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

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

2019-06-20_10-54-52

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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.

Syndications, Cryptocurrencies and Crowdfunding, Oh My!

Real Estate Nerds Podcast: Syndications, Cryptocurrencies and Crowdfunding, Oh My!

real estate nerdsCLICK HERE TO LISTEN

Mark Roderick fills us in on how the rich can take care of themselves and the non-rich need the government which is why he thinks crowdfunding is so important to the regular Joe. Since the JOBS Act of 2012, Mark has spent much of his time in the crowdfunding space.

If you have ever thought to yourself the internet is a ruthless landscape slowly squeezing the middleman and driving human being up the value chain? Then you’ll want to tune into this week’s episode where Mark will explain everything from syndications to cryptocurrencies to crowdfunding, oh my!

Questions? Let me know.

Podcast: Mark Roderick Talks Real Estate Syndications

MSR Podcast Real Estate

Lifetime CashFlow through Real Estate Investing Podcast with Rod Khleif

Special Guest: Mark Roderick

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In this episode of Lifetime CashFlow through Real Estate Investing, you will learn:

  • Real Estate Syndications OPM (Other People’s Money) and Securities Laws;
  • Understanding Securities Exemptions;
  • Most common exemptions for syndications;
  • The 506(b) exemption;
  • Accredited Investors Sophisticated Investors;
  • The JOBS ACT; and
  • The 506(c) exemption Understanding Reg A Documents for Syndication.

Questions? Let me know.

Tokenization: The Legal Take on Jobs Act Equity Crowdfunding and Security Token Offerings

Podcast: Regulation A+ Crowdfunding

Tokenization podcast MSR

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If you’re a entrepreneur, you’re probably looking for some way to raise capital. You probably have heard of crowdfunding, but you may not have heard of the Jobs Act of 2012 and how it relates to crowdfunding – which is significant because its potential is enormous. Besides Regulation A+, Reg. CF, and Title II crowdfunding options to name a few, now investors and issuers can take advantage of the “tokenization” of assets via Security Token Offerings based on blockchain technology. However, there are complicated rules associated with all aspects of crowdfunding, which is why it’s so important to have legal representation throughout all phases of the process.

In this podcast episode, we interviewed crowdfunding attorney Mark Roderick from Flaster Greenberg PC who gave us many insights on crowdfunding in general, plus his take on tokenization and what security tokens can actually do for issuers and investors alike. Forget what everyone says about raising money. As stated on the podcast, crowdfunding is a marketing business, but it’s smart to have legal counsel at all times too – which is why anyone thinking of getting involved with crowdfunding on any level would be wise to contact Mr. Roderick and read his crowdfunding blog where you can find hundreds of posts with excellent information dedicated to legal crowdfunding success. See that? Sometimes lawyers can be your friend!

And speaking of crowdfunding, according to Mark, about 90% of the Reg.A+ crowdfunding deals he’s seen is regarding real estate. You know what most of the Reg.CF deals are? (here’s a hint).

Questions? Let me know.

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.

 

 

Will Someone Please Offer Investment Advice For Crowdfunding?

business handshake

Very few retail investors have the skill to pick a great deal from a mediocre deal. I know I don’t, and I’ve been representing real estate developers and entrepreneurs my whole career.

Taking a cue from the public stock market, one way to address the retail market is to create the equivalent of a mutual fund for Crowdfunding investments. You would create a limited liability company to act as the fund, raise money from investors using Crowdfunding, and the manager would select investments from Crowdfunding portals.

Great idea conceptually, but it doesn’t work legally:

  • The LLC would, by definition, be an “investment company” under the Investment Company Act of 1940. As such, you would be prohibited from using Title III or Title IV to raise money for the fund.
  • You could use Title II to raise money for the fund, but as an investment company the fund would be subject to extremely onerous and costly regulation, e., the same regulation that applies to mutual funds. To avoid the regulation, you would have to limit the fund to either (1) no more than 100 accredited investors, or (2) only investors with at least $5 million of investments. In either case, you defeat the purpose.

But there is another way! A licensed investment adviser could offer investment advice with respect to investments in Crowdfunding projects and, for that matter, make the investments on behalf of his or her retail customers, charging an annual fee based on the amount invested. The adviser would allow each retail investor to effectively create his or her own “mutual fund” of projects based on individual preferences.

Not only would the investment adviser make money, the availability of unbiased advice would draw retail investors into the space – a win for the industry.

To quote Pink Floyd, is there anybody out there?

Questions? Let me know.

A Regulation A+ Primer

Regulation A Plus Women GossipingNo disrespect to Kim Kardashian, but I think the SEC’s proposals for Regulation A+ have come closer to breaking the Internet than the photos I heard about last year – although that could be a function of the circles I travel in.

My contribution started as a blog post but got too long for a blog post. Hence, I’m providing this Regulation A+ Primer as a separate link. Within the Primer are links to:

I am trying to provide not just technical details in the Primer – which are important – but also practical advice about the cost of Regulation A+ offerings, the advantages and disadvantages, and examples.

