Category Archives: Crowdfunding

Married Couples As Accredited Investors

When a married couple invests in an offering under Rule 506(b), Rule 506(c), or Tier 2 of Regulation A, we have to decide whether the couple is “accredited” within the meaning of 17 CFR §501(a). How can we conclude that a married couple is accredited?

A human being can be an accredited investor in only four ways:

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  • Method #1: If her net worth exceeds $1,000,000 (without taking into account her principal residence); or
  • Method #2: If her net worth with her spouse exceeds $1,000,000 (without taking into account their principal residence); or
  • Method #3: Her income exceeded $200,000 in each of the two most recent years and she has a reasonable expectation that her income will exceed $200,000 in the current year;
  • Method #4: Her joint income with her spouse exceeded $300,000 in each of the two most recent years and she has a reasonable expectation that their joint income will exceed $300,000 in the current year.

A few examples:

EXAMPLE 1: Husband’s net worth is $1,050,001 without a principal residence. Wife’s has a negative net worth of $50,000 (credit cards!). Their joint annual income is $150,000. Husband is accredited under Method #1 or Method #2. Wife is accredited under Method #2.

EXAMPLE 2: Husband’s net worth is $1,050,001 without a principal residence. Wife’s has a negative net worth of $500,000 (student loans!). Their joint annual income is $150,000. Husband is accredited under Method #1. Wife is not accredited.

EXAMPLE 3: Husband’s net worth is $850,000 and his income is $25,000. Wife’s has a negative net worth of $500,000 and income of $250,000. Husband is not accredited. Wife is accredited under Method #3.

Now, suppose Husband and Wife want to invest jointly in an offering under Rule 506(c), where all investors must be accredited.

They are allowed to invest jointly in Example 1, because both Husband and Wife are accredited. They are not allowed to invest jointly in Example 2 because Wife is not accredited, and they are not allowed to invest jointly in Example 3 because Husband is not accredited.

The point is that Husband and Wife may invest jointly only where both Husband and Wife are accredited individually. At the beginning, I asked “How can we conclude that a married couple is accredited?” The answer: There is no such thing as a married couple being accredited. Only individuals are accredited.

CAUTION: Suppose you are an issuer conducting a Rule 506(c) offering, relying on verification letters from accountants or other third parties. If a married couple wants to invest jointly, you should not rely on a letter saying the couple is accredited. Instead, the letter should say that Husband and Wife are both accredited individually.

Questions? Let me know.

Simple Wholesaling Podcast: Raising Money Online for Your Deals & More

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Mark Roderick appeared on the Simple Wholesaling Podcast to talk about crowdfunding and the laws and logistics of raising money online.

In this episode, Mark discusses:

  • Mark’s story
  • Raising capital online
  • Businesses that have been very successful
  • How entrepreneurs and the consumers are protected online
  • Portals he recommends
  • Where people should start if they’re interested to try crowdfunding
  • The “don’ts” when trying to raise money on the Internet
  • What accredited investor means
  • The types of returns entrepreneurs pay out to their crowd investors
  • The effects on the stock market when we have many options to invest in different things

The Exchange with KB: Crowdfunding, Blockchain & Cryptocurrencies

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Mark Roderick appeared on The Exchange with KB podcast with host Kirill Bensonoff, where he discussed Crowdfunding, Blockchain & Cryptocurrencies. In this episode, Kirill and Mark discussed the JOBS Act, Title II Crowdfunding, Accredited Investors, Regulation Crowdfunding, why we need investment regulation, the future of cryptocurrency, Libra and other blockchain tech and cryptocurrency, and legislation regarding blockchain and crypto.

School for Startups Radio: Crowdfunding Update with Mark Roderick

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Mark Roderick appeared on School for Startups Radio with Jim Beach to discuss the current state of crowdfunding and how the industry is progressing. He discusses the booming real estate crowdfunding industry and how the rest of the crowdfunding space measures up.

