Workshop on Regulation A+

 

On March 4th I had the pleasure of co-presenting a workshop on Regulation A (Title IV Crowdfunding) in Mountain View, California, at an event organized by Crowdfund Beat. My co-presenter, Jillian Sidoti of SyndicationLawyers.com, is a terrific person, an engaging speaker, and one of the country’s leading authorities on Regulation A.

I hope you enjoy our conversation and get a sense of the real-life practicalities of preparing and filing a Regulation A offering.

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You Can Use Subsidiaries Without Violating the 100 Investor Rule

crowdfunding_investorEveryone knows the “100 investor rule” is a thorn in the side of Crowdfunding portals. The good news is you can still use subsidiaries to protect yourself from liability.

The basics of the 100 investor rule:

  • A company engaged in the business of investing in securities is an “investment company” and subject to burdensome regulation under the Investment Act of 1940.
  • A “special purpose vehicle” formed by a portal to invest in a portfolio company is engaged in the business of investing in securities.
  • There’s an exception: if the SPV has no more than 100 investors, it’s not an investment company.

Today, most deals on Crowdfunding portals are funded with fewer than 100 investors and qualify for the exception. But that’s because most Crowdfunding deals are still small, i.e., less than $2 million. As the deals get bigger and, most important, as we start to see pools of assets rather than individual assets, SPVs will no longer be available. Already, they’re not available for Regulation A+ deals.

In the absence of an SPV, investors will be admitted directly to the issuer’s cap table. But what if the issuer owns one or more subsidiaries? Will the issuer itself be disqualified as an investment company?

Here’s an example. Suppose NewCo is raising $25 million to acquire 10 properties, and we expect 1,000 investors. We’d like to put each property in a separate subsidiary because (1) we might want to finance them separately, and (2) we don’t want the liabilities arising from one property to leak into another property. But would that make NewCo an investment company, holding the stock (securities) of 10 subsidiaries?

Fortunately, the answer is No.

For purposes of deciding whether NewCo is an investment company, the rule is that you ignore securities issued by any company that NewCo controls, as long as the company itself is not an investment company.

That means NewCo can put Business #1 in Subsidiary #1, Business #2 in Subsidiary #2, and so on and so forth, without becoming an investment company. Most likely, NewCo will hold each property in a separate limited liability company, serving as the manager of each.

Don’t fool around with investment company issues. A company that becomes an investment company without knowing it can face a world of trouble, including having all its contracts invalidated.

Questions? Let me know.

 

Regulation A+ Is Here

A Plus Walking the Red CarpetWell, that didn’t take long.

It’s been a mere 457 days since the SEC proposed regulations under Title IV of the JOBS Act, aka Regulation A+, and a mere 1,070 days since the JOBS Act was signed into law. Yet the SEC approved final regulations today, with just a few tweaks from the proposed rules. Regulation A+ will go into effect in roughly 60 days.

The most important provisions of the proposed regulations survived intact: companies will be allowed to raise up to $50 million – from anyone, not just accredited investors – without approval from state regulators. You will still have to file a thick offering statement with the SEC, and investors – both accredited and non-accredited – will still be limited to investing 10% of the greater of income or net worth. Nevertheless, I expect Regulation A+ to be used very widely, indeed to transform the Crowdfunding landscape.

I’ll be providing a link to the final regulations shortly (as well as a bunch of other useful links), as well as some thoughts about where Regulation A+ will be most useful.

Title III, anybody?

Questions? Let me know.

INTEGRATION OF REGULATION A+ OFFERINGS WITH OTHER OFFERINGS

Yesterday I spoke about Regulation A+ on a panel at the National Press Club in Washington, D.C. One topic was whether offerings under Regulation A+ would be “integrated” with other offerings, including offerings under Title II.

The word “integration” describes a legal concept in U.S. securities laws, where two offerings that the issuer intends to keep separate are treated as one offering instead. For example, I raise $1 million in an offering under Rule 506(b), where I admit 19 non-accredited investors. Needing more money, I start another offering under Rule 506(b) a month later – and for the same project – and admit 23 more non-accredited investors. Wrong! The SEC says those two offerings are “integrated” and now I’ve exceeded the limit of 35 non-accredited investors.growth captial summit

Today, entrepreneurs can raise money under Title II Crowdfunding only from accredited investors. Under Regulation A+ they’ll be able to raise money from non-accredited investors as well, vastly expanding the potential investor base. Unlike a Title II offering, however, where accredited investors can invest an unlimited amount, an investor in a Regulation A+ offering, accredited or non-accredited, will be limited to investing 10% of his or her income or net worth.

The question naturally arises, why not do a Regulation A+ offering for non-accredited investors while at the same time doing a Title II offering for accredited investors, thus maximizing the amount raised from everyone?

The answer, unfortunately, is integration. The two offerings would be treated as one, and they would both fail as a result.

But along with that bad news, the integration rules under the proposed-but-not-adopted Regulation A+ regulations offer good news as well:

  • A Regulation A+ offering will not be integrated with an offering that came first. Thus, I can raise money in a Title II offering, accepting an unlimited amount from accredited investors, and the day after that offering ends conduct a Regulation A+ offering for non-accredited investors.
  • A Regulation A+ offering will not be integrated with an offering to foreign investors under Regulation S. The two can happen simultaneously.
  • A Regulation A+ offering will not be integrated with an offering that begins more than six months after the Regulation A+ offering ends.
  • A Regulation A+ offering will not be integrated with a Title III offering, even if they happen at the same time.

Another takeaway from the conference is that the SEC plans to finalize the proposed regulations under Regulation A+ by the end of the year (this year). Issuers and portals, get ready.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.