Who says inflation is all bad? The SEC just published these new, inflation-adjusted limits and thresholds for Reg CF:

These changes are effective on September 20, 2022, even for offerings that are already live.
Questions? Let me know.
Who says inflation is all bad? The SEC just published these new, inflation-adjusted limits and thresholds for Reg CF:
These changes are effective on September 20, 2022, even for offerings that are already live.
Questions? Let me know.
I was disappointed to learn that Kim Kardashian doesn’t read my blog posts, at least not all of them. With her hectic lifestyle she probably misses out on a lot of other fun stuff as well. Had Kim read my blog post on May 2, 2018 she would have known about section 17(b) of the Securities Act of 1933:
It shall be unlawful for any person. . . . to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof [italics added].
Kim was paid $250,000 to promote EMAX tokens to her 330 million Instagram followers. “ARE YOU GUYS INTO CRYPTO????” she wrote, including a link to Ethereum Max’s website. Whoops! By failing to disclose her compensation she violated section 17(b) and will now pay a $1.26 million fine to the SEC.
Sometimes it’s tempting to think of the SEC as all-powerful. In reality the SEC is a tiny agency compared with the size of the markets it regulates. Faced with a chronic shortage of resources, the SEC picks and chooses the cases to enforce, looking for easy cases with maximum visibility. Well, they couldn’t have asked for a better one. As of today another 330 million people know about section 17(b), almost doubling the number who knew from this blog.
Matt Damon, looking for a lawyer?
Questions? Let me know.
The SEC recently proposed new rules for private fund advisers. If you raise and/or manage money from other people, you should probably pay attention.
A private fund adviser is an investment adviser who provides advice to private funds. A “private fund” is any issuer that would be treated as an “investment company” if not for the exemptions under section 3(c)(1) (no more than 100 investors) or section 3(c)(7) (all qualified purchasers) of the Investment Company Act.
In general, investment advisers are required to register either with the SEC or with the state(s) where they do business. But an advisor who provides advice only to private funds and manages assets of less than $150 million is exempt from registration with the SEC, and many states have similar exemptions. In fact, the SEC has expanded the definition of “private funds” for these purposes to include an issuer that qualifies for any exclusion under the Investment Company Act, not just the exemptions under sections 3(c)(1) and 3(c)(7).
An advisor who qualifies for the private fund exemption, like Nikki, is often referred to as an “exempt reporting adviser.” That’s because while she doesn’t have to register as an investment adviser, she does have to file reports with the SEC (an abbreviated Form ADV) and probably with the state where the fund is located also.
All of that is just to say that investment advisers who provide advice to private funds fall into two categories: those who are required to register with the SEC and those who are not registered but still have to file reports. The SEC proposals affect both.
The following proposals would affect only advisers registered with the SEC:
The following proposal would affect all advisers, including Nikki:
I’ll just mention two of those items that come up frequently.
First, general partners typically seek to protect themselves from lawsuits brought by investors. Delaware and other states allow the general partner to disclaim all traditional fiduciary duties and adopt a “business judgment” standard in their place. If the SEC’s proposals are adopted, general partners acting as private fund advisers will no longer be allowed to protect themselves in this way and will be liable for a breach of fiduciary obligations as well as simple negligence.
NOTE: Sponsors like Nikki wear more than one hat. They provide investment advice but perform other duties as well, like deciding whether to admit new LPs and on what terms. The SEC’s proposals would require Nikki to remain liable for negligence when she’s wearing her investment adviser hat but not when she’s wearing her other hats. The LLC Agreement could and should make that distinction.
Second, general partners typically enter into “side letters,” giving some limited partners a better economic deal than others – either a lower promote or a higher preferred return. These arrangements will still be allowed if the SEC’s proposals are adopted, but only if the terms are disclosed to everyone, which is not typically done today.
Questions? Let me know.
The SEC once wanted to prohibit the Simple Agreement for Future Equity, or SAFE, in Reg CF offerings. After a minor uproar the SEC changed its mind, and SAFEs are now used frequently. I think prohibiting SAFEs would be a mistake. Nevertheless, funding portals, issuers, and investors should think twice about using (or buying) a SAFE in a given offering.
Some have argued that SAFEs are too complicated for Reg CF investors. That’s both patronizing and wrong, in my opinion. Between a SAFE on one hand and common stock on the other, the common stock really is the more difficult concept. As long as you tell investors what they’re getting – especially that SAFEs have no “due date” – I think you’re fine.
The reason to think twice is not that SAFEs are complicated but that a SAFE might not be the right tool for the job. You wouldn’t use a hammer to shovel snow, and you shouldn’t use a SAFE in circumstances for which it wasn’t designed.
The SAFE was designed as the first stop on the Silicon Valley assembly line. First comes the SAFE, then the Series A, then the Series B, and eventually the IPO or other exit. Like other parts on the assembly line, the SAFE was designed to minimize friction and increase volume. And it works great for that purpose.
But the Silicon Valley ecosystem is very unusual, not representative of the broader private capital market. These are a few of its critical features:
The point is that SAFEs don’t exist in a vacuum. They were created to serve a particular purpose in a particular ecosystem. To name just a couple obvious examples, a company that won’t need to raise more money or a company that plans to stay private indefinitely probably wouldn’t be good candidates for a SAFE. If it’s snowing outside, don’t reach for the hammer.
