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.

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


« »
SEC Completes Inflation Adjustment Under Titles I And III Of The Jobs Act; Adopts Technical Amendments
Posted by Securities Attorney Laura Anthony | April 25, 2017 Tags: , , , , , ,

On March 31, 2017, the SEC adopted several technical amendments to rules and forms under both the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) to conform with Title I of the JOBS Act. On the same day, the SEC made inflationary adjustments to provisions under Title I and Title III of the JOBS Act by amending the definition of the term “emerging growth company” and the dollar amounts in Regulation Crowdfunding.

Title I of the JOBS Act, initially enacted on April 5, 2012, created a new category of issuer called an “emerging growth company” (“EGC”). The primary benefits to an EGC include scaled-down disclosure requirements both in an IPO and periodic reporting, confidential filings of registration statements, certain test-the-waters rights in IPO’s, and an ease on analyst communications and reports during the EGC IPO process. For a summary of the scaled disclosure available to an EGC as well as the differences in disclosure requirements between an EGC and a smaller reporting company, see HERE.

As a reminder, the definition of an EGC as enacted on April 5, 2012 (i.e., not including the new inflationary adjustment discussed in this blog) is a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011.  An EGC loses its EGC status on the earlier of (i) the last day of the fiscal year in which it exceeds $1 billion in revenues; (ii) the last day of the fiscal year following the fifth year after its IPO (for example, if the issuer has a December 31 fiscal year-end and sells equity securities pursuant to an effective registration statement on May 2, 2016, it will cease to be an EGC on December 31, 2021); (iii) the date on which it has issued more than $1 billion in non-convertible debt during the prior three-year period; or (iv) the date it becomes a large accelerated filer (i.e., its non-affiliated public float is valued at $700 million or more).  EGC status is not available to asset-backed securities issuers (“ABS”) reporting under Regulation AB or investment companies registered under the Investment Company Act of 1940, as amended. However, business development companies (BDC’s) do qualify.

The provisions of Title I of the JOBS Act were self-executing and automatically became effective on April 5, 2012. Although the SEC has passed several rules and made numerous form amendments to conform to the JOBS Act provisions, several of the rules and forms under the Securities Act, Exchange Act, periodic and current reports forms, Regulation S-K and Regulation S-X did not reflect the JOBS Act provisions.

The statutory definition of an EGC, as reflected in Securities Act Section 2(a)(10) and Exchange Act Section 3(a)(80), require the SEC to make an adjustment to index to inflation the annual gross revenue amount used to determine an EGC, every five years.

Likewise, Title III of the JOBS Act, which set the statutory groundwork for Regulation Crowdfunding, requires an inflationary adjustment to the dollar figures in Regulation Crowdfunding every five years. On March 31, 2017, the SEC did so for the first time.

Inflation Adjustments

Definition of “Emerging Growth Company”

The JOBS Act amended Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act to define an “emerging growth company” to mean a company with total annual gross revenues of less than $1 billion, as adjusted for inflation every 5 years, during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011.

The SEC is now making its first inflationary increase to the definition. The inflation increase is $70,000. Accordingly, an EGC is now defined as a company with total gross revenues of less than $1,070,000,000.

Regulation Crowdfunding Amendments

Title III of the JOBS Act, enacted in April 2012, amended the Securities Act to add Section 4(a)(6) to provide an exemption for crowdfunding offerings.  Regulation Crowdfunding went into effect on May 16, 2016. For a summary of the provisions, see HERE. The Securities Act requires that the amounts set forth in Regulation Crowdfunding be adjusted by the SEC for inflation not less than once every five years. The SEC is now making its first inflationary increase by amending Rules 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C. The inflation increase is $70,000.

