Tag Archives: Flaster Greenberg

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.

Podcast: The Complete Guide to Investment Crowdfunding Regulations in the US

Podcast MSR Blog Post

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Are the countless rules, regulations and exemptions surrounding crowdfunding in the US starting to get too difficult to keep track of?

Katipult recently partnered with Mark Roderick to help you get a better understanding of regulation relevant to your company. In this podcast, Mark shares information that will help you navigate the complex crowdfunding regulations in the US.

Questions? Let me know.

Podcast: Crowdfunding From a Legal Perspective

Podcast for MSR

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What does the crowdfunding sector look like from a legal perspective? How do recent and previous laws passed by Congress impact startup entrepreneurs and crowdfunding campaigns? Here to give his unique take on the subject is one of the leading crowdfunding and financial technology lawyers in the United States, Mark Roderick. In his conversation with Roy, Mark opens up about the JOBS Act of 2012, the pros and cons of equity crowdfunding, various liability concerns that startup entrepreneurs should keep on their radar and much more. You don’t want to miss a minute of this engaging episode featuring Mark!

Questions? Let Mark know.

Why Qualified Opportunity Zone Funds Are the Hottest Topic of Crowdfunding Real Estate

Podcast: MAPABLE USA 

Why Qualified Opportunity Zone Funds Are the Hottest Topic of Crowdfunding Real Estate

Mapable USA Podcast

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The word is out about Qualified Opportunity Zones (QOZ) and just about every real estate professional in the country is interested about how this IRS sanctioned program works. Investing in a QOZ Fund provides all Americans with a way to save money on their taxes and provides real estate developers with a great angle to raise money for their projects. But are these investment vehicles securities? Can non-accredited investors participate in this form of crowdfunding? How can issuers create their own fund? Listen to attorney Mark Roderick from Flaster Greenberg PC address these questions, what the intricacies of QOZ investing are, and many other items of interest on this episode of the Mapable USA crowdfunding podcast.

While most funds center around real estate projects, any form of substantial improvement into a Qualified Opportunity Zone will satisfy the requirement of a QOZ fund – and that includes bringing in businesses and employment opportunities into these distressed communities. As such, the QOZ Marketplace is a website in progress connecting and identifying Qualified Opportunity Zone tracks and census data, along with a list of Opportunity Zone Funds and real estate properties for those interested in QOZ investing. Because of their tax deferral benefits, getting people seeking to defer their capital gains taxes to invest in these funds probably won’t be an issue. But Mr. Roderick brings up a great point: because QOZ Funds are self-certified, it’s important to be on the outlook for fraud. His advice? Look for a deal with a strong foundation with reputable people – the tax deferral savings is just icing on the cake!

Recent Blog Posts related to QOZ Fund:

Questions? Let me know.

Non-U.S. Investors and Companies in U.S. Crowdfunding

Non-US Investors and Companies in US Crowdfunding

When I was a kid, back in the 1840s, we referred to people who live outside the United States as “foreigners.” Using the more globalist and clinical term “non-U.S. persons,” I’m going to summarize how people and companies outside the U.S. fit into the U.S. Crowdfunding and Fintech picture.

Can Non-U.S. Investors Participate in U.S. Crowdfunding Offerings?

Yes. No matter where he or she lives, anyone can invest in a U.S. Crowdfunding offering, whether under Title II, Title III, or Title IV.

The Crowdfunding laws don’t distinguish U.S. investors from non-U.S. investors. Thus:

  • To invest in an offering under Title II (SEC Rule 506(c)), a non-U.S. investor must be “accredited.”
  • If a non-U.S. investor invests in an offering under Title III (aka “Regulation CF”), he or she is subject to the same investment limitations as U.S. investors.
  • If a non-U.S. investor who is also non-accredited invests in an offering under Tier 2 of Title IV (aka “Regulation A”), he or she is subject to the same limitations as non-accredited U.S. investors, e., 10% of the greater of income or net worth.

What About Regulation S?

SEC Regulation S provides that an offering limited to non-U.S. investors is exempt from U.S. securities laws. Mysterious on its face, the law makes perfect sense from a national, jurisdictional point of view. The idea is that the U.S. government cares about protecting U.S. citizens, but nobody else.

EXAMPLE:  If a U.S. citizen is abducted in France, the U.S. military sends Delta Force. If a German citizen is abducted in France, Delta Force gets the day off to play volleyball.

Regulation S is relevant to U.S. Crowdfunding because a company raising money using Title II, Title III, or Title may simultaneously raise money from non-U.S. investors using Regulation S. Why would a company do that, given that non-U.S. investors may participate in Title II, Title III, or Title IV? To avoid the limits of U.S. law. Thus:

  • A company raising money using Title II can raise money from non-accredited investors outside the United States using Regulation S.
  • A company raising money using Title III can raise money from investors outside the United States without regard to income levels.
  • A company raising money using Tier 2 of Title IV can raise money from non-accredited investors outside the United States without regard to income or net worth.