The Cashflow Hustle Podcast: Crowdfunding Techniques to Level Up Your Business

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Mark Roderick appeared on the Cashflow Hustle Podcast with Justin Grimes, where he discussed Crowdfunding Techniques to Level Up Your Business.

In this Episode, You’ll Learn About:

1. The Crowdfunding and its flavors
2. The deductions in Crowdfunding
3. The role of SEC
4. Blockchain technology in Crowdfunding
5. The Investor portals
6. Tokenized security in Crowdfunding

Questions? Let me know.

Facebook’s Cryptocurrency

Facebook just announced a Facebook cryptocurrency called Libra.

To me, the timing seems poor. Over the last year or so, Facebook has suffered one public relations black eye after another regarding its privacy policies, it compliance with an order of the Federal Trade Commission, its role in disseminating conspiracy theories and election interference, and its dominance in the social media industry. A Facebook cryptocurrency will, by definition, give Facebook even more private information and even more financial power. Already, regulators and members of the public are shouting “No!”

A few thoughts about what this means:

  • Not long ago, some predicted that cryptocurrencies would lead to a better world, a world that would be more free, more decentralized, where consumers could interact with one another without middlemen. Libra, a cryptocurrency created by one of the most powerful companies in the world, seems to promise exactly the opposite.
  • It didn’t take long to get from idealism to disappointment, but the arc itself is typical of technologies, from radio to automobiles to the internet. We expect technologies to save us, then they don’t.
  • Are tokens securities? Does Howey apply? Facebook’s announcement shows that those questions are small potatoes in the scheme of how cryptocurrencies may re-shape the financial world.
  • Undoubtedly, Facebook is in this for the data. Will consumers care? Probably not.
  • Facebook might be first, but how long can it be before Google and Amazon — especially Amazon — issue their own cryptocurrencies?
  • Regardless of political persuasion, governments aren’t going to allow Facebook or anybody else to compete with their national currencies. We are already seeing opposition from Democrats and Republicans alike, and we can expect more.
  • And the next step: How long can it be before the U.S. dollar itself is given the features of a cryptocurrency, in effect competing with Facebook?
  • The price of bitcoin increased on the announcement, but I think that’s exactly wrong. The announcement shows that bitcoin and other cryptocurrencies will be left behind as big companies take over, just as a few big companies now monetize the once-egalitarian internet.
  • In the same way, I expect the announcement to stifle innovation in the cryptocurrency industry generally, just as the existence of Facebook already stifles innovation in social media and Microsoft once stifled innovation in software. Nobody wants to compete with the giant.

As all six readers of this blog know, I’m a believer in Crowdfunding from a capitalist, ideological perspective. I believe in making capital available to entrepreneurs everywhere, no matter where you grew up, no matter who your parents are, and in making great investments available to ordinary Americans, helping to narrow the wealth and income gaps that do so much harm to our society.

Frankly, Facebook and Libra feel like a step in the opposite direction, toward a world where knowledge and wealth and power are more concentrated and ordinary Americans are so many data points to be monetized. I’m certainly interested in hearing a different point of view.

Questions? Let me know.

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 mark.roderick@flastergreenberg.com

The Wealthy Wellthy Podcast: What You Don’t Know About Crowdfunding

The Wealthy Wellthy Podcast: What You Don’t Know About Crowdfunding

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Our guest on this episode of The Wealthy Wellthy Podcast is Mark Roderick, an attorney who devotes most of his time to crowdfunding. Maybe you are like me in thinking that crowdfunding is pretty straightforward and self-explanatory. I mean, if your friend is looking to start a business and you want to support them, you can donate or invest through their crowdfunding page online and that’s that, right?

Every entrepreneur faces the stage in their business where they need to acquire capital, either from acquaintances, networking, angel investors, venture capitalists, or strategic partners. This process is messy and confusing, filled with regulations and stipulations that may make acquiring the capital more trouble than it is worth. This was partially due to the antiquated laws that were created in the aftermath of The Great Depression and were stifling in the modern economic climate. However, in 2012, the Jobs Act made it legal for entrepreneurs to advertise to raise capital. This opened up a whole new world for small business owners and others who were desperate to be able to connect more easily with potential investors as well as investors who were eager to find new opportunities.