The new offering amount and investment limits are as follows:

The new financial statement requirement thresholds are as follows:

Technical Amendments to Rules and Forms

                Scaled Disclosure in Registration Forms and Periodic Reports

Section  102(b)(1)  of the JOBS Act amended Section 7(a) of the Securities Act to provide that (1) an EGC is permitted  to present only two years of audited financial statements in its IPO registration statement,  and (2) in any Securities Act registration statement other than its IPO registration statement, an EGC need not present selected financial data under Item 301 of Regulation S-K for any period prior to the earliest audited period presented in its IPO registration statement. However, Item 301 and Rule 3-02 of Regulation S-X and Form 20-F had not been amended for these changes and, until now, contained conflicting requirements. In particular, such rules and forms only addressed reduced disclosure requirements for smaller reporting companies and not address the JOBS Act rules related to EGC’s. The SEC is now amending Item 301 and Rule 3-02 of Regulation S-X and Form 20-F to conform with Section 7(a) of the Securities Act.

Section 102(b)(2) of the JOBS Act amended Section 13(a) of the Exchange Act to provide that an EGC need not present selected financial data in an Exchange Act registration statement or periodic report for any period prior to the earliest audited period presented in the EGC’s first effective registration statement under either the Exchange Act or Securities Act. The SEC is now amending Item 301 of Regulation S-X to conform with Section 13(a) of the Exchange Act.

Likewise, the SEC is amending Item 303 of Regulation S-K related to management discussion and analyses (MD&A) such that a disclosure needs only to be provided for the periods of the financial statements included in the EGC’s IPO registration statement.

Auditor Attestation; Section 404(b) of Sarbanes-Oxley

Section 103 amended Section 404(b) of the Sarbanes-Oxley Act to exempt EGC’s from the need to provide an auditor attestation on management’s assessment of the effectiveness of the EGC’s internal controls over financial reporting. Compliance with Section 404(b) is very expensive, with the average cost being in the $2 million range. To conform with SEC rules and forms to amended Section 404(b), the SEC has amended Article 2-02 of Regulation S-X, Item 308 of Regulation S-K, and Forms 20-F and 40-F to specify that the auditor of an EGC does not need to attest to, and report on, management’s report on internal control over financial reporting and that management does not need to include the auditor’s attestation report in an annual report required by Section 13(a) or 15(d) of the Exchange Act.

Executive Compensation Disclosure and Shareholder Advisory Vote

Section 102(c) of the JOBS Act provides that an EGC need only provide the same executive compensation disclosure as a smaller reporting company.  The smaller reporting company executive compensation disclosures are delineated in Items 402(m)-(r) of Regulation S-K. The SEC is amending Item 402 to specify that these scaled disclosures also apply to EGC’s.

Exchange Act Rule 14a-21 requires companies to conduct shareholder advisory votes on say-on-pay, say-on-frequency and golden parachute compensation arrangements with any “named executive officers.” Item 102(a) of the JOBS Act amended Section 14A(e) of the Exchange Act to exempt EGC’s from these requirements. The SEC is amending Exchange Act Rule 14a-21 and Item 402(t) and Instruction 1 to Item 1011(b) of Regulation S-K to conform with this statutory exemption.  For more on say-on-pay, say-on-frequency and golden parachute compensation disclosures, see HERE.

Foreign Private Issuers

The definition of an emerging growth company is not dependent on whether the company is domestic or qualifies as a foreign private issuer. A foreign private issuer that qualifies as an EGC may avail itself of the scaled disclosures to the same extent as domestic companies. The SEC is now amending Form 20-F to conform its disclosure requirements with those available to an EGC.

“Check Box” Notice of EGC Status and Compliance with New or Revised Accounting Standards

Section 102(b) of the JOBS Act amended Section 7(a)(2)(B) of the Securities Act and Section 13(a) of the Exchange Act such that an EGC is not required to comply with new or revised financial accounting standards until private companies are also required to comply with those standards. An EGC can, however, choose to comply with such new or revised accounting standards but must do so on the next report or registration statement and notify the SEC of its choice. The election is irrevocable.  To provide a method to inform the SEC of its choice, the SEC is adding a “check box” to Securities Act Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 and Exchange Act Forms 10, 8-K, 10-Q, 10–K, 20–F and 40-F.

Click Here To Print- PDF Printout SEC Completes Inflation Adjustment Under Titles I And III Of The Jobs Act; Adopts Technical Amendments

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.

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