SEC Issues Whitepaper On Title III Crowdfunding
Posted by Securities Attorney Laura Anthony | May 9, 2017 Tags: , , ,

On February 28, 2017, the SEC released a white paper on Regulation Crowdfunding, which law went into effect on May 16, 2016. Regulation Crowdfunding had been long in the making, with the JOBS Act having been passed on April 5, 2012, and the first set of proposed crowdfunding rules having been published on October 23, 2013. Regulation Crowdfunding provides the rules implementing Section 4(a)(6) of the Securities Act of 1933 (the Securities Act). For a summary of Regulation Crowdfunding, see my blog HERE.

From the time the SEC published the final Regulation Crowdfunding rules and regulations on October 30, 2015, the regulatory framework has met with wide criticism. The most commonly repeated issues with the current structure include: (i) the $1 million annual minimum is too low to adequately meet small-business funding needs; (ii) companies cannot “test the waters” in advance of or at the initial stages of an offering; and (iii) companies cannot currently use a Special Purchase Vehicle (SPV) in a crowdfunding offering.

To address the feedback and offer a resolution, on March 23, 2016, North Carolina Representative Patrick McHenry introduced HR 4855, aptly titled the “Fix Crowdfunding Act.” The Fix Crowdfunding Act would increase the annual funding limit from $1 million to $5 million. The Act would also allow for the use of special purpose vehicles (SPV’s) in the fundraising process. It is thought that an SPV structure helps protect the smaller investors by allowing them to pool funds together with larger investors in an entity that offers separate protections than the offering company itself. Finally, the Fix Crowdfunding Act adds “test the waters” provisions allowing companies to communicate with potential investors and gauge interest before spending significant time and expense on the offering process. The Fix Crowdfunding Act passed the House on July 5, 2016, but there has been no further action.

Background

Crowdfunding generally is where an entity or individual raises funds by seeking small contributions from a large number of people. The crowdfunder sets a goal amount to be raised from the crowd, with the funds to be used for a specific business purpose. In addition, a crowdfunding campaign allows the crowd to communicate with each other, thus adding the benefit of the “wisdom of the crowd.” Small businesses can particularly benefit from crowdfunding as they are not limited by purchaser qualification requirements and, subject to the rules, can engage in general solicitation and advertising. It is intended that crowdfunding offerings will be relatively low-cost and easy to implement; however, the general consensus is that that particular goal falls short.

Title III of the JOBS Act amended Section 4 of the Securities Act, adding Section 4(a)(6) to create a new exemption to the registration requirements of Section 5 of the Securities Act. Effective May 16, 2016, Regulation Crowdfunding, implementing Section 4(a)(6), became effective.

Regulation Crowdfunding allows companies to solicit “crowds” to sell up to $1 million in securities in any 12-month period as long as no individual investment exceeds certain threshold amounts. Regulation Crowdfunding limits investment amounts per investor for all crowdfunding offerings by all issuers in any 12-month period as follows: (a) if either annual income or net worth is less than $100,000, the investment limitation is the greater of $2,000 or 5% of the lesser of annual income or net worth; or (b) if both annual income and net worth are equal to or greater than $100,000, the investment limitation is 10% of the lesser of annual income or net worth. In addition, the final rule provides an overall investment limitation of $100,000 for any investor in any 12-month period. Significantly, the investment limitations apply across all crowdfunding issuers during any 12-month period.

Regulation Crowdfunding requires that all crowdfunding offerings be conducted through an intermediary that is a broker-dealer or funding portal that is registered with the SEC and a member of FINRA.  All offerings must be conducted through the intermediary’s Internet-based platform.  Securities sold in a crowdfunding offering are generally restricted for one year.

In offerings over $100,000, financial statements must be reviewed by an independent accountant and in offerings over $500,000 audited financial statements must be provided, provided however that audits are not required for a first-time offering.

In addition, Regulation Crowdfunding requires that companies and intermediaries provide certain information to investors, potential investors and the SEC prior to making an investment. The offering disclosure document is on Form C. Companies must also provide the SEC and investors with a closing report on Form C-U and an annual report on Form C-AR following the offering.

The registered intermediary has certain requirements designed to reduce fraud.  Among others, the intermediary is responsible for filing the Form C with the SEC, must provide communication channels to allow discussion of the offerings on its platform, must disclose compensation received by the intermediary, and must provide educational materials to investors.

