avoid paying tax on the appreciation.
  • Bad Motives:  Investors can even have bad motives. An unhappy investor might consciously try to harm your business or, God forbid, a competitor might accumulate shares in your company.
  • Lack of Information:  Investors will never have as much information about your business as you have. Even if they go to church, are kind to animals, and have your best interests at heart, they are unable to make the same good decisions you would.
  • Drain on Resources:  If you allow investors to vote you’ll have to spend lots of time educating them and trying to convince them to do what you think is best. Any time you spend educating investors is time you’re not spending managing your business.
  • Logistics:  Even in the digital age it’s a pain tabulating votes from thousands of people.
  • Mistakes:  When investors have voting rights you have to follow certain formalities. If you forget to follow them you’re cleaning up a mess.

I anticipate two objections:

  • First Objection:  VCs and other investors writing big checks get voting rights, so why shouldn’t Crowdfunding investors?
  • Second Objection:  Even if they don’t help run the business on a day-to-day basis, shouldn’t investors have the right to vote on big things like mergers or issuing new shares?

As to the first objection, the answer is not that Crowdfunding investors should get voting rights but that VCs and other large investors shouldn’t. The only reason we give large investors voting rights is they ask for them, and our system is called “capitalism.”

Before the International Venture Capital Association withdraws its invitation for next year’s keynote, I’m not saying VCs and other large investors don’t bring anything but money to the table. They can bring broad business experience and, perhaps most important, valuable connections. A non-voting Board of Advisors makes a lot of sense.

The second objection is a closer call. On balance, however, I think that for most companies most of the time it will be better for everyone if the founder retains flexibility.

To resolve disputes between the owners of a closely-held business we typically provide that one owner can buy the others out or even force a sale of the company. Likewise, while we don’t give Crowdfunding investors voting rights we should try to give them liquidity in one form or another, at least the right to sell their shares to someone else.

Give investors a good economic deal. Give them something to believe in. But don’t give them voting rights.

Questions? Let me know.

Improving Legal Documents In Crowdfunding: New Risk Factor For Supreme Court Ruling

It appears the Supreme Court is about to strike down Roe v. Wade, allowing states to regulate or outlaw abortion. Many states are poised to do so with varying degrees of severity. 

In his draft opinion in Dobbs v. Jackson Women’s Health Organization, Justice Alito states that the decision would not affect other rights, like the right to gay marriage (Obergefell v. Hodges), the right to engage in homosexual relationships (Lawrence v. Texas), or the right to contraception (Griswold v. Connecticut). In my opinion, you should take Justice Alito’s assurance with a large spoonful of salt.. Theoretically, all these cases rest on a constitutional right to privacy. If you knock that pillar down for one right it falls for all of them. On a practical level, Justice Alito himself voted against gay marriage and I have little doubt that there are at least five votes to overturn all these precedents.

Some states are already considering bans on contraception and surely challenges to gay marriage are close on the horizon.

When the COVID-19 pandemic swept the country, companies raising capital had to add one or more risk factor to their offering materials, describing how the pandemic could harm their businesses. I believe the Supreme Court’s opinion in Dobbs v. Jackson Women’s Health Organization calls for the same thing.

Imagine a SAAS company in Austin, Texas, looking to recruit talented young engineers. Imagine the company’s ideal candidate:  a woman who just graduated from Stanford with a specialty in AI. If she has one job offer from the company in Austin and another from a company in Oregon it isn’t hard to see why the Texas company would have a competitive disadvantage, all other things being equal.

Companies are already trying to mitigate the risk. For example, Starbucks has announced free travel to employees to states where abortion is legal. But even that might not eliminate the risk. Do women want to travel out of state for medical care? And, in any case, many states where abortion is or will be illegal are trying to make it illegal to travel out of state for an abortion

Whatever the realities of the marketplace, our job as securities lawyers is to make investors aware of risks so our clients can’t be sued afterward. I suggest the following or something like it in the offering materials of any company where recruitment is important

State Laws Might impair the Company’s Ability to Recruit: The U.S. Supreme Court [seems poised to overturn] [has recently overturned] women’s privacy rights in health care decisions set forth in Roe v. Wade. Moreover, the reasoning used by the Court in overturning Roe v. Wade suggests that other constitutional rights could also become subject to restriction by the states, including the right to gay marriage and use of contraception. Texas, where the Company’s headquarters are located, has enacted strict laws regulating abortion and its political climate is such that it might seek to limit or take away other rights as well. These state laws could impair the Company’s ability to recruit and retain personnel and could put the Company at a competitive disadvantage with companies in other states.

Questions? Let me know.

New Podcast – In-Depth Commercial Real Estate

In this episode Paul speaks to Crowdfunding attorney Mark Roderick about Crowdfunding in real estate. They go in-depth how the JOBS act that created crowdfunding changed funding portals, advertising, and where the future of raising capital is and what sponsors should focus on and be careful with.

In-Depth Commercial Real Estate

In-Depth Commercial Real Estate is an exploration of the people, ideas, strategies, and methods behind commercial real estate. In each episode, we’ll talk to an expert about a particular topic: from CMBS and cap. rates to innovation and hiring strategies, and everything in between.

Disclaimer: This real estate podcast is for informational and educational purposes only and does not imply suitability. The views and opinions expressed by the presenters are their own. The information is not intended as investment advice.For any inquiries or comments, you can reach us as info@indepthrealestate.com.

Questions? Let me know.

Regulation A: What Country Do You See When You Wake Up?

sara palin

A company may use Regulation A (Tier 1 or Tier 2) only if the company:

  • Is organized in the U.S. or Canada, and
  • Has its principal place of business in the U.S. or Canada.

I’m often asked what it means for a company to have its principal place of business in the U.S. or Canada. The first step is to identify the people who make the important decisions for the company. The next step is to ask what country those people see when they wake up in the morning. If they see the U.S. or Canada, they’re okay. If they see some other country, even a beautiful country like Norway or Italy, they’re not okay, or at least they can’t use Regulation A.

Seeing the U.S. or Canada via Facetime doesn’t count.

A company called Longfin Corp. ignored this rule and suffered the consequences. The people who made the important decisions for the company saw India when they woke up in the morning. The only person who saw the U.S. was a 23-year-old, low-level employee who worked by himself in a WeWork space. In its offering materials the company claimed to be managed in the U.S., but a Federal court found this was untrue and ordered rescission of the offering, $3.5 million in disgorgement, and $3.2 million in penalties.

Harder questions arise if, for example, three of the directors and the CFO see the U.S. when they wake up, but two directors and the CEO see Ireland.

On the plus side, a U.S. mining company with headquarters in Wyoming definitely can use Regulation A even if all its mines are in South America. The “principal place of business” means the location where the company is managed, not where it operates.

Questions? Let me know.

Syndications, Cryptocurrencies and Crowdfunding, Oh My!

Real Estate Nerds Podcast: Syndications, Cryptocurrencies and Crowdfunding, Oh My!

real estate nerdsCLICK HERE TO LISTEN

Mark Roderick fills us in on how the rich can take care of themselves and the non-rich need the government which is why he thinks crowdfunding is so important to the regular Joe. Since the JOBS Act of 2012, Mark has spent much of his time in the crowdfunding space.

If you have ever thought to yourself the internet is a ruthless landscape slowly squeezing the middleman and driving human being up the value chain? Then you’ll want to tune into this week’s episode where Mark will explain everything from syndications to cryptocurrencies to crowdfunding, oh my!

Questions? Let me know.