Regulation A Webinar Follow-Up Q&A

A couple weeks ago, Howard Marks of StartEngine and I presented a webinar about Regulation A. Listeners asked far more questions than we were able to answer in the time given, and I promised to post their questions and answers on the blog. Here goes.

First, a few links:

What’s the difference between Regulation A and Regulation A+?

There is no difference. Regulation A has been around for a long time, but was rarely used primarily because issuers could raise only $5 million and were required to register with every state where they offered securities. Title IV of the JOBS Act required the SEC to create a new and improved version of Regulation A, and the new and improved version is sometimes referred to colloquially as Regulation A+. But it’s the same thing legally as Regulation A.

Can I use Regulation A to raise money from non-U.S. investors?

Definitely. Non-U.S. investors may participate in all three flavors of Crowdfunding: Title II, Title III, and Title IV (Regulation A).

But don’t forget, the U.S. isn’t the only country with securities laws. If you raise money from a German citizen, Germany wants you to comply with its laws.

Can non-U.S. companies use Regulation A?

Only companies organized in the U.S. or Canada and having their principal place of business in the U.S. or Canada may use Regulation A.

What about a company with headquarters in the U.S. but manufacturing facilities elsewhere?

That’s fine. What matters is that the issuer’s officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the U.S (or Canada).

Is Regulation A applicable to use for equity or debt for a real estate development project?

I believe that real estate will play the same dominant role in Regulation A that it plays in Title II. I also believe that real estate development will be more difficult to sell than stable, cash-flowing projects simply because of the different risk profile.

Is there any limit on the amount an accredited investor can invest?

No. An accredited investor may invest an unlimited amount in both Tier 1 and Tier 2 offerings under Regulation A. A non-accredited investor may invest an unlimited amount in Tier 1 offerings, but may invest no more than 10% of her income or 10% of her net worth, whichever is greater, in each Tier 2 offering.

What kinds of securities can be sold using Regulation A?

All kinds: equity, debt, convertible debt, common stock, preferred stock, etc.

But you cannot sell “asset-backed securities” using Regulation A, as that term is defined in SEC Regulation AB. The classic “asset-backed security” is where a hedge fund purchases $1 billion of credit card debt from the credit card issuer, breaks the debt into “tranches” based on credit rating and other factors, and securitizes the tranches to investors. However, the SEC views the term more broadly.

Can I combine a Regulation A offering with other offerings?

In general yes. For example, there’s no problem if an issuer raises money using Rule 506 (Rule 506(b) or Rule 506(c)) while it prepares its Regulation A offering. The legal issues become more cloudy if an issuer wants to combine multiple types of offerings simultaneously. Theoretically just about anything is possible.

Can the same platform list securities under both Regulation A and Title II?

Yes. In fact, the same platform can list securities under all three flavors of Crowdfunding:  Title II, Title III, and Title IV. But on that platform, only licensed “Funding Portals” can offer Title III securities.

Does a platform offering securing under Regulation A have to be a broker-dealer?

The simple answer is No. But a platform that crosses the line into acting like a broker-dealer, or is compensated with commissions or other “transaction based compensation,” would have to register as a broker-dealer or become affiliated with a broker-dealer.

Can a non-profit organization use Regulation A?

Regulation A is one exception to the general rule that all offerings of securities must be registered with the SEC under section 5 of the Securities Act of 1933. Non-profit organizations are allowed to sell securities without registration under a different exception. So the answer is that non-profits don’t have to use Regulation A.

With that said, I represent non-profit organizations that have created for-profit subsidiaries that plan to engage in Regulation A offerings. For example, a non-profit in the business of urban development might create a subsidiary to develop an urban in-fill project, raising money partly from grants and partly from Regulation A.

Can I use Regulation A to create a fund?

If by “fund” you mean a pool of assets, like a pool of 30 multi-family apartment communities, then Yes. You can either buy the apartment communities first and then raise the money, or raise the money first and then deploy it in your discretion. If you want to own each apartment community in a separate limited liability company subsidiary, that’s okay also.

If by “fund” you mean a pool of investments, like a pool of 30 minority interests in limited liability companies that themselves own multi-family apartment communities, then No. Your “fund” would be treated as an “investment company” under the Investment Company Act of 1940, and Regulation A may not be used to raise money for investment companies.

Can a fund be established for craft beverages?

Same idea. You could use Regulation A to raise money for a brewery that will develop multiple craft beverages. You cannot use Regulation A to buy minority interests in multiple craft beverage companies.