Thus, a company raising money in the U.S. using the U.S. Crowdfunding laws can either (1) raise money from non-U.S. investors applying the same rules to everybody, or (2) place non-U.S. investors in a simultaneous offering under Regulation S.

What’s the Catch?

The catch is that the U.S. is not the only country with securities laws. If a company in the U.S. is soliciting investors from Canada, it can satisfy U.S. law by either (1) treating the Canadian investors the same way it treats U.S. investors (for example, accepting investments only from accredited Canadian investors in a Rule 506(c) offering), or (2) bringing in the Canadian investors under Regulation S. But to solicit Canadian investors, the company must comply with Canadian securities laws, too.

Raising Money for Non-U.S. Companies

Whether a non-U.S. company is allowed to raise money using U.S. Crowdfunding laws depends on the kind of Crowdfunding.

Title II Crowdfunding

A non-U.S. company is allowed to raise money using Title II (Rule 506(c)).

Title III Crowdfunding

Only a U.S. entity is allowed to raise money using Title III (aka “Regulation CF”). An entity organized under the laws of Germany may not use Title III.

But that’s not necessarily the end of the story. If a German company wants to raise money in the U.S. using Title III, it has a couple choices:

  • It can create a U.S. subsidiary to raise money using Title III. The key is that the U.S. subsidiary can’t be a shell, raising the money and then passing it up to the parent, because nobody wants to invest in a company with no assets. The U.S. subsidiary should be operating a real business. For example, a German automobile manufacturer might conduct its U.S. operations through a U.S. subsidiary.
  • The stockholders of the German company could transfer their stock to a U.S. entity, making the German company a wholly-owned subsidiary of the U.S. entity. The U.S. entity could then use Title III.

Title IV Crowdfunding

Title IV (aka “Regulation A”) may be used only by U.S. or Canadian entities with a “principal place of business” in the U.S. or Canada.

(I have never understood why Canada is included, but whatever.)

If we cut through the legalese, whether a company has its “principal place of business” in the U.S. depends on what the people who run the company see when they wake up in the morning and look out the window. If see the U.S., then the company has it’s “principal place of business” in the U.S. If they see a different country, it doesn’t. (Which country they see when they turn on Skype doesn’t matter.)

Offshore Offerings

Regulation S allows U.S. companies to raise money from non-U.S. investors without worrying about U.S. securities laws. But once those non-U.S. investors own the securities of the U.S. company, they have to think about U.S. tax laws. Often non-U.S. investors, especially wealthy non-U.S. investors, are unenthusiastic about registering with the Internal Revenue Service.

The alternative, especially for larger deals, is for the U.S. entity to form a “feeder” vehicle offshore, typically in the Cayman Islands because of its favorable business and tax climate. Non-U.S. investors invest in the Cayman entity, and the Cayman entity in turn invests in the U.S. entity.

These days, it has become a little fashionable for U.S. token issuers to incorporate in the Cayman Islands and raise money only from non-U.S. investors, to avoid U.S. securities laws. Because the U.S. capital markets are so deep and the cost of complying with U.S. securities laws is so low, this strikes me as foolish. Or viewed from a different angle, if a company turns its back on trillions of dollars of capital to avoid U.S. law, I’d wonder what they’re hiding.

What About the Caravan from Honduras?

Yes, all those people can invest.

Questions? Let me know.

Podcast: The Business Credit & Financing Show Focusing on How to Avoid Crowdfunding Legal Pitfalls with Mark Roderick

MSR Podcast OCt 2018

CLICK HERE TO LISTEN | Also available on iTunes & Spotify

During This Show We Discuss…

  • Your potential legal liability using crowdfunding platforms
  • When a potential investor can sue the project creator
  • The “3 flavors” of crowdfunding you should know about
  • Legal issues with flex versus fixed funding
  • How the new tax law affects crowdfunding
  • 20% tax deduction in crowdfunding transactions
  • Getting crowd funding for real estate investing
  • What you should know about peer-to-peer lending
  • Issues with bonuses you may offer to donors
  • What to know about the SEC’s role in crowdfunding
  • What an opportunity zone fund is and how they work
  • Why trusts invest in crowdfunding projects
  • Other big investors who are investing in crowdfunding campaigns
  • Potential legal pitfalls in peer-to-peer lending?
  • And much more

Mark Roderick is one of the leading Crowdfunding and Fintech lawyers in the United States. Expanding on his in-depth knowledge of capital-raising and securities law, Mark represents many portals and other players in the Crowdfunding field. He writes a widely read blog, crowdfundattny.com, which provides readers with a wealth of legal and practical information for portals, issuers and investors. He also speaks at Crowdfunding events across the country and represents industry participants across the country and around the world.