The ability to utilize crowdfunding is subject to bad boy restrictions and other disqualifying events.  All crowdfunding issuers must be United States entities.  Crowdfunding issuers cannot be subject to the reporting requirements of the Securities Exchange Act of 1934 or an investment company as defined by the Investment Company Act of 1940.

The SEC White Paper

The SEC white paper reviewed crowdfunding offerings from the date of inception of Regulation Crowdfunding on May 16, 2016, through December 31, 2016. During that time there were 163 offerings by 156 companies seeking to raise a total of $18 million.  The average offering sought $110,000 but allowed over-subscriptions, generally up to the total $1 million statutory limit. The average offering closed in 4 to 5 months.

Since first-time issuers are not required to file audited financial statements, many set maximum offering limits at the total allowed $1 million mark.  As repeat issuers enter the market, the average size of maximum offering amount may decrease to avoid audit expenses.

Of the offerings, approximately $10 million was raised, by 33 issuers, with the average amount raised being $290,000. However, some of these offerings remained open on December 31, 2016, so this number would likely be higher today.

For offerings initiated in 2016, 24 were withdrawn by companies or associated with an intermediary whose FINRA membership was terminated and funding portal registration withdrawn, seeking a total of $2.3 million based on the target amount.

Most offerings solicited in all states. The most popular type of securities was equity, including both common and preferred, followed by simple agreements for future equity (SAFE’s) and debt.

The most popular state of incorporation was Delaware, and the most popular location of the business was California, followed by Texas and New York.  Most issuers have been pre-revenue start-ups or development-stage companies, with the median company having under $50,000 in assets, under $5,000 in cash, $10,000 in debt, no revenues and 3 employees. The average issuer had 5 employees, assets of $327,000 and cash of $64,000.  However, many companies were growing. The median growth from the prior fiscal year was 15%, and median sales growth was 80%.

Some of the companies also did prior, concurrent or subsequent Regulation D (15%) or Regulation A (3%) offerings. None of the issuers had previously been listed on an exchange or subject to the Exchange Act reporting requirements.

As of December 31, 2016, 21 funding portals have registered with the SEC and FINRA.  One funding portal had its FINRA membership terminated and withdrew its SEC registration. In addition, 8 broker-dealers have conducted crowdfunding offerings. The average funding portal fee is 5%, though broker-dealers averaged at 7.7%.

The SEC acknowledges that the initial results are probably not indicative of what the crowdfunding market will look like as it matures. In particular, companies, investors and the intermediaries will gain experience and learn from mistakes as time goes on. Moreover, it is likely that the number of intermediaries will grow and some may be industry-specific or concentrate on specific demographics.

Click Here To Print- PDF Printout SEC Issues Whitepaper On Title III Crowdfunding

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
330 Clematis Street, Suite 217
West Palm Beach, FL 33401
Phone: 800-341-2684 – 561-514-0936
Fax: 561-514-0832
LAnthony@LegalAndCompliance.com
www.LegalAndCompliance.com
www.LawCast.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

© Legal & Compliance, LLC 2017


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House Passes Creating Financial Prosperity For Business And Investors Act
Posted by Securities Attorney Laura Anthony | February 7, 2017 Tags: , , , , , , , , , , , , , ,

ABA Journal’s 10th Annual Blawg 100

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On December 5, 2016, the U.S. House of Representatives passed the Creating Financial Prosperity for Businesses and Investors Act (H.R. 6427) (the “Act”), continuing the House’s pro-business legislation spree. The Act is actually comprised of six smaller acts, all of which have previously been considered and passed by the House in 2016. The Act is comprised of: (i) Title I: The Small Business Capital Formation Enhancement Act (H.R. 4168); (ii) Title II: The SEC Small Business Advocate Act (H.R. 3784); (iii) Title III: The Supporting American’s Innovators Act (H.R. 4854); (iv) Title IV: The Fix Crowdfunding Act (H.R. 4855); (v) Title V: The Fair Investment Opportunities for Professionals Experts Act (H.R. 2187); and (vi) Title VI: The U.S. Territories Investor Protection Act (H.R. 5322).

Title I: The Small Business Capital Formation Enhancement Act (H.R. 4168)

This Act requires the SEC to respond to the findings and recommendations of the SEC’s annual Government-Business Forum on Small Business Capital Formation, which forum I attended in 2016 and found very interesting and productive. The Act would require the SEC to respond to recommendations by issuing a public statement evaluating the finding or recommendation and indicating what action the SEC intends to take as a result. Currently, the SEC is required to hold the annual Government-Business Forum to review the current status of problems and programs related to small business capital formation. The SEC is also required to prepare summaries of the Forum and any findings made by the Forum but is not required to comment or take a position on same.

