Crowdfunding now comes in multiple flavors:
- Title II Crowdfunding – Rule 506(c)
- Title III Crowdfunding
- Title IV Crowdfunding – Regulation A+
- Existing Regulation A
- Rule 504 of Regulation
All have one thing in common: the entrepreneur can use “general solicitation and advertising” to raise money.
But that’s all they have in common. They differ on such critical features as:
- Who is allowed to invest
- How much money can be raised
- Whether Internet portals can be used
- How much each investor can invest
- The degree of SEC oversight
- Whether foreign companies can participate
I’ve created a chart to keep it all straight – a Crowdfunding Cheat Sheet. The chart won’t
format properly here in the blog, so you’ll need to click here to view it. You might want to print it for future reference.
CLICK HERE TO VIEW THE CROWDFUNDING CHEAT SHEET
This is my takeaway from the chart:
Of the five flavors of Crowdfunding that will soon be available, only Title II Crowdfunding and Regulation A+ Crowdfunding are likely to play a major role. Title III Crowdfunding – ironically, the only thing the media talked about when the JOBS Act was passed in 2012 – seems doomed to a non-speaking part, at least as long as the $1 million limit remains in place. Those satisfied with raising money from only accredited investors will probably look to the simplicity of Title II while those needing to cast a wider net will likely take the plunge into Regulation A+. As for Rule 504 and the old version of Regulation A – they’re history.
But it’s a brand new world in the capital markets, and impossible to predict.
Questions? Contact Mark Roderick.
I have been asked by the New Jersey Institute of Continuing Legal Education to present a webinar on the recent change of Crowdfunding rules. The program will take place on Wednesday, October 9, 2013 and has been approved for CLE credits. For additional information on the webinar, or to register, click here.
More info: Crowdfunding – A Monumental Change in Securities Law
Now, for the first time, small companies and entrepreneurs will be able to raise money directly from the public using newspaper advertisements, Facebook pages, and other means of “general solicitation,” without going through brokers or other middlemen.
My presentation, entitled “A Monumental Change in Securities Law: Crowdfunding is Now Open for Business,” will discuss the basic changes to the law, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”
I concentrate my practice on the representation of entrepreneurs and their businesses. I represent companies across a wide range of industries, including technology, real estate, and healthcare. I am also spearheading my firm’s Crowdfunding Practice.
Check back frequently for information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business.
Feel free to contact me directly with any questions.
A company raising money through Crowdfunding will face certain logistical challenges:
- How to keep track of prospective investors
- How to automate the due diligence process
- How to execute documents electronically and securely
- How to communicate with investors
- How to securely handle the transfer of funds
- How to satisfy the new SEC requirements regarding accredited investors
- How to prepare and file the newly-expanded Form D with the SEC
These challenges have always been present in Regulation D offerings, but with a dozen investors, or two dozen, or three dozen, they were merely a manageable nuisance. In a Crowdfunding offering with 150 investors they could be overwhelming.
SeedInvest, a startup with offices in Manhattan, offers a technology platform that claims to do all these things and more. A company seeking to raise money through Crowdfunding, or a brokerage firm seeking to raise money for its clients, or an angel group seeking to manage multiple investments, would in effect “rent” the SeedInvest platform as an alternative to spending the time and money to build its own.
Today, thousands of entrepreneurs – perhaps some of them reading this blog – are planning to jump into the Crowdfunding space. One entrepreneur might be building a portal for biotech companies in the Northeast – a place where investors could find and invest in the best the research centers in the Northeast have to offer. Another might be doing the same for Manhattan commercial real estate, believing there must be many accredited investors around the country who would like to own a piece of New York. And on and on, in every industry and every region.
By using SeedInvest’s platform, or a similar platform offered by a competitor, the entrepreneur overcomes some of the most significant technological and logistical barriers to entry. In effect, the entrepreneur can focus on the business of attracting quality companies and investors while outsourcing the technological back office.
Crowdfunding is already creating new opportunities for entrepreneurs in many industries. SeedInvest is one example; there will be many, many more.
Questions? Contact Mark Roderick at Flaster/Greenberg PC.
Having just allowed the use of advertisements and “general solicitation” to raise money, the SEC now proposes several steps to protect investors and keep track of the explosion in Crowdfunding the new rules are certain to trigger.
Beefing Up Form D
Form D has been around for along time, but now the SEC proposes to beef it up significantly. The company raising money through general solicitation will now have to:
- File a Form D no later than 15 days before first engaging in general solicitation.
- File a closing amendment to Form D within 30 days after the offering has been completed or abandoned.
- Disclose much more information in the Form D, including:
- Its website address;
- Specific uses of the proceeds of the offering;
- The number and types of accredited investors participating in the offering;
- Whether general solicitation materials were filed with FINRA;
- The types of general solicitation used or to be used; and
- Methods used or to be used to verify the accredited investor status of purchasers.
The SEC also proposes a number of new legends that must appear in general solicitations, including that the securities can only be sold to accredited investors, that the SEC has not passed on the merits of the offering, that investing entails risk (!), and that past performance does not guaranty future performance.
Sending General Solicitation Material to the SEC
Finally, the SEC proposes that companies must submit their written general solicitation materials to the SEC, on a temporary basis, by no later than the date of first use of the materials. This rule would expire two years after its effective date, presumably giving the SEC enough time to see what is happening in the marketplace and issue a new or different rule as it sees fit.
* * *
Unlike the rules allowing general solicitation, these new rules are merely proposals, and could be revised or withdrawn after a 60 day public comment period.
Questions? Contact Mark Roderick at Flaster/Greenberg PC.