2. Companies need $
• Companies of all sizes, in general, need to
raise money.
– For example:
• 1) Uber – recently raised $1 billion.
• 2) Apple – recently sold $6.5 billion in bonds.
• 3) Oculus Rift – raised $2.4 million on Kickstarter.
4. When Raising Funds, ask - is it a
security?
• High-level
– If you are raising money, likely you are issuing securities.
• Details:
– 15 U.S.C § 77b(a)(1), states, “unless the context otherwise
requires” - “The term ‘security’ means any note, stock,
treasury stock, security future, security-based swap, bond,
debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, . . .
5. If it is a Security
If it is a security, it is:
• 1) Registered, or
• 2) Exempt, or
• 3) Illegal
If it is illegal, bad things happen:
• Criminal charges
• Civil penalties
• Rescind the deal (money back)
• Principal’s may be personally liable
• Jeopardize future funding
6. Why not just register the security?
If it is a security, must be:
• 1) Registered, or 2) Exempt, or 3) Illegal
Reason some companies do not register:
• Registration doesn’t usually happen for
startups until IPO – usually involves > $1
million in legal, underwriting, and accounting
costs.
7. Exemptions from Registration
Type Dollar
Limit
Manner of
Offering
Issuer and
Investor
Requirements
Filing
Requirements
Blue Sky
Exemption
Section 3(a) 11
/ Intrastate
None No limitation other than
to maintain intrastate
character of offering
Issuer and investors must
be residents in state. No
limitation on number.
None No
Section 4(a)(2)
/ Private
Placement
None No general solicitation
or general advertising
Investors must meet
sophistication and access to
information test
None No
Reg D Rule 504 $1 million
within prior
12 months
No general solicitation
or general advertising
unless . . .
Available to non-reporting
companies only that are not
investment companies or
blank check companies
File Form D with the
Commission not later
than 15 days after first
sale.
No
Reg D Rule 505 $5 million
within prior
12 months
No general solicitation
or general advertising
Unlimited accredited
investors and 35 non-
accredited investors
File Form D with the
Commission not later
than 15 days after first
sale.
No
Reg D Rule
506(b)
None No general solicitation
or general advertising.
Unlimited accredited
investors and 35 non-
accredited investors that
are sophisticated
File Form D with the
Commission not later
than 15 days after first
sale.
Yes
8. Exemptions from Registration
Type Dollar Limit Manner of
Offering
Issuer and
Investor
Requiremen
ts
Filing
Requiremen
ts
Blue Sky
Exemption
Reg D Rule
506(c)
None General
solicitation
permitted,
provided that all
purchasers are
accredited
investors
All purchasers
must be accredited
File Form D with
the Commission
not later than 15
days after first
sale.
Yes
Regulation
Crowdfunding*
Up to $1 million in a
12 month period
Offering must be
made through a
platform
Issuers that are
not reporting
companies, not
funds, and not
subject to
disqualification.
Requires the
preparatino of a
Form C, which
resembles a Form
1-A.
Yes
10. No Friends and Family Exemption!
• Unfortunately, under the U.S. securities laws,
there is NO such thing as a “friends and
family” exemption from registration.
• To sell shares of stock or securities in a
company, the company either has to:
– 1) Register the securities with the SEC (an
expensive and onerous process), or
– 2) Issue the securities pursuant to a securities law
exemption.
11. Difficulty with Exemptions
Type Dollar Limit Manner of
Offering
Issuer and Investor
Requirements
Section 3(a) 11 / Intrastate Issuer and investors must be residents
in state.
Section 4(a)(2) / Private
Placement
Too vague - on the knowledge of the
offerees and to the extent that they
can fend for themselves.
Reg D Rule 504 only if the issuer complies with
applicable state law that provides
adequate investor protection
Reg D Rule 505 35 non-accredited investors / No
general solicitation/ massive disclosure
requirements for non-accredited
Rule D 506(b) 35 non-accredited investors/ HUGE
disclosure requirements for non-
accredited
Rule D 506(c) All must be accredited
Regulation Crowdfunding Up to $1 million in 12
months
General solicitation
permitted; Advertising
restrictions
May be unaccredited
In particular, the difficulty with these exemptions when raising funds from numerous
people
12. Accredited Investor
SEC defines an accredited investor as:
• Any natural person whose individual net worth, or joint net
worth with that person’s spouse, exceeds $1,000,000.
– Equity value of one’s house (primary residence) is not included.
– Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years, or
– Joint income with that person’s spouse in excess of $300,000 in
each of those years and has a reasonable expectation of
reaching the same income level in the current year.
– Company insiders
• Approximately only 9 million accredited investors in the
United States. The total population of the United States is
roughly 322,183,000, it means that only 2.7% of the
population in the US is an accredited investor.
14. General Solicitation
SEC defined general solicitation and advertising broadly:
• “Offers to any person with whom the issuer, or the
issuer’s agent, has not had a prior relationship.”
Examples of general solicitation include:
• (1) Advertisement, article, notice or other
communication published in any newspaper, magazine,
or similar media or broadcast over television or radio;
and
• (2) Any seminar or meeting whose attendees have
been invited by any general solicitation or general
advertising;
15. Crowdfunding Exemption
In broad strokes:
• The point of the slides that follow is to provide
an overview.
• To put crowdfunding on your radar as a future
source of funding.
16. Crowdfunding Exemption
• What we will discuss:
– When it goes live
– What it is exactly
– Compliance requirements:
• Not as simple as posting your company on the portal!
• This is not a Craigslist ad.
• You will need professional guidance.
17. Question
• When does crowdfunding go live (i.e., when
can you raise money with it)?