The SEC is already legally required to review and respond to findings of the Investor Advisory Committee but currently is not required to take this additional step related to the small business forum. As with the Investor Advisory Committee, the SEC’s action on recommendations could be simply to review the matter further, conduct a study, consider or propose a rule change, or the SEC could state that it is taking no action at all. The Act does not limit, direct or require any particular response, just that a response be made. This Act was originally passed as part of the Financial Choice Act.

Title II: The SEC Small Business Advocate Act (H.R. 3784)

This legislation establishes the Office for Small Business Capital Formation within the SEC to assist small businesses and their investors in resolving problems and to provide a forum to identify issues and propose changes to statutes, regulations and rules to benefit small businesses and their investors and generally facilitate capital formation. The SEC would be required to review and respond to any recommendations by the committee. However, like similar rules, including the proposed H.R. 4168, the SEC’s response could be to review the matter further, conduct a study, consider or propose a rule change, or the SEC could state that it is taking no action at all.

The new Office for Small Business Capital Formation would be responsible for planning and holding the annual Government-Business Forum on Small Business Capital Formation. The new office would also analyze the effects of new and proposed rules on small businesses. The purpose would be to create an office in the SEC that would advocate for rule and policy changes on behalf of small businesses and their investors.  In order to give the office independence in its role, the office would provide its reports directly to various committees of Congress without review or oversight by the SEC itself.

The legislation also establishes the SEC Small Business Advisory Committee to provide the SEC with advice on rules, regulations and policies related to capital formation, securities trading, public reporting and corporate governance for emerging, privately held and smaller reporting companies with less than $250 million in public float. This new SEC Small Business Advisory Committee would essentially replace the voluntarily created SEC Advisory Committee on Small and Emerging Companies. The Advisory Committee on Small and Emerging Companies was last renewed by the SEC Chair and Commissioners on September 24, 2015 for a period of two years and accordingly, unless renewed again, will dissolve later this year.

As a reminder, the Advisory Committee on Small and Emerging Companies was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

The SEC would have the same mandate to review and respond to recommendations by the new committee. My prior blog discussing this act is HERE.

Title III: The Supporting America’s Innovators Act (H.R. 4854)

This legislation creates a new small “qualifying venture capital fund” under the Investment Company Act of 1940 and increases the current registration exemption under Section 3(c)(1) of the Investment Company Act to allow for up to 250 investors in such qualifying venture capital fund. Currently Section 3(c)(1) of the Investment Company Act exempts pooled funds, such as hedge funds, from registering under the Act as long as they have fewer than 100 equity holders. There is no limit on the amount of invested capital in a fund to qualify for the 3(c)(1) exemption. H.R. 4854 would create a new class of pooled fund, called a “qualifying venture capital fund,” which would be defined as any venture fund with $10 million or less of invested capital and allow up to 250 investors in such fund.

Title IV: The Fix Crowdfunding Act (H.R. 4855)

From the time the SEC published the final Regulation Crowdfunding rules and regulations on October 30, 2015, the regulatory framework has met with wide criticism, including that the process is too costly considering the $1 million raise limitation. The most commonly repeated issues with the current structure include: (i) the $1 million annual minimum is too low to adequately meet small business funding needs; (ii) companies cannot “test the waters” in advance of or at the initial stages of an offering; and (iii) companies cannot currently use a Special Purchase Vehicle (SPV) in a crowdfunding offering. The Fix Crowdfunding Act only addresses one of these three complaints.

The Fix Crowdfunding Act would also allow for the use of special purpose vehicles (SPV’s) in the fundraising process. The Act would allow for SPV’s by amending the Investment Company Act of 1940 to add a newly defined “crowdfunding vehicle” which is limited by its organizational and charter documents to one that acquires, holds and disposes of securities of a single issuing company in one or more crowdfunding transactions conducted under Section 4(a)(6) and Regulation Crowdfunding.

In addition, the newly defined “crowdfunding vehicle” would need to meet the following requirements: (i) have only one class of securities; (ii) neither the vehicle nor any person associated with the vehicle can receive any compensation in connection with the purchase, holding or sale of securities of the investment target; (iii) the vehicle can only purchase securities issued in a transaction under Section 4(a)(6) and Regulation Crowdfunding; (iv) both the crowdfunding vehicle and investment target must remain current in their respective disclosure obligations under Regulation Crowdfunding; and (v) the crowdfunding vehicle must be advised by either a state or federally registered investment advisor (RIA).