If you have thoughts, as many of you will, I am eager to hear them and plan to supplement the Primer.

Questions? Let me know.

Will Crowdfunding Hurt My Company Later On?

With bona fide JOBS Act Crowdfunding about to launch, many entrepreneurs wonder whether raising money through Crowdfunding will hurt their company in the future.

The simple answer: not if you do it the right way.

A company raises money for its current needs, naturally. But no matter where the money is coming from, Crowdfunding or otherwise, the company must have one eye on the future to ensure that nothing it does today will keep it from raising more money tomorrow.

Here are a few tips to avoid problems in the future:

  • The Crowdfunding investors should not have the right to veto later rounds of financing.
  • The Crowdfunding investors should not be able to control the company’s Board of Directors.
  • The Crowdfunding investors should have very limited liquidity rights, if any.
  • The company should be able to grant later investors economic and management rights – for example, a preferred return on sale – that are superior to the rights of the Crowdfunding investors.

These things and much more can be accomplished with the right legal structure for the company and the Crowdfunded investment. In fact, if Crowdfunding is done correctly, it should not interfere with subsequent rounds of investment at all.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

WHEN CAN MY INVESTORS SUE ME?

You’ve raised money from investors, through Crowdfunding or otherwise. You did everything right through the money-raising process, such as disclosing all the right information. What are your obligations to the investors/shareholders as you now operate the company? Or, to ask the question in a more negative but practical way, when can they sue you successfully?

The exact answer depends primarily on (1) the state you chose to incorporate, (2) whether you are a corporation or a limited liability company, and (3) whether you included provisions in your governing instruments (Certificate of Incorporation, Operating Agreement) to protect yourself. State laws are not uniform and there can be enormous differences between LLCs and corporations.

Nevertheless, we will assume that you are in a “normal” state and that your lawyer prepared “normal” documents. That allows us to generalize by saying you can be sued successfully under these two circumstances:

  • You make business decisions that are unusually bad and careless.
  • You take actions that unfairly benefit yourself to the disadvantage of your company.

Under the laws of “normal” states, if you try your best, pay attention, review relevant information beforehand, and have the best interests of the company at heart, it is fairly hard to make a business decision so poor that you can be sued successfully by investors. The hands-off approach taken by statutes and courts in this area – referred to as the “business judgment rule” – recognizes that management must often make decisions without complete information, that decisions are easy to challenge with the benefit of hindsight, and that if investors were allowed to sue for every poor decision, judges could never take vacations.

It is much easier to be sued successfully where you take actions that unfairly benefit yourself to the disadvantage of your company. Examples:

  • You lease office space to your company for higher-than-market rent.
  • You borrow money from your company when you shouldn’t, or on unfair terms.
  • Your company is in the business of developing digital imaging software, but when you are approached by an inventor with a new technique, you form a new company with the inventor and don’t offer the opportunity to your old company.

Investors are an odd group inasmuch as when they lose their money they tend to be unhappy. This means that even before raising money you should:

  1. Make sure your governing instruments include the right language;
  2. Get good legal advice; and
  3. Get a quote for Director and Officer (“D&O”) insurance.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

THE GOLD RUSH – PART ONE

A man and woman created a Crowdfunding campaign for their newborn. A company raised $2 million in one day. The SEC regulations to launch “real” Crowdfunding per the JOBS Act might be far off, but the Crowdfunding gold rush is already well underway.

The excitement – the discovery of an enormous vein of money flowing into a brand-new channel – holds many opportunities. If you are an entrepreneur looking for funding there have never been more places to look. No longer beholden to a broker or a wealthy aunt or a lawyer with a big Rolodex, every entrepreneur now has ready access to the biggest Rolodex in the world: the Internet.

Seizing their own opportunity, Crowdfunding portals are springing up like Western mining towns with names that can become nationally-recognized overnight. Circle Up, SeedInvest, and Funders Club are among the equity-based portals while Kickstarter and Indiego remain the leaders in donation- or rewards-based projects, at least for the time being. New portals are being formed and coming online all the time as eager prospectors look for their share of the gold.

Others are poised to benefit as well:

There is an enormous and growing need for someone to perform meaningful due diligence on all the new companies, beyond the information that might be posted online. The new structures and relationships will require new insurance products, some of which are already being developed. If it hasn’t happened already, someone is going to offer to represent Crowdfunding investors on the Boards of Directors of far-flung companies. Every company funded by the Crowd will need an investor relations platform.

With so few barriers to entry, the opportunity to stake a claim in the Crowdfunding gold rush is practically unlimited today.

Bear in mind, all this is happening before true JOBS Act Crowdfunding springs to life, probably by late summer. When that happens, companies will be able to legally raise money from large numbers of non-affluent, unsophisticated investors for the first time in 80 years, uncovering the largest vein of capital yet.

One thing seems certain. With all the gold and all the gunslingers, some things will go wrong and some people will get hurt. In our next post, we’ll offer some pointers so you’re not one of them.

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

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