Category Archives: Title III Crowdfunding

AUSTIN ROUNDUP

Austin cityscapeHats off to the folks at Coastal Shows for making the Austin event – officially the CFGE Crowdfund Real Estate Summit – the best Crowdfunding event ever.

The event featured the leading players in the industry:

Title III of the JOBS Act may be flawed, and the final rules for Regulation A+ may be long overdue, but the speakers and panelists agree that Crowdfunding is here to stay, with Title II leading the way. Two days before the conference began, Fundrise raised $31 million of capital in a Series A round of financing. That served as a very useful background, illuminating the potential of a market that promises to transform the U.S. capital formation industry.

Over coffee during the day and beer in the evening, I spoke with dozens of real estate developers and entrepreneurs. Their message came through loud and clear: We’re tired of dealing exclusively with our traditional sources of capital and are eager to raise money through Crowdfunding channels.

Developers are eager for new sources of capital, and individual investors are eager to participate in a market that, until now, has been reserved for institutions and the very wealthy. That’s Crowdfunding, in a nutshell.

What happens in Vegas might stay in Vegas, but what happened in Austin is going to spread across the country. Thanks for a great event, Coastal Shows.

A DOWNPOUR OF #CROWDFUNDREALESTATE ADVICE AND IDEAS

Thank you to the panelists and audience members who braved a biblical downpour to attend the SOLD OUT Harvard Business School Club Innovations in Real Estate: Crowdfund Investing program last night at the UJA Federation of NY Conference Center. Former New York Governor David Paterson kicked off the evening with his typical wit and insight before our panel of Crowdfunding industry experts shared their experiences and knowledge with an extremely engaged and thoughtful audience.

Our panelists:

  • Jason Fritton of Patch of Land and William Skelley of iFunding, two of the earliest Crowdfunding innovators and most successful Title II portals
  • Elvin Ames of Golden Eye Investments and Erin Wicomb of Mavrix Group, two experienced and successful real estate developers who have recently turned to Crowdfunding to raise capital
  • Scott Lichtman, a real estate investor who has himself invested in Crowdfunded deals and did a super job putting the conference together

Thus, all sides the Crowdfunding triangle were represented: portals, developers, and investors. And Jason, William, Elvin, Erin, and Scott – not to mention Governor Paterson – acquitted themselves with flying colors, demonstrated why they have been so successful generally and specifically why they have been leaders in Crowdfunding.

Some of the issues discussed:

  • The build-out of the Title II portal market, and how it is likely to segment into verticals
  • How portals successfully distinguish themselves
  • What investors look for in a portal and a project sponsor
  • The legal basis for Crowdfunding, and its significance in the marketplace
  • Why Crowdfunding is attractive to developers
  • How portals can participate in community development and “do well by doing good”
  • How portals market and price their services
  • How developers distinguish their projects
  • What due diligence means in a Crowdfunded environment

Judging by the number and quality of questions from the audience following the presentation, there are likely a few dozen more Crowdfunding entrepreneurs this morning than there were yesterday. Including one statistician, who asked about the standard deviation of Crowdfunding investments.

Thanks again to everyone. I hope to stay in touch with all of you. Email me at mark.roderick@flastergreenberg.com, subscribe to my Crowdfunding blog at www.crowdfundattny.com, or follow me on Twitter at @CrowdfundAttny.

LEGAL FOCUS ON CROWDFUNDING

Lawyer Monthly magazine has been following Crowdfunding developments, along with the
business community and media. The attached interview highlights a couple of hot button points, including the benefits and common legal implications of Crowdfunding. Click here to read more.

legal focus on crowdfunding

Questions? Contact Mark Roderick.

CROWDFUNDING CHEAT SHEET

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 investCFCS
  • 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.

SEC TAKES DIFFERENT APPROACHES ON TITLE II AND TITLE III

If you didn’t know better, you might think the Title II Crowdfunding regulations and the Title III Crowdfunding regulations were written by two different agencies.

On one hand, the Title II regulations take a decidedly hands-off approach to the Crowdfunding marketplace. For example:

  • Title II Portals are required only to take “reasonable steps” to ensure that investors are accredited.
  • Issuers are not required to provide any particular information to prospective investors, not even any particular financial information.
  • Title II Portals are not obligated to register with the SEC.

Recall that in the first version of the Title II regulations, the SEC didn’t even include safe harbors for determining whether an investor is accredited. The safe harbors were added only after a public uproar demanding more rules from the SEC (and thus, from the government).