During the interview, Mark distinguishes between the 3 kinds of crowdfunding: (1) to accredited investors only, (2) Regulation A to accredited or non accredited investors, and (3) Title 3 – which is the most common. He also talks about the factors that are most important from a legal perspective when you are determining which crowdfunding site to use to raise capital or to invest capital. It was also interesting to hear Mark spell out the 3 reasons why people invest through crowdfunding: (1) they want to support the company, (2) to do social good, and (3) to make money.

Mark even gave me some advice about a real estate deal I am considering and revealed that 90-95% of the capital exchanged through crowdfunding is for real estate transactions. Finally, he busted a couple of myths regarding the amount of risk involved in crowdfunding and whether money raised from others is subject to securities laws.

What We Covered

  • [2:16] – Who is Mark Roderick?
  • [3:28] – Mark describes the fragmented traditional ways of raising capital.
  • [8:58] – Angel investors and how to present your “deck” to them.
  • [11:08] – Working with venture capitalists and strategic partners.
  • [13:31] – A brief history of the laws affecting capital.
  • [22:34] – What does crowdfunding look like for startup entrepreneurs?
  • [27:20] – How to find a regulated site to post your capital request on.
  • [30:58] – Crowdfunding is the intersection of old and new school.
  • [34:57] – Advice to keep in mind when you are using a crowdfunding site.
  • [38:06] – Mark tells us 3 of the crowdfunding sites he works with.
  • [40:08] – When should an entrepreneur hire an attorney during this process?
  • [42:40]– The prevalence of real estate in the crowdfunding world.
  • [53:24] – What message does Mark want to get out there?
  • [56:17] – Mark busts 2 myths about crowdfunding.

Questions? Let me know.

Crowdfunding & Fintech for Real Estate Podcast

CF and Fintech for Real Estate Podcast

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Technology has made it easier to raise capital for real estate deals. Since Crowdfunding has grown exponentially, John Casmon, host of the popular Target Market Insights podcast, invited me on his show to learn more about crowdfunding and fintech (financial technology).  On this episode, I talk about different ways to use the internet to raise money and the impact new technologies will have on the way we buy real estate.

Key Market Insights

  • Crowdfunding is raising money on the internet

  • Two versions – donation based (think Kickstarter) and equity based

  • Crowdfunding is online syndication with 3 flavors: title 2, title 3 and title 4

  • All crowdfunding falls under the JobsAct

  • Title 2 is very similar to 506c for accredited investors

  • Title 3 is very different, can only raise $1MM annually

  • Title 4 can raise $50 million

  • FinTech – any technology disrupting the financial services industry

  • Many believe banks should be a disintermediary

  • Roboadvisor apps are apart of FinTech

  • Online syndication is not more risky than traditional syndication

  • Anytime you take money, you can be sued

  • When done properly, you should not be exposed to any actual liability – even if they lose money

  • Blockchain technology could disrupt the real estate industry

  • Blockchain is a database or ledger that cannot be changed and has no central authority – everyone must consent

  • Title companies and other “middle men” could be pushed away through blockchain

Questions? Let me know.

What’s an Investment Adviser in Crowdfunding?

 

investment adviser.jpgAs Crowdfunding grows and investment advisers migrate into the space, we’re going to devote a few blog posts to investment adviser basics:

  • Federal vs. State regulation of investment advisers
  • Advisers to private funds
  • Venture capital advisers
  • Duties of investment advisers
  • Registration of investment advisers

Today we start with the most basic question:  What is an investment adviser?

Here’s the definition from the Investment Adviser Act of 1940:

“[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . .”

The term “securities” is very broad, covering obvious things like stock, bonds, and interests in limited liability companies, but less obviously things like (1) mortgages, and (2) blockchain tokens that are treated as securities under Howey.