For a brand new company, can the audited financial statements required by Tier 2 be dated as of the date of formation, and just show zeroes?

Yes, as long as the date of formation is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date.

How does the $50 million annual limit apply if I have more than one project?

The $20 million annual limit under Tier 1, and the $50 million limit under Tier 2, are per-issuer limits. A developer with, say, three office building projects, each requiring $50 million of equity, can use Regulation A for all three at the same time.

NOTE:  This is different than Title III, where the $1 million annual limit applies to all issuers under common control.

What does “testing the waters” mean?

It means that before your Regulation A offering is approved (“qualified”) by the SEC, and even before you start preparing all the legal documents, you can advertise the offering and accept non-binding commitments from prospective investors. If you don’t find enough interest, you can save yourself the trouble and cost of going through with the offering.

NOTE:  Any materials you use for “testing the waters” must be submitted to the SEC, if the offering proceeds.

Where can Regulation A securities be traded?

Theoretically, Regulation A securities could be registered with the SEC under the Exchange Act and traded on a national market. But I’m sure that’s not what the listener meant. Without being registered under the Exchange Act, a Regulation A security may be traded on the over-the-counter market, sponsored by a broker-dealer.

This sounds expensive! Can you give us an estimate?

Stay tuned! A post about cost is on the way.

Questions? Let me know.



Crowdfunding Is Just Beginning

American Classic

For those of us who work in the Crowdfunding space, it can seem as if we’ve covered a lot of ground since April 5, 2012, the day President Obama signed the JOBS Act into law. At a conference in New York earlier this year, a panelist actually referred to Crowdfunding as a “mature” industry.

Nothing could be further from the truth. Crowdfunding is actually just beginning.

A couple weeks ago I received a promotional email from OurCrowd. Founded by Jon Medved, one of the most successful venture capitalists in the world, OurCrowd has developed into the most successful Crowdfunding portal in the world outside the real estate industry. Unlike most angel investors and venture capitalists, Jon understood that Crowdfunding is nothing more or less than the Internet disrupting the capital formation industry – his industry. Rather than resist the disruption, he built the most successful disrupter.

The email recites the impressive number of successful exits and IPOs of companies financed through OurCrowd (remember when Jon’s fellow VCs were claiming that a Crowdfunded company could never attract more financing?), and boasts that OurCrowd has signed up 15,000 investors. That’s a number many Crowdfunding portals would envy, for sure. On the other hand, it represents a market penetration of less than 0.2% among the roughly 8.5 million accredited investors in the United States, and a market penetration of less than 0.02% among the total population of U.S. investors, accredited and non-accredited. And that’s for the most successful non-real estate site in the market.

That’s not a mature industry, folks. By way of comparison to an industry that really is mature, I would say the Crowdfunding industry is about where the automotive industry was in 1912, when a few early adapters were driving these crazy machines with four wheels while their more respectable neighbors were driving proper horse-drawn carriages.

Today, everything about the automotive industry seems obvious, pre-ordained. But here are some of the things we didn’t know in 1912:

  • Whether consumers would use automobiles
  • How they would use them
  • How much they would pay for them
  • Who would make automobiles and their many parts
  • Who would distribute them
  • How automobiles would be regulated
  • Who would make money, and how
  • How automobiles would work
  • Whether the automobile market would segment
  • How it would segment
  • Who would build the automobile infrastructure
  • That a person with an orange wig would someday run for President

If you’re already in the Crowdfunding industry trying to make a living, realizing how little we know can feel disconcerting, even alarming. But try thinking of it this way:  98% of the innovation is yet come, almost all of the opportunities remain unexplored, the disruption of OurCrowd and others will be multiplied a thousand times.

One of the most influential essays of American history was Frederick Jackson Turner’s The Closing of the American Frontier, written in 1893, shortly after the Western frontier was declared closed by the U.S. census. Turner argued persuasively that the idea of a frontier had been central to the American national identify up until that time, and speculated how the national identify might change with the end of the idea.

In Crowdfunding, we are nowhere near the closing of the frontier.

Questions? Let me know.



The New And Improved Regulation A: A Short Summary

On October 16th, I’m going to be talking about Regulation A at the 5th Annual Global Crowdfunding Convention in Las Vegas, with Miss Nevada as my co-presenter (of course). I prepared this summary-of-a-summary for the event. For more in-depth information, here’s my Regulation A+ Primer. – MARK

The JOBS Act created three flavors of Crowdfunding:

  • Title II Crowdfunding, which allows issuers to raise an unlimited amount of money from an unlimited number of investors using unlimited advertising – but is limited to accredited investors.
  • Title III Crowdfunding, which allows issuers to raise up to $1 million per year from anyone, including non-accredited investors.
  • Title IV Crowdfunding, which modified the old Regulation A and is sometimes referred to as Regulation A+.