If you do use a SAFE, which one? The Y Combinator forms are the most common starting points, but in a Reg CF offering, you should make at least three changes:
The founder of a Reg CF funding portal might have come from the Silicon Valley ecosystem. In fact, her company might have been funded by SAFEs. Still, she should understand where SAFEs are appropriate and where they are not and make sure investors understand as well.
Questions? Let me know.
The SEC has two powerful tools to stop your Regulation A offering anytime.
Rule 258
Rule 258 allows the SEC to immediately suspend an offering if
If the SEC suspends an offering under Rule 258, the issuer can appeal for a hearing – with the SEC – but the suspension remains in effect. In addition, at any time after the hearing, the SEC can make the suspension permanent.
Rule 258 gives the SEC enormous discretion. For example, the SEC may theoretically terminate a Regulation A offering if the issuer fails to file a single report or files late. And while there’s lots of room for good-faith disagreement as to whether an offering statement or advertisement failed to state a material fact, Rule 258 gives the SEC the power to decide.
Don’t worry, you might think, Rule 260 provides that an “insignificant” deviation will not result in the loss of the Regulation A exemption. Think again: Rule 260(c) states, “This provision provides no relief or protection from a proceeding under Rule 258.”
Rule 262(a)(7)
Rule 262(a)(7) is even more dangerous than Rule 258.
Rule 258 allows the SEC to suspend a Regulation A offering if the SEC concludes that something is wrong. Rule 262(a)(7), on the other hand, allows for suspension if the issuer or any of its principals is “the subject of an investigation or proceeding to determine whether a. . . . suspension order should be issued.”
That’s right: Rule 262(a)(7) allows the SEC to suspend an offering merely by investigating whether the offer should be suspended.
Effect on Regulation D
Suppose the SEC suspends a Regulation A offering under either Rule 258 or Rule 262(a)(7). In that case, the issuer is automatically a “bad actor” under Rule 506(d)(1)(vii), meaning it can’t use Regulation D to raise capital, either.
In some ways, it makes sense that the SEC can suspend a Regulation A offering easily because the SEC’s approval was needed in the first place. But not so with Regulation D, and especially not so with a suspension under Rule 262(a)(7). In that case, the issuer is prevented from using Regulation D – an exemption that does not require SEC approval – simply because the SEC is investigating whether it’s done something wrong. That seems. . . .wrong.
Conclusion
As all six readers of this blog know, I think the SEC has done a spectacular job with Crowdfunding. But what the SEC giveth the SEC can taketh away. I hope the SEC will use discretion exercising its substantial power under Rule 258 and Rule 262(a)(7).
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 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.
With uncanny precision, I predicted the SEC would approve the Crowdfunding changes no later than August 31, 2020. I was right on target except for the month and year.
The SEC Commissions just voted 3-2 to adopt the changes effective 60 days after they’re published in the Federal Register.
It looks as if there were no significant changes to the proposals made on March 4th, but I’ll let you know shortly. You can read the full text and SEC explanations here.
For all the ink spilled wondering and worrying how the SEC might change the definition of accredited investor, yesterday’s announcement seems almost anti-climactic.
Perhaps the main story is what the SEC didn’t do. It didn’t limit the definition of accredited investor in any way. Everyone who was an accredited investor yesterday is an accredited investor today. In that sense the SEC continues to demonstrate its support for the private investment marketplace and give the lie to those who believe otherwise.
On the other hand, the SEC didn’t break much new ground expanding the definition, at least for now.
The principal expansion, as expected, was in adding to the list of accredited investors individuals who hold Series 7, Series 65, or Series 82 licenses. The SEC also added investment advisers registered with the SEC or any state and, more surprisingly, venture capital fund advisers and exempt reporting advisers. I say “more surprisingly” because neither venture capital fund advisers nor exempt reporting advisers are required to pass exams or otherwise demonstrate financial knowledge or sophistication.
The list of accredited investors was also extended to include:
Finally, the SEC clarified that existing provisions of the accredited investor definition that refer to spouses also includes “spousal equivalents,” meaning someone who has gotten under your nerves for at least seven years (actually “a cohabitant occupying a relationship generally equivalent to that of a spouse”).
While a modest first step, these additions are welcome and a harbinger of bigger things to come. The new rule explicitly invites FINRA, other industry self-regulatory authorities, and accredited education institutions to develop “certifications, designations, or credentials” that the SEC would approve for accredited investor qualification. I imagine FINRA and professional organizations will jump at the chance. If this leads to millions or tens of millions of Americans learning about securities and participating in the Crowdfunding market, well, that’s a very good thing for everyone.
The new definition will become effective 60 days after being published in the Federal Register.
Questions? Let me know.
A company may use Regulation A (Tier 1 or Tier 2) only if the company:
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.
Raising money without begging investors is no easy task for startups. At times, help from a third-party individual is needed to make it happen. But how do you know if you are legally paying brokers to raise capital and not breaking any law or guides set by the Securities and Exchange Commission?
In this interview, Mark Roderick explains what a broker is, and the legal process that raising money entails. He cites examples of the repercussions of hiring an unlicensed broker-dealer, gives advice on the lessons he has learned in the industry, and touches on his blog that tackles crowdfunding.