Tag: SEC regulations

A Constructive Approach To Accredited Investor Definition

On By crowdfundattnyIn Accredited Investor, Crowdfunding, Dodd-Frank Act, JOBS Act, SECLeave a comment

crowdfunding_investorSection 413(b) of Title IV of the Dodd-Frank Act allows the SEC to evaluate the current definition of “accredited investor,” which has been in place since 1982, and to revisit the issue at four year intervals. As the SEC deliberates, alarm bells are sounding in the industry, warning that a new definition could destroy not only the nascent Crowdfunding industry but the entire ecosystem around private capital formation.

Though well-intended, these warnings are misguided, in my opinion.

If the SEC indexed the existing definition to the CPI over the last 32 years, leading to an income threshold of about $500,000 and a net worth threshold of about $2.5 million, the effect would indeed be devastating, with only star athletes and Google employees allowed to invest. However, I see no reason to believe the SEC has anything like that in mind, for several reasons:

  • The SEC could have changed the definition on its own initiative at any time over the last 32 years but hasn’t.
  • Not only has the SEC not changed the definition, it has never expressed any particular concern with Rule 506, where most private placements take place.
  • Most important, the Dodd-Frank Act instructs the SEC to modify the definition “as the Commission may deem appropriate for the protection of investors, in the public interest, and in light of the economy.” In my own extensive but necessarily anecdotal experience, I have seen no evidence that the current income or net worth requirements fail to protect investors or, for that matter, that they are particularly relevant to protecting invesors. In the absence of widespread problems, there is simply no reason to make the definition more stringent than it is today and, given the Congressional mandate to keep one eye on the economy – that is, on the economic benefits of making capital available – there are probably stronger reasons to relax the current definition.

According to the Chairman of the SEC, Mary Jo White, the SEC is considering a more nuanced definition of accredited investor, one that takes into account not just income and net worth but also financial sophistication. That sounds right to me.

For now, the best way to help the SEC adopt a sensible definition of accredited investor is to provide real data. If you have reliable information about the incidence of fraud in private placements, for example, or about the correlation (or lack thereof) between financial sophistication and annual income, the SEC would love to see it. Feel free to send it to me and I will forward it.

In the meantime, don’t worry. . . .too much.

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.

Investor Verification: Questions & Answers from The SEC

On By crowdfundattnyIn Investor, Investor Verification, Rule 501(a)(5), SEC, Securities Exchange CommissionLeave a comment

The SEC recently issued four questions and answers dealing with investor verification.

Question #1

If a purchaser’s annual income is not reported in U.S. dollars, what exchange rate should an issuer use to determine whether the purchaser’s income meets the income test for qualifying as an accredited investor?

Answer: The issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for that year.

Question #2

Can assets in an account or property held jointly with another person who is not the purchaser’s spouse be included in determining whether the purchaser satisfies the net worth test in Rule 501(a)(5)?

Answer: Yes, assets in an account or property held jointly with a person who is not the purchaser’s spouse may be included in the calculation for the net worth test, but only to the extent of his or her percentage ownership of the account or property. [July 3, 2014]

Question #3

Rule 506(c)(2)(ii)(A) sets forth a non-exclusive method of verifying that a purchaser is an accredited investor by, among other things, reviewing any Internal Revenue Service form that reports the purchaser’s income for the “two most recent years.” If such an Internal Revenue Service form is not yet available for the recently completed year (e.g., 2013), can the issuer still rely on this verification method by reviewing the Internal Revenue Service forms for the two prior years that are available (e.g., 2012 and 2011)?

Answer: No, the verification safe harbor provided in Rule 506(c)(2)(ii)(A) would not be available under these circumstances. We believe, however, that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method by:

  • Reviewing the Internal Revenue Service forms that report income for the two years preceding the recently completed year; and
  • Obtaining written representations from the purchaser that (i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available, (ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and (iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year.

Where the issuer has reason to question the purchaser’s claim to be an accredited investor after reviewing these documents, it must take additional verification measures in order to establish that it has taken reasonable steps to verify that the purchaser is an accredited investor. For example, if, based on this review, the purchaser’s income for the most recently completed year barely exceeded the threshold required, the foregoing procedures might not constitute sufficient verification and more diligence might be necessary.