Quick Summary of Regulation A

  • Raise up to $50 million per year for each issuer
  • Raise money from both accredited and non-accredited investors
  • Register with the SEC
  • Takes about five months, start to finish
  • No State-level registration
  • Shares freely tradeable from day one
  • Sales by existing shareholders
  • Regulation A shareholders not counted toward Exchange Act limits for full reporting
  • Mini-IPO, but with much lower cost

Two Tiers

Theoretically, there are two “tiers” under Regulation A:

  Tier One Tier Two
Amount Per Year $20 million $50 million
Non-Accredited Allowed Yes Yes
Limits on Investment None For non-accrediteds, 10% of income or net worth, whichever is greater, per offering.
Audited Financials No Yes
Registration with SEC Yes Yes
Registration with State Yes No
Excluded from Exchange Act Limits Yes Yes
Shares Freely Tradeable Yes Yes
Post-Offering Reporting No Yes
Testing the Waters Yes Yes
Online Distribution Allowed Yes Yes
Bad Actor Limits Yes Yes


Because of the exemption from State registration, most companies will choose Tier Two.

Companies That Cannot Use Regulation A

Investment Companies Companies that own stock or other securities in other companies.
Foreign Companies Issuers must be organized and have their principal place of business in the U.S. or Canada.
Oil and Gas Companies Can’t sell fractional undivided interests in oil and gas rights, or a similar interest in other mineral rights.
Public Companies Can’t be a publicly-reporting company.
Companies Selling Asset-Backed Securities For example, interests in a pool of credit card debt.


Where Regulation A Makes the Most Sense

  • Pools of high-quality real estate assets, especially REITs
  • High quality assets in inefficient markets
  • Sexy companies (companies with high social-media followers or potential)

Additional Resources

Questions? Let me know.


Improving Legal Documents in Crowdfunding: New Tax Audit Language for Operation Agreements


By: Steve Poulathas & Mark Roderick 

Last year I reported that Congress had changed the rules governing tax audits of limited liability companies and other entities that are treated as partnerships for tax purposes. The changes don’t become effective until tax years beginning on or after January 1, 2018, but because most LLCs created today will still be around in 2018, it’s a good idea to anticipate the changes in your Operating Agreements today.

Under the current rules, the IRS conducts audits of LLCs at the entity level through a “tax matters partner” (normally the Manager of the LLC), and collects taxes from the individual members. Under the new rules, the IRS will continue to conduct audits at the entity level, but will also collect taxes, interest, and penalties at the entity level. That puts the LLC in the position of paying the personal tax obligations of its members, a drain on cash flow every deal sponsor will want to avoid.

Naturally, there are exceptions to the new rules and exceptions to the exceptions. Trouble sleeping? I’ll send you a detailed summary.

Consult with your own tax advisors, of course, here’s some language for your Operating Agreements that gives the deal sponsor maximum flexibility:

Tax Matters.