Even after the addition of the safe harbors, there are many, many questions that the Title II regulations don’t even address. Operating in laissez-faire mode, the SEC has left the answers to the marketplace and to the courts.

On the other hand, the Title III regulations – all 585 pages of them, including the preambles – impose stringent and detailed requirements on issuers and portals alike. For example:

  • Title III portals are required to register with the SEC.
  • Title III portals are required to perform detailed background checks on every issuer and its directors, officers, and significant shareholders.
  • Title III portals must deny access to any issuer if the portal believes the issuer “presents the potential for fraud or otherwise raises concerns regarding investor protection,” or if the portal is unable to adequately or effectively assess the risk.
  • Title III issuers are required to provide reams of information to the investing public, including:
  • The business and employment history of all its directors and officers for the previous three years.
  • The reasons why the investment is risky.
  • How the securities were valued.
  • The names of everyone who owns more than 20% of the stock.
  • An explanation how investors could be affected by the exercise of rights by the principals.
  • An explanation of the capital structure.
  • How the money from investors will be used.
    • Detailed information must be provided not only up front, but on an annual basis.
    • After subscribing, Title III investors are given the right to change their minds up to 48 hours before closing.

The Title III regulations, in fact, create a regulatory scheme that has far more in common with the rules that apply to publicly-traded companies than with the laissez-faire approach of the Title II regulations. The main question about the Title III regulations is whether they are so burdensome that they will snuff out Title III Crowdfunding before it begins.

Did different government agencies create the Title II and Title III regulations? Obviously not. The chasm between Title II and Title III can be explained by one fact:  Title II investors are all accredited (for individuals, income of at least $200,000 or net worth of at least $1 million) while Title III investors can be anyone. The assumption behind the regulations is that wealthier people can take care of themselves while those of modest means need the paternalistic protection of the government.

It’s a theme that has run through U.S. securities laws for a long, long time. We’ll see how well it works for Crowdfunding.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

IT’S EASY TO BE A TITLE III CROWDFUNDING PORTAL!

All you have to do is:

  • Register with the Securities and Exchange Commission by filing a Form Funding Portal and posting a bond of at least $100,000.
  • Notify the SEC within 30 days if any of the information on Form Funding Portal changes.
  • Join FINRA and comply with all its rules and regulations.
  • Implement written policies and procedures “reasonably designed to achieve compliance with the federal securities laws.”
  • Comply with the requirements of 31 CFR Chapter X relating to money laundering.
  • Comply with the requirements of 17 CFR 248 relating to privacy.
  • Permit inspection by all your records and facilities by the SEC.
  • For each issuer (company trying to raise money) listed on your platform, have a reasonable basis for believing the issuer (1) complies with all applicable requirements, and (2)  has established a way to keep accurate records of investors.
  • Deny access to any issuer if:
    • You believe the issuer is a “bad actor.” To enforce this requirement you must (at a minimum) conduct a background and securities enforcement check on each issuer and on each officer, director, and beneficial owner of at least 20% of the issuer.
    • You believe the issuer or the offering presents the potential for fraud “or otherwise raises concerns regarding investor protection.” How would you know? If you are unable to “effectively assess the risk of fraud,” you have to deny access.
  • Provide educational materials to potential investors that explain in plain language “and are otherwise designed to communicate effectively and accurately”:
    • The mechanism for purchasing stock of the issuer;
    • The risks of purchasing stock;
    • The types of securities offered on your platform and the risks of each type;
    • The restrictions on resale imposed by law or contract;
    • The kinds of information the issuer is required to provide;
    • The per-investor limitations on investment;
    • The investor’s right to cancel the investment, and the limitations on those rights;
    • The need for the investor to think about whether the investment is appropriate; and
    • That following the investor’s purchase of stock, there might be no further relationship between the investor and your portal.
  • Keep all those educational materials current on your website and, where appropriate, make any revisions available to investors before accepting investments.
  • Tell investors about the requirements applicable to promoters.
  • Disclose to investors how you are being compensated.
  • Make available to investors and the SEC – in
    downloadable form – all the information the issuer itself is required to make available, including:

    • The name, address, and website of the issuer;
    • The names of the directors and officers, their positions with the issuer, and their overall business experience over the last three years;
    • Each person’s principal occupation and employment, and the name and principal business of any other entity where the occupation and employment took place;
    • The name of each person who owns at least 20% of the issuer;
    • A description of the issuer’s business and business plan;
    • The number of the issuer’s employees;
    • A discussion of factors that make the investment risky;
    • The target offering amount, and a statement that if the target is not reached, all the money will be returned;
    • Whether the issuer will accept money in excess of the target, and how;
    • The purpose and intended uses of the offering proceeds;
    • A description of the process to complete a purchase and sale of stock, including statements that:
      • An investor may cancel his investment up to 48 hours before the deadline;
      • The portal (you) will notify investors when the target amount is reached;
      • The issuer may close the offering before the deadline if the target amount is reached; and
      • If the investor does not cancel his investment and the target is reached, the offering will close
    • That a material change is made after an investor commits, his or her money will be returned unless he or she affirmatively re-commits;
    • The price of the stock;
    • A description of the capital structure of the issuer, including:
      • A summary of all securities, including associated voting rights;
      • A statement how the exercise of rights held by the principal stockholders of the issuer could affect investors;
      • The name and “ownership level” of each person who owns 20% or more of the issuer;
      • How the stock purchased by the investor was valued, and might be valued in the future;
      • The risks associated with minority ownership and the issuance of additional securities in the future; and
      • A description of all restrictions on transfer;
    • The name of the portal (you);
    • The amount of your compensation;
    • A description of all indebtedness of the issuer;
    • A description of all non-public offerings of securities within the last three years, including:
      • The date of the offering;
      • The offering exemption;
      • The types of securities offered; and
      • The amount of money raised and how it was used;
    • A description of any transaction since the beginning of the issuer’s last full fiscal year, involving at least 5% of the amount to be raised in the Title III offering, in which any of the following had an interest:
      • A director or officer of the issuer;
      • A person who owned 20% or more of the issuer;
      • A promoter of the issuer; or
      • A family member of any of the foregoing;
    • A description of the issuer’s financial condition;
    • Financial statements (the kind of statement is based on how much money the issuer is raising);
    • Any matters that would have resulted in disqualification under the “bad actor” rules had they occurred after Title III became effective.
  • Make all of that information available to investors and the SEC on a Form C (newly created) at least 21 days before any securities are sold, update the progress of the offering, and keep all of the information available until the offering is completed or canceled.
  • Before accepting money from an investor:
    • Have a reasonable basis for believing the investor satisfies the applicable investment limitations (you can generally rely on the investor’s representations); and
    • Obtain from the investor:
      • A representation that the investor has reviewed the education materials and can bear the entire loss of his or her investment; and
      • A questionnaire demonstrating the investor’s understanding that:
        • There are restrictions on his or her ability to cancel the investment;
        • It may be difficult to re-sell the stock; and
        • Investing is risky – in fact, the investor should be able to afford the loss of his or her entire investment.
  • Establish communications channels (message boards?) that allow investors to communicate with one another and with representatives of the issuers about offerings on your platform, provided that:
      • You can’t participate in these communications;
      • You have to provide unlimited public access to the communications, but can allow comments only from those registered with your platform; and
      • You require anyone posting comments to disclose whether he or she is affiliated with the issuer;
  • Upon receiving a commitment from an investor, you must give him or her notification of:
    • The dollar amount of the commitment;
    • The price of the security;
    • The identify of the issuer; and
    • The deadline for canceling the commitment;
  • Establish a relationship with a bank as an escrow agent under a written escrow agreement and direct that:
    • Funds from investors be transferred to the issuer if the target amount has been reached, the cancellation period has expired, and at least 21 days have elapsed since the issuer’s information was first made available on your platform; and
    • Return the funds to the investor if the investor cancels or the offering terminates.
  • On or before the closing of the offering, give notice to all investors, providing:
    • The date of the closing;
    • The type of security purchased by the investor;
    • The identity, price, and number of securities purchased by the investor;
    • The total amount of securities sold by the issuer and the price(s) at which they were sold;
    • If the security is a debt security, the interest rate, the maturity date, and the yield to maturity;
    • If the security is callable, the first date it can be called; and
    • The amount and source of your remuneration.
    • If the issuer decides to close the transaction earlier than the deadline established initially, give notice to all investors, providing:
      • The date of the new deadline;
      • The right for investors to cancel up to 48 hours before the new deadline; and
      • Whether the issuer will continue to accept commitments during the 48 hour period before the new deadline.
  • If there is a material change to the terms of the offering or the information about the issuer, notify investors that all commitments will be canceled unless investors re-confirm their commitments.
  • If any investor fails to re-confirm within five business days, notify the investor and direct the return of his or her money.
  • If an offering is canceled, notify all investors, direct the return of their money, and ensure that no further commitments are made for the offering.
  • Maintain the following records for five years:
    • Records relating to each investor who purchased securities or tried to;
    • Records relating to each issuer that offered securities or tried to;
    • Records of all communications on your platform;
    • Records relating to anyone who uses your platform to promote securities or communicate with investors;
    • Records that document your compliance with the SEC’s rules and regulations;
    • All your notices to issuers and investors, including your Terms of Use;
    • All your contracts;
    • Daily, monthly, and quarterly summaries of transactions, including:
      • Transactions that have successfully closed; and
      • Transaction volume, expressed in:
        • Number of transactions;
        • Number of securities sold in transactions;
        • Total amounts raised by each issuer; and
        • Total amounts raised by all issuers; and
    • A log reflecting the progress of each issuer.
    • Maintain and preserve all your organizational documents.