EXAMPLE #1:  Molly Smith operates a Crowdfunding site that allows investors to participate in specific mortgage loans made to real estate fix-and-flippers. Because investors choose their own mortgage loans, Molly probably isn’t an investment adviser.

EXAMPLE #2:  Samantha O’Hara creates a fund that buys and sells mortgage loans made to real estate fix-and-flippers. If Samantha is deciding which loans the fund will buy and sell, she’s probably an investment adviser.

EXAMPLE #3:  John Kelly, software engineer, reads the Wall Street Journal and often gives investment tips to his friends. Because he’s not in business and not being compensated, John isn’t an investment adviser.

EXAMPLE #4:  Craig Toricelli creates a fund that buys and sells apartment buildings. Because a fee simple interest in real estate isn’t a “security,” Craig isn’t an investment adviser.

EXAMPLE #5:  Gregg Wright creates a fund that buys and sells bitcoin (buy on the dip!). Because bitcoin isn’t a “security,” Gregg isn’t an investment adviser.

A few common exceptions:

  • Lawyers, accountants, engineers, and teachers aren’t investment advisers if their performance of advisory services is solely incidental to their professions.
  • Brokers and dealers aren’t investment advisers if their performance of advisory services is solely incidental to the conduct of their business as brokers and dealers, and they do not receive any special compensation for advisory services.
  • Publishers of bona fide newspapers, newsletters, and business or financial publications of general and regular circulation aren’t investment advisers if their publications meet three requirements:
    • The publication must offer only impersonal advice, e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio.
    • The publication must contain disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities.
    • The publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry.

EXAMPLE:  Each time Cindy Liu, Esquire finishes work on an ICO, she post on her Facebook page:  “Take a look!” Even If her clients think they’re paying for the publicity as well the legal work, Cindy’s not an investment adviser, because she’s not being paid by her Facebook friends.

In that list, you don’t see “advisers to private funds” or “advisers to family offices.” That’s because while these and other common species of investment advisers are exempt from registering with the SEC, they are still investment advisers, which means (1) they are still subject to certain legal obligations, and (2) they still might have to register with a state. More on all that later.

Questions? Let me know.

Section 17(b) of the Securities Act in Crowdfunding and Token Sales

Among the tricks of Wall Street bad guys is the fake financial analysis, prepared (and paid for) to promote a particular stock but presented as an objective review. Section 17(b) of the Securities Act of 1933 was written to stop that:

It shall be unlawful for any person. . . . to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof [italics added].

It’s no joke. For example, in April 2017 the SEC brought an enforcement action charging 28 businesses and individuals for participating in a scheme to generate bullish articles on investment websites like SeekingAlpha.com, Benzinga.com, and SmallCapNetwork.com while concealing the compensation.  See Press Release, SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors, Rel. No. 2017-79 (Apr. 10, 2017).

Hypothetical examples in the Crowdfunding and token world:

  • NewCo pays an industry periodical to publish an article written by NewCo that purports to objectively rate the “Top 10 ICOs of 2018” and happens to list NewCo’s ICO as #1. Section 17(b) doesn’t make the article illegal, it just says the periodical has to disclose both the fact that it’s being paid and the amount of the payment.
  • If NewCo paid me to highlight its ICO on this blog, I’d have to report the compensation.
  • A real estate Crowdfunding platform sends an email promoting an offering, or a group of offerings, on its platform. That email is not covered by section 17(b) because of the italicized language above, i.e., it’s clear that the email is an offer of securities (which raises its own issues, separate from section 17(b)).
  • An investor relations firm places favorable articles about NewCo in trade publications while NewCo’s ICO is live. Those articles are covered by section 17(b).
  • A live event called “ICO Summit World” purports to highlight “The Most Promising ICOs of 2018,” but presents only companies that pay to play. Definitely covered by section 17(b).

My sense is that in the Crowdfunding world, and especially in the token world, there’s a lot of paid promotional activity going on without the disclosure required by section 17(b). The securities laws don’t apply to tokens, right?

Questions? Let me know.

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