  1. Appointment. The Manager shall serve as the “Tax Representative” of the Company for purposes of this section 1. The Tax Representative shall have the authority of both (i) a “tax matters partner” under Code section 6231 before it was amended by the Bipartisan Budget Act of 2015 (the “BBA”), and (ii) the “partnership representative” under Code section 6223(a) after it was amended.
  2. Tax Examinations and Audits. At the expense of the Company, the Tax Representative shall represent the Company in connection with all examinations of the Company’s affairs by the Internal Revenue Service and state taxing authorities (each, a “Taxing Authority”), including resulting administrative and judicial proceedings, and is authorized to engage accountants, attorneys, and other professionals in connection with such matters. No Member will act independently with respect to tax audits or tax litigation of the Company, unless previously authorized to do so in writing by the Tax Representative, which authorization may be withheld by the Tax Representative in his, her, or its sole and absolute discretion. The Tax Representative shall have sole discretion to determine whether the Company (either on its own behalf or on behalf of the Members) will contest or continue to contest any tax deficiencies assessed or proposed to be assessed by any Taxing Authority, recognizing that the decisions of the Tax Representative may be binding upon all of the Members.
  3. Tax Elections and Deficiencies. Except as otherwise provided in this Agreement, the Tax Representative, in his, her, or its sole discretion, shall have the right to make on behalf of the Company any and all elections under the Internal Revenue Code or provisions of State tax law. Without limiting the previous sentence, the Tax Representative, in his, her, or its sole discretion, shall have the right to make any and all elections and to take any actions that are available to be made or taken by the “partnership representative” or the Company under the BBA, including but not limited to an election under Code section 6226 as amended by the BBA, and the Members shall take such actions requested by the Tax Representative. To the extent that the Tax Representative does not make an election under Code section 6221(b) or Code section 6226 (each as amended by the BBA), the Company shall use commercially reasonable efforts to (i) make any modifications available under Code section 6225(c)(3), (4), and (5), as amended by the BBA, and (ii) if requested by a Member, provide to such Member information allowing such Member to file an amended federal income tax return, as described in Code section 6225(c)(2) as amended by the BBA, to the extent such amended return and payment of any related federal income taxes would reduce any taxes payable by the Company.
  4. Deficiencies. Any deficiency for taxes imposed on any Member (including penalties, additions to tax or interest imposed with respect to such taxes and any taxes imposed pursuant to Code section 6226 as amended by the BBA) will be paid by such Member and if required to be paid (and actually paid) by the Company, may  be recovered by the Company from such Member (i) by withholding from such Member any distributions otherwise due to such Member, or (ii) on demand. Similarly, if, by reason of changes in the interests of the Members in the Company, the Company, or any Member (or former Member) is required to pay any taxes (including penalties, additions to tax or interest imposed with respect to such taxes) that should properly be the obligation of another Member (or former Member), then the Member (or former Member) properly responsible for such taxes shall promptly reimburse the Company or Member who satisfied the audit obligation.
  5. Tax Returns. At the expense of the Company, the Tax Representative shall use commercially reasonable efforts to cause the preparation and timely filing (including extensions) of all tax returns required to be filed by the Company pursuant to the Code as well as all other required tax returns in each jurisdiction in which the Company is required to file returns. As soon as reasonably possible after the end of each taxable year of the Company, the Tax Representative will cause to be delivered to each person who was a Member at any time during such taxable year, IRS Schedule K-1 to Form 1065 and such other information with respect to the Company as may be necessary for the preparation of such person’s federal, state, and local income tax returns for such taxable year.
  6. Consistent Treatment of Tax Items. No Member shall treat any Company Tax Item inconsistently on such Member’s Federal, State, foreign or other income tax return with the treatment of such Company Tax Item on the Company’s tax return. For these purposes, the term “Company Tax Item” means any item of the Company of income, loss, deduction, credit, or otherwise reported (or not reported) on the Company’s tax returns.

Questions? Let us know.


Steve Poulathas is member of Flaster Greenberg’s Taxation, Business and Corporate, Trusts and Estates and Employee Benefits Practice Groups. He counsels and represents individuals, family-owned businesses and public companies in the tax, business and finance, and estate practices. He can be reached at 856.382.2255 or



Mark Roderick is one of the leading Crowdfunding lawyers in the United States. He represents platforms, portals, issuers, and others throughout the industry. For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, follow Mark’s blog, or his twitter handle: @CrowdfundAttny. He can also be reached at 856.661.2265 or


Regulation A Timeline

Click here to view the timeline.

“How long will it take?” That’s one of the two questions I’m asked most often about Regulation A.

The answer is that if everything goes smoothly, it should take about 20 – 24 weeks from the day an issuer decides to raise money using Regulation A until it begins selling securities. Every company is different, of course, and lots of things can delay the process, but 20 – 24 weeks is a good rule of thumb.

With this Regulation A Timeline, I hope to provide issuers and their advisors with a framework for conducting a Regulation A offering, with tasks and milestones. Three notes:

  • Don’t try to view this on your phone! There’s a lot to cover.
  • As you’ll see, there’s a lot to do in the first few weeks. The more thorough the attention given to the earliest tasks, the more smoothly the process will roll out.
  • By definition, this Timeline is from the perspective of the lawyer. Each member of the team – the accountant, the escrow agent, etc. – will have a separate timeline, all within the same 20 – 24 week framework.

What is the other question I’m asked most often about Regulation A? You guessed it. I’ll cover assembling the team and the cost of Regulation A in another post.

Questions? Let me know.

Improving Legal Documents in Crowdfunding: Get Rid of the State Legends!

I see lots of offering documents like this, with pages of state “legends.” The good news is that in Crowdfunding offerings – Title II (Rule 506(c)), Title III (Regulation Crowdfunding), and Title IV (Regulation A) – you can and should get rid of them.