– A) Right now
– B) May 16, 2016
– C) May 16, 2017
– D) Not yet decided
21. Types of Crowdfunding
There are different types of crowdfunding
1. Rewards/Product pre-purchase
– Kickstarter, indiegogo
2. Donation Crowdfunding
– gofundme
3. Lending Crowdfunding
– Lending Club
4. Equity Crowdfunding* (aka section 4(a)(6) of the
Securities Act).
22. Crowdfunding Exemption – some
details
Conduit
• All transactions covered by the new rules must be conducted
through an SEC-registered conduit.
• Examples of portals:
– Crowdfunder
– Offerboard
– CircleUp
– SeedInvest
– Agfunder
– MicroVentures
24. Crowdfunding Exemption – some
details
Amount of money that can be raised
• It allows private companies to raise up to $1 million within 12
months.
Individual investments
• Annual incomes or a net worth less than $100,000 – can invest
– a maximum of 5% of their yearly income or net worth, or
– up to $2,000, if that's greater.
• Those with higher incomes can invest up to 10%.
25. Crowdfunding Exemption – some
details - compliance
PART 227— Regulation Crowdfunding, general
rules and regulations
• Subpart A – General
• *Subpart B – Requirements for Issuers
• Subpart C – Requirements for Intermediaries
• Subpart D – Funding Portal Regulation
• Subpart E – Miscellaneous Provisions
26. Crowdfunding Exemption – some
details
PART 227—REGULATION CROWDFUNDING,
GENERAL RULES AND REGULATIONS
• Subpart B – Requirements for Issuers
– 227.201 - Disclosure requirements.
– 227.202 - Ongoing reporting requirements.
– 227.203 - Filing requirements and form.
– 227.204 - Advertising.
– 227.205 - Promoter compensation.
27. Crowdfunding Exemption – some
details
Subpart B – Requirements for Issuers
• Disclosure requirements: (a)- (y)
• Some of these disclosures are straight-forward:
– (a) The name, legal status (including its form of organization, jurisdiction in
which it is organized and date of organization), physical address and website
of the issuer.
– (e) The current number of employees of the issuer.
• A little more complex
– (d) A description of the business of the issuer and the anticipated business
plan of the issuer.
• Complex
– (f) A discussion of the material factors that make an investment in the issuer
speculative or risky.
– (s) A discussion of the issuer’s financial condition, including, to the extent
material, liquidity, capital resources and historical results of operations.
– (t) some financial reporting.
28. Crowdfunding Exemption – some
details
Disclosure requirements of 227.201(t) broken into three tiers
based on size of offering:
– 1) $100,000 or less,
– 2) more than $100,000, but not more than $500,000, and
– 3) and issuers offering more than $500,000.
29. Crowdfunding Exemption – some
details
Offerings of $100,00 or less, must disclose:
• 1) Amount of total income, taxable income and total
tax, or the equivalent line items, as reported on the
federal income tax returns filed by the issuer for the
most recently completed year (if any).
• 2) Principal executive officer of the issuer must certify
it.
If financial statements of the issuer are available that
have either been reviewed or audited by a public
accountant that is independent of the issuer, the issuer
must provide those financial statements instead
30. Crowdfunding Exemption – some
details
Offerings greater $100,000 less than $500,000:
– Financial statements reviewed by independent
public accountant.
– If have audited financial statements, must provide
those instead.
31. Crowdfunding Exemption – some
details
Offerings more than $500,000, must disclose:
• Financial statements audited by independent public
accountant.
32. Crowdfunding Exemption – some
details
PART 227—REGULATION CROWDFUNDING,
GENERAL RULES AND REGULATIONS
• Subpart B – Requirements for Issuers
– 227.201 - Disclosure requirements.
– 227.202 - Ongoing reporting requirements.
– 227.203 - Filing requirements and form.
– 227.204 - Advertising.
– 227.205 - Promoter compensation.
33. Crowdfunding Exemption – some
details
227.202 - Ongoing reporting requirements –
• Action - must file with the Commission & post
on the issuer’s website.
• What:
• 1) An annual report, and
• 2) Financial statements, either: certified, review or
audited in a fashion similar to before.
34. Crowdfunding Exemption – some
details
• There are advertising limitations. You must:
– 1) direct investors to the intermediary’s platform, and
– 2) include no more than the following information:
• A) A statement that the issuer is conducting an offering
pursuant to the Crowdfunding Exemption.
• B) The name of the intermediary through which the
offering is being conducted and a link directing the
potential investor to the intermediary’s platform;
• C) The terms of the offering; and
• D) Factual information about the legal identity and
business location of the issuer.
35. Crowdfunding Exemption
Exciting
– Has the possibility of raising money from
numerous people, outside of VCs and accredited
investors.
– Can harness the power of the internet – social
media (get the word out).
36. Presentation in a nutshell
1) All startup securities offerings must be exempt or they are
illegal!
2) Equity Crowdfunding goes live May 16, 2016
Consider whether it would be a useful funding mechanism and if
yes, be aware of the compliance requirements prior to using it
that should be discussed with a lawyer.
Editor's Notes
(1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) arising solely from the efforts of the promoter or a third party. The word “solely” has been eliminated from the efforts-of-others part of the test and instead, the question is “whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”
At the extreme end, the company and its principals can face criminal charges, both state and federal.
The SEC or state securities commissioner can bring claims for civil penalties, such as monetary fines and injunctions against any further capital raising activity.
Reg D Rule 504 - No general solicitation or general advertising unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sales to accredited investors with general solicitation
Rule D 506(b) - this is a major point. having non-accredited investors in a 505 or 506 offering requires cost-prohibitive disclosures and audting
Time does not permit a thorough explanation of the rules – that is a 685 page document available on the SEC’s website.