A crowdfunding SPV will be exempt from the current per-investor investment limits under Regulation Crowdfunding (i.e., (a) if either annual income or net worth is less than $100,000, the investment limitation is the greater of $2,000 or 5% of the lesser of annual income or net worth; or (b) if both annual income and net worth are equal to or greater than $100,000, the investment limitation is 10% of the lesser of annual income or net worth). However, investments into the crowdfunding SPV would remain subject to the per-investor limitations.

It is thought that an SPV structure helps protect the smaller investors by allowing them to pool funds together with larger investors in an entity that offers separate protections than the offering company itself. The SPV structure has become prevalent in Rule 506(c) offerings where the company is utilizing a platform to advertise and attract investors. However, under Rule 506(c), which is limited to accredited investors, it has not been problematic for SPV’s to stay within the current exemptions to registration under the Investment Company Act of 1940 by having fewer than 100 investors.

The Fix Crowdfunding Act also modifies the current exemption from the Exchange Act Section 12(g) registration requirements under Regulation Crowdfunding. The Exchange Act and Regulation Crowdfunding currently provide that security holders who acquired their securities in a crowdfunded offering are not counted for purposes of the registration threshold, provided that the issuer is current in its required annual reports and has engaged a transfer agent for its securities. The Fix Crowdfunding Act would remove the annual report and transfer agent conditions if the issuer had a public float for the last semi-annual period of less than $75 million, or if the public float is zero for such period annual revenues of less than $50 million in the most recently completed fiscal year.

One of my colleagues in the world of corporate finance, Dara Albright, wrote a great letter to Representative McHenry supporting the Fix Crowdfunding Act. Ms. Albright’s letter can be read HERE.

Title V: The Fair Investment Opportunities for Professionals Experts Act (H.R. 2187)

This legislation amends the definition of “accredited investor” under the Securities Act of 1933 to include: (i) persons whose individual net worth, together with their spouse, exceeds $1,000,000, adjusted for inflation, excluding the value of their primary residence; (ii) persons with an individual income greater than $200,000, or $300,000 for joint income, both adjusted for inflation; (iii) any person currently licensed or registered as a broker or investment adviser by the SEC, FINRA, an equivalent SRO, or state securities regulator; and (iv) persons whom the SEC determines have demonstrable education or job experience to qualify as having professional subject-matter knowledge related to a particular investment (FINRA or an equivalent self-regulatory organization must verify the person’s education or job experience).

My prior blog discussing this act is HERE.

Title VI: The U.S. Territories Investor Protection Act (H.R. 5322)

This legislation amends the Investment Company Act to terminate an exemption for investment companies located in Puerto Rico, the Virgin Islands and other territories of the United States. Currently an exemption applies for entities located in these territories that limits sales of securities to residents of the particular territory in which they operate. The Act contains a three-year phase-in safe harbor.

Other 2016 House Legislation

Earlier in 2016 I wrote about: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts embedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. See my blog HERE.

In early July, the House passed H.R. 2995, an appropriations bill for the federal budget for the fiscal year beginning October 1.  No further action has been taken. The 259-page bill, which is described as “making appropriations for financing services and general government for the fiscal year ending September 30, 2017, and for other purposes” (“House Appropriation Bill”), contains numerous provisions reducing or eliminating funding for key aspects of SEC enforcement and regulatory provisions. My discussion on this provision can be read as part of my blog on the Financial Choice Act, a link to which is below.

On September 8, 2016, the House passed the Accelerating Access to Capital Act. Unlike many of the House bills that passed in 2016, this one gained national attention, including an article in the Wall Street Journal. The Accelerating Access to Capital Act is actually comprised of three bills: (i) H.R. 4850 – the Micro Offering Safe Harbor Act; (ii) H.R. 4852 – the Private Placement Improvement Act; and (iii) H.R. 2357 – the Accelerating Access to Capital Act. See my blog HERE.

On September 13, 2016, the House passed the Financial Choice Act, which is an extreme anti-regulation act that would dramatically change the current SEC regime and dismantle a large portion of the Dodd-Frank Act. Read my blog on the Financial Choice Act HERE.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

© Legal & Compliance, LLC 2017


« »
  • Contact Information

    Laura Anthony, Attorney
    Legal & Compliance, LLC
    330 Clematis Street, Ste. 217
    West Palm Beach, FL 33401

    Toll Free: 1.800.341.2684
    Phone: 561.514.0936
    Fax: 561.514.0832