But you must not:

  • Have any financial interest in any of your listed companies.
  • Receive any financial interest as compensation for your services.
  • Offer investment advice or recommendations.
  • Deny access to an issuer based on your assessment of the issuer’s prospects.
  • Solicit purchases, sales or offers to buy the securities offered on your platform.
  • Compensate employees or others for such solicitation.
  • Hold or manage investor funds.
  • Pay anyone for providing personally identifiable information of investors.
  • Pay anyone except registered brokers or dealers for directing issuers or investors to your platform on a commission basis.

That’s all you have to do!

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

Proposed Title III Crowdfunding Regulations: Better Late than Never

On October 23, 2013 the SEC proposed regulations to implement Title III Crowdfunding.

There are two extremely important things about the proposed regulations:

  • That they were issued. After a 90 day public comment period, it seems likely that Title III Crowdfunding will finally come into effect in the first quarter of 2014.
  • That they run to almost 600 pages. Given the complexity, there is some question whether, in the end, a company trying to raise money will find Title III Crowdfunding worthwhile.

Recall that the JOBS Act provides for two kinds of Crowdfunding:

  • Title II Crowdfunding allows companies to raise an unlimited amount of money from an unlimited number of accredited investors using general soliciting and advertising. That kind of Crowdfunding came into effect on September 23, 2013 and is now in full swing.
  • Title III Crowdfunding is a different animal. It allows companies to:
    • Raise up to $1 million per year;
    • On an SEC-registered internet portal;
    • From a unlimited number of investors who do not have to be accredited;
    • But with strict limits on the amount each investor can invest.

For a detailed outline of the Title III statute itself, click here.

Despite their length, the proposed regulations do not add much to the statute. There are just a few points worth noting for a company looking to raise money:

  • The company can use only one portal at a time.
  • The company must file information via EDGAR, the SEC’s electronic database.
  • The $1 million-per-year limit applies only to money raised in Title III offerings. Thus, a company could raise $3 million in a traditional private placement (or a Title II offering) while still raising $1 million in a Title III offering.
  • Investors can change their minds up to 48 hours before the investment deadline, in all circumstances, and must also be given the right to terminate in the event of a material change in the investment opportunity.
  • The company must disclose not only its own prior offerings, but the prior offerings in which its directors and other principals were involved.
  • The SEC has created a new Form C to report Title III offerings.
  • The company may advertise, but only to direct potential investors to the portal’s website. The company may not use general solicitation and advertising, as it can in a Title II offering.
  • “Bad actors” are excluded from Title III Crowdfunding, as they are from Title II Crowdfunding.

The proposed regulations are even more important for portals, or would-be portals. The portal is designated as the virtual policeman for ensuring compliance with the law. For example, the proposed regulations provide that the portal must have a reasonable basis for believing that company is complying with the law, and must deny access to the issuer under certain circumstances. In effect, the portal is required to act as an arm of the SEC itself.

Just as a company trying to raise money might decide that Title III is too onerous, an entrepreneur thinking about forming a Title III portal might decide that the fruit are a little too high and a little too green.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

SEC PROPOSES RULES FOR TITLE III CROWDFUNDING

Today, at long last, the SEC issued proposed regulations implementing Title III Crowdfunding, which will allow companies to raise up to $1 million per year in small increments from non-accredited investors.

With commentary, the proposed regulations run to almost 600 pages. We’ll be posting a summary soon.

Title II Crowdfunding has been live since September 23, 2013. The era of Crowdfunding is now.

Stay tuned for more updates…

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

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