Question #4

A purchaser is not a U.S. taxpayer and therefore cannot provide an Internal Revenue Service form that reports income. Can an issuer review comparable tax forms from a foreign jurisdiction in order to rely on the verification method provided in Rule 506(c)(2)(ii)(A)?

Answer: No, the verification safe harbor provided in Rule 506(c)(2)(ii)(A) would not be available under these circumstances. In adopting this safe harbor, the Commission noted that there are “numerous penalties for falsely reporting information” in Internal Revenue Service forms. See Securities Act Release No. 33-9415 (July 10, 2013). Although the safe harbor is not available for tax forms from foreign jurisdictions, we believe that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method by reviewing filed tax forms that report income where the foreign jurisdiction imposes comparable penalties for falsely reported information.

Where the issuer has reason to question the reliability of the information about the purchaser’s income after reviewing these documents, it must take additional verification measures in order to establish that it has taken reasonable steps to verify that the purchaser is an accredited investor.

The Takeaway

The lesson is that issuers and portals should not try to verify investors on their own. Leave that to a third party service like Crowdentials or VerifyInvestor – they keep track of these rules so you won’t have to.

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.

 

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.

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.

It’s Easy To Be A Title III Crowdfunding Portal!

On By crowdfundattnyIn Crowdfunding, FINRA, Investing, Investor, SEC, Securities Laws, Title III CrowdfundingLeave a comment

All you have to do is:

  • Register with the Securities and Exchange Commission by filing a Form Funding Portal and posting a bond of at least $100,000.
  • Notify the SEC within 30 days if any of the information on Form Funding Portal changes.
  • Join FINRA and comply with all its rules and regulations.
  • Implement written policies and procedures “reasonably designed to achieve compliance with the federal securities laws.”
  • Comply with the requirements of 31 CFR Chapter X relating to money laundering.
  • Comply with the requirements of 17 CFR 248 relating to privacy.
  • Permit inspection by all your records and facilities by the SEC.
  • For each issuer (company trying to raise money) listed on your platform, have a reasonable basis for believing the issuer (1) complies with all applicable requirements, and (2)  has established a way to keep accurate records of investors.
  • Deny access to any issuer if:
    • You believe the issuer is a “bad actor.” To enforce this requirement you must (at a minimum) conduct a background and securities enforcement check on each issuer and on each officer, director, and beneficial owner of at least 20% of the issuer.
    • You believe the issuer or the offering presents the potential for fraud “or otherwise raises concerns regarding investor protection.” How would you know? If you are unable to “effectively assess the risk of fraud,” you have to deny access.
  • Provide educational materials to potential investors that explain in plain language “and are otherwise designed to communicate effectively and accurately”:
    • The mechanism for purchasing stock of the issuer;
    • The risks of purchasing stock;
    • The types of securities offered on your platform and the risks of each type;
    • The restrictions on resale imposed by law or contract;
    • The kinds of information the issuer is required to provide;
    • The per-investor limitations on investment;
    • The investor’s right to cancel the investment, and the limitations on those rights;
    • The need for the investor to think about whether the investment is appropriate; and
    • That following the investor’s purchase of stock, there might be no further relationship between the investor and your portal.
  • Keep all those educational materials current on your website and, where appropriate, make any revisions available to investors before accepting investments.
  • Tell investors about the requirements applicable to promoters.
  • Disclose to investors how you are being compensated.
  • Make available to investors and the SEC – in
    downloadable form – all the information the issuer itself is required to make available, including:

    • The name, address, and website of the issuer;
    • The names of the directors and officers, their positions with the issuer, and their overall business experience over the last three years;
    • Each person’s principal occupation and employment, and the name and principal business of any other entity where the occupation and employment took place;
    • The name of each person who owns at least 20% of the issuer;
    • A description of the issuer’s business and business plan;
    • The number of the issuer’s employees;
    • A discussion of factors that make the investment risky;
    • The target offering amount, and a statement that if the target is not reached, all the money will be returned;
    • Whether the issuer will accept money in excess of the target, and how;
    • The purpose and intended uses of the offering proceeds;
    • A description of the process to complete a purchase and sale of stock, including statements that:
      • An investor may cancel his investment up to 48 hours before the deadline;
      • The portal (you) will notify investors when the target amount is reached;
      • The issuer may close the offering before the deadline if the target amount is reached; and
      • If the investor does not cancel his investment and the target is reached, the offering will close
    • That a material change is made after an investor commits, his or her money will be returned unless he or she affirmatively re-commits;
    • The price of the stock;
    • A description of the capital structure of the issuer, including:
      • A summary of all securities, including associated voting rights;
      • A statement how the exercise of rights held by the principal stockholders of the issuer could affect investors;
      • The name and “ownership level” of each person who owns 20% or more of the issuer;
      • How the stock purchased by the investor was valued, and might be valued in the future;
      • The risks associated with minority ownership and the issuance of additional securities in the future; and
      • A description of all restrictions on transfer;
    • The name of the portal (you);
    • The amount of your compensation;
    • A description of all indebtedness of the issuer;
    • A description of all non-public offerings of securities within the last three years, including:
      • The date of the offering;
      • The offering exemption;
      • The types of securities offered; and
      • The amount of money raised and how it was used;
    • A description of any transaction since the beginning of the issuer’s last full fiscal year, involving at least 5% of the amount to be raised in the Title III offering, in which any of the following had an interest:
      • A director or officer of the issuer;
      • A person who owned 20% or more of the issuer;
      • A promoter of the issuer; or
      • A family member of any of the foregoing;
    • A description of the issuer’s financial condition;
    • Financial statements (the kind of statement is based on how much money the issuer is raising);
    • Any matters that would have resulted in disqualification under the “bad actor” rules had they occurred after Title III became effective.
  • Make all of that information available to investors and the SEC on a Form C (newly created) at least 21 days before any securities are sold, update the progress of the offering, and keep all of the information available until the offering is completed or canceled.
  • Before accepting money from an investor:
    • Have a reasonable basis for believing the investor satisfies the applicable investment limitations (you can generally rely on the investor’s representations); and
    • Obtain from the investor:
      • A representation that the investor has reviewed the education materials and can bear the entire loss of his or her investment; and
      • A questionnaire demonstrating the investor’s understanding that:
        • There are restrictions on his or her ability to cancel the investment;
        • It may be difficult to re-sell the stock; and
        • Investing is risky – in fact, the investor should be able to afford the loss of his or her entire investment.
  • Establish communications channels (message boards?) that allow investors to communicate with one another and with representatives of the issuers about offerings on your platform, provided that:
      • You can’t participate in these communications;
      • You have to provide unlimited public access to the communications, but can allow comments only from those registered with your platform; and
      • You require anyone posting comments to disclose whether he or she is affiliated with the issuer;
  • Upon receiving a commitment from an investor, you must give him or her notification of:
    • The dollar amount of the commitment;
    • The price of the security;
    • The identify of the issuer; and
    • The deadline for canceling the commitment;
  • Establish a relationship with a bank as an escrow agent under a written escrow agreement and direct that:
    • Funds from investors be transferred to the issuer if the target amount has been reached, the cancellation period has expired, and at least 21 days have elapsed since the issuer’s information was first made available on your platform; and
    • Return the funds to the investor if the investor cancels or the offering terminates.
  • On or before the closing of the offering, give notice to all investors, providing:
    • The date of the closing;
    • The type of security purchased by the investor;
    • The identity, price, and number of securities purchased by the investor;
    • The total amount of securities sold by the issuer and the price(s) at which they were sold;
    • If the security is a debt security, the interest rate, the maturity date, and the yield to maturity;
    • If the security is callable, the first date it can be called; and
    • The amount and source of your remuneration.
    • If the issuer decides to close the transaction earlier than the deadline established initially, give notice to all investors, providing:
      • The date of the new deadline;
      • The right for investors to cancel up to 48 hours before the new deadline; and
      • Whether the issuer will continue to accept commitments during the 48 hour period before the new deadline.
  • If there is a material change to the terms of the offering or the information about the issuer, notify investors that all commitments will be canceled unless investors re-confirm their commitments.
  • If any investor fails to re-confirm within five business days, notify the investor and direct the return of his or her money.
  • If an offering is canceled, notify all investors, direct the return of their money, and ensure that no further commitments are made for the offering.
  • Maintain the following records for five years:
    • Records relating to each investor who purchased securities or tried to;
    • Records relating to each issuer that offered securities or tried to;
    • Records of all communications on your platform;
    • Records relating to anyone who uses your platform to promote securities or communicate with investors;
    • Records that document your compliance with the SEC’s rules and regulations;
    • All your notices to issuers and investors, including your Terms of Use;
    • All your contracts;
    • Daily, monthly, and quarterly summaries of transactions, including:
      • Transactions that have successfully closed; and
      • Transaction volume, expressed in:
        • Number of transactions;
        • Number of securities sold in transactions;
        • Total amounts raised by each issuer; and
        • Total amounts raised by all issuers; and
    • A log reflecting the progress of each issuer.
    • Maintain and preserve all your organizational documents.