The legal case is pretty simple:

  • Before 1996, states were allowed to regulate private offerings. Every state allowed exemptions, but these exemptions often required legends, differing from state to state.
  • The National Securities Market Improvement Act of 1996 added section 18 to the Securities Act of 1933. Section 18 provides that no state shall “impose any conditions upon the use of. . . .any offering document that is prepared by or on behalf of the issuer. . . .” in connection with the sale of “covered securities.”
  • The securities sold under Title II, Title III, and Title IV are all “covered securities.”
  • Hence, section 18 prohibits states from imposing any conditions regarding the issuer’s offering documents, including a condition that requires the use of a state legend.

If the capitalized legends just take up space, why not include them anyway just to be safe? Take Pennsylvania’s legend as an example:

These securities have not been registered under the Pennsylvania Securities Act of 1972 in reliance upon an exemption therefrom. any sale made pursuant to such exemption is voidable by a Pennsylvania purchaser within two business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is not a written binding contract of purchase, within two business days after he or she makes the initial payment for the shares being offered.

If you include the Pennsylvania legend “just to be safe,” you’ve given Pennsylvania investors a right of rescission they wouldn’t have had otherwise!

Two qualifications.

First, the North American Securities Administrators Association –the trade group of state securities regulators – suggests including uniform legend on offering documents. I include this or something similar as a matter of course:


Second, some states, including Florida, require a legend to appear on the face of the offering document to avoid broker-dealer registration. Because Section 18 of the Securities Act doesn’t prohibit states from regulating broker-dealers, some lawyers recommend including those legends, while others believe those requirements are an improper “back door” way for states to avoid the Federal rule. I come out in the latter camp, but opinions differ.

Questions? Let me know.

Two Related Party Rules In Title III Crowdfunding

Title III includes two definitions about related parties, similar but not identical.

The first definition dictates who is subject to the $1 million-per-year limit on raising money. There, the regulations provide that the limit applies not only to the issuer itself (the company raising money), but also to “all entities controlled by or under common control with the issuer and any predecessors of the issuer.” To determine who controls whom, the regulations borrow the definition from SEC Rule 405:

The term ‘control’ means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise.

This means, for example, that if Company X is raising money using Title III, then Company X and all members of the same corporate family are subject to the same $1 million cap, even if other members of the corporate family are engaged in very different businesses.

(Don’t even think about having your husband or girlfriend or best friend from college own the other businesses get around the rule. It doesn’t work.)

This is a very broad rule and, like so much of Title III, very different than anything we’ve seen before in the U.S. securities laws. For example, while Issuer X may include only 35 investors in an offering under Rule 506(b), Issuer X is allowed to have multiple offerings – an apartment building in this offering, an oil and gas development in this offering, a social media app in a third offering – and include 35 non-accredited investors in each.

Similarly, in Title IV an issuer can raise up to $50 million for a mortgage REIT. Nothing stops a company under common control with the issuer from raising another $50 million for a REIT that buys office buildings.

Why the stricter rule for Title III? I would say that, consistent with the whole Title III paradigm, the goal was to reserve Title III for little guys, the neighborhood businesses, while keeping the professional financiers from Wall Street and Silicon Valley out. It’s part of the big compromise that allowed enactment of Title III in the first place.

The second definition around related parties in Title III dictates who on the portal side may own securities of the issuer. The rule is that:

  • The portal itself may own a financial interest in the issuer only if (1) the portal received the financial interest as compensation for the services provided to or for the benefit of the issuer, and (2) the financial interest consists of the same securities that are being offered to investors on the portal’s platform.
  • No director, officer, or partner of the portal, or any person occupying a similar status or performing a similar function, may own a financial interest in an issuer.

The term “financial interest in an issuer” means a direct or indirect ownership of, or economic interest in, any class of the issuer’s securities.

This rule means, for example, that:

  • A portal may not raise money for itself on its own platform.
  • Neither the portal nor any of its directors, officers, or partners may invest in an issuer before it raises money on the portal (they could invest afterward).
  • Purely contractual arrangements, not relating to the securities of the issuer, are okay.

The rule about financial interests doesn’t use the words “common control” but, because a portal is controlled by its directors, officers, and partners, the result is nearly the same. But not identical. In a typical Crowdfunding structure, for example, the Title III portal is owned in a separate company. Key contributors to other parts of the corporate family who are not directors, officers, or partners of the portal itself should be allowed to invest without violating the rule, even where all the companies are under common control.

Questions? Let me know.

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