Yes, A Parent Company Can Use Title III Crowdfunding

Title III Crowdfunding

We know an “investment company,” as defined in the Investment Company Act of 1940, can’t use Title III Crowdfunding. For that matter, an issuer can’t use Title III even if it’s not an investment company, if the reason it’s not an investment company is one of the exemptions under section 3(b) or section 3(c) of the 1940 Act. By way of example, suppose a a company is engaged in the business of making commercial mortgage loans. Even if the company qualifies for the exemption under section 3(c)(5)(C) of the 1940 Act, it still can’t use Title III.

We also know that, silly as it seems, a company whose only asset is the securities of one company is generally treated as an investment company under the 1940 Act. That’s why we can’t use so-called “special purpose vehicles,” or SPVs, in Title III Crowdfunding, to round up all the investors in one entity and thereby simplify the cap table.

Put those two things together and you might conclude that only an operating company, and not a company that owns stock in the operating company, can use Title III Crowdfunding. But that wouldn’t be quite right.

A company that owns the securities of an operating company – I’ll call that a “parent company” — can’t use Title III if it’s an “investment company” under the 1940 Act. However, while every investment company is a parent company, not every parent company is an investment company. Here’s what I mean.

Section 3(a)(1) of the 1940 Act defines “investment company” as:

  • A company engaged primarily in the business of investing, reinvesting, or trading in securities; or
  • A company engaged in the business of investing, reinvesting, owning, holding, or trading in securities, which owns or proposes to acquire investment securities having a value exceeding 40% of the value of its assets.

Suppose Parent, Inc. owns 100% of Operating Company, LLC, and nothing else. If Parent’s interest in Operating Company is treated as a “security,” then Parent will be an investment company under either definition above and can’t use Title III. However, it should be possible to structure the relationship between Parent and Operating Company so that Parent’s interest is not treated as a security, relying on a long line of cases involving general partnership interests.

These cases arise under the Howey test, made famous by the ICO world. Under Howey, an instrument is a security if and only if:

  • It involves an investment of money or other property in a common enterprise;
  • There is an expectation of profits; and
  • The expectation of profits is based on the efforts of someone else.

Focusing on the third element of the Howey test, courts have held that a general partner’s interest in a limited partnership generally is not a security because (1) by law, the general partner controls the partnership, and (2) the general partner is therefore relying on its own efforts to realize a profit, not the efforts of someone else.

If Operating Company were a partnership and Parent were its general partner, then the arrangement would fall squarely within this line of cases and Parent wouldn’t be treated as an investment company. As a general partner, however, Parent would be fully liable for the liabilities of Operating Company, defeating the main purpose of the parent/subsidiary relationship, i.e., letting the tail wag the dog.

Fortunately, Parent should be able to achieve the same result even though Operating Company is a limited liability company. The key is that Operating Company should be managed by its members, not by a manager. That should place Parent in exactly the same position as the typical general partner:  relying on its own efforts, rather than the efforts of someone else, to realize a profit from the enterprise.

If Parent’s interest in Operating Company isn’t a “security,” then Parent isn’t an “investment company,” and can raise money using Title III.

Questions? Let me know.

Opportunity Zone Funds in Crowdfunding

businessman stack of coins.jpg

Everywhere you look, there’s another opportunity zone fund. What are these things and why are they suddenly so popular?

The Tax Savings

It’s all about taxes, specifically capital gain taxes. Added to the Internal Revenue Code by the 2017 tax act, new section 1400Z-2 allows investors to reduce their capital gain taxes in four increasingly-generous levels:

  • Level One Savings: If you sell property (including property sold through a partnership or limited liability company) and recognize a capital gain, then you don’t have to pay tax right away on the gain to the extent you invest in a “qualified opportunity zone fund,” or QOZF, within 180 days. Instead, the gain is deferred until the earlier of (i) the date you sell your interest in the QOZF, or (ii) December 31, 2026.

EXAMPLE:  You bought stock two years ago for $1,000, and sell it during 2018 for $1,100, recognizing a $100 capital gain. If you invest $75 in a QOZF within 180 days, you pay tax in 2018 only on $25 of the gain. You pay tax on the $75 on the earlier of the date you sell your interest in the QOZF or 12/31/2026.

It gets better.

  • Level Two Savings: If you hold your investment in the QOZF for at least five years, you get to increase your tax basis in the QOZF by 10% of the gain you deferred, further reducing your tax bill.

EXAMPLE:  In the example above, if you hold your investment in the QOZF for at least five years, you get to increase your tax basis by 10% of $75, or $7.50.

And better.

  • Level Three Savings: If you hold your investment in the QOZF for at least seven years, you get to increase your tax basis in the QOZF by another 5% of the gain you deferred.

And better.

  • Level Four Savings: If you hold your investment in the QOZF for 10 years, you pay no capital gain tax on the appreciation in the QOZF.

EXAMPLE:  If, in the original example, you invested $75 in the QOZF and sold it after 10 years for $195 (10% appreciation per year