But you must not:

  • Have any financial interest in any of your listed companies.
  • Receive any financial interest as compensation for your services.
  • Offer investment advice or recommendations.
  • Deny access to an issuer based on your assessment of the issuer’s prospects.
  • Solicit purchases, sales or offers to buy the securities offered on your platform.
  • Compensate employees or others for such solicitation.
  • Hold or manage investor funds.
  • Pay anyone for providing personally identifiable information of investors.
  • Pay anyone except registered brokers or dealers for directing issuers or investors to your platform on a commission basis.

That’s all you have to do!

Questions? Let me know.

SEC Proposes For Title III Crowdfunding

On By crowdfundattnyIn 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 crowdfundattnyIn 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

Will The SEC’s 15 Day Notification Rule End Angel Fairs?

On By crowdfundattnyIn Angel Fairs, AngelList, Crowdfunding, FundersClub, General Solicitation, Regulation D offerings, Rule 506, SEC, Securities Exchange CommissionLeave a comment

No, it won’t.

On July 10, 2013 the SEC proposed rules that would, among other things, require a company to notify the SEC at least 15 days before using any “general solicitation” to raise money under the newly-adopted Rule 506(c) of Regulation D, also known as Title II Crowdfunding.

This proposal triggered more anxiety in the investment community than any other. Angel groups in particular were concerned about the possible effect on “angel fairs” and similar networking events, where companies look for investors and publicity by making presentations and handing out literature. If these activities constituted general solicitation, so the thinking went, and a company had not notified the SEC at least 15 days in advance, the company would be violating the law with potentially serious consequences.

Should companies stop presenting at angel fairs? Should attendance at angel fairs be limited? Would the SEC rule bring a wrenching halt to the way startups have raised money for 30 years?

There are two reasons why the concerns in the investment community are probably overblown.

First, “general solicitation” is not a new concept. Regulation D has always prohibited general solicitation. Rule 506 of Regulation D is itself a regulatory implementation of section 4(a)(2) of the Securities Act of 1933, which provides simply that the registration requirements do not apply to “transactions by an issuer not involving any public offering.” It has always been the position of the SEC, reflected in Rule 502(c), that using general solicitation to attract investors crossed the indistinct line from “private offering” to “public offering.”

Thus, every angel fair that has ever been held for the last several decades has been subject to the SEC prohibition on general solicitation. Yet given all that time and all those opportunities, the SEC has never taken the position that what happens at angel fairs constitutes prohibited general solicitation.

Having stood aside and permitted angel fairs for three decades, it seems unlikely that the SEC would take the opposite position today, after Congress announces its support for Crowdfunding by enacting the JOBS Act!

So far, it is safe to say that the SEC has taken the opposite approach, i.e., by making Crowdfunding easier, not more difficult. Consider, for example, the two no-action letters issued by the SEC on March 26, 2013 to FundersClub and AngelList. It seems very possible, even likely, that these letters would not have been issued before enactment of the JOBS Act. The SEC seems to have taken the wishes of Congress to heart and there is no reason to believe it intended to do otherwise with the 15 day proposal.

The other reason the concerns are overblown is that the rule in question is not yet in effect. The public comment period ended on September 23, 2013 and the SEC is considering the many comments made by the investment community. The chances are very high that when the SEC issues the final rule, these comments will be taken into account.

Maybe I’ll be proven wrong. Maybe the SEC will suddenly reverse course after 30 years and issue final rules that blow angel fairs out of the water, throw up unnecessary impediments to Crowdfunding despite the JOBS Act, and make everyone angry. Don’t bet on it.

Questions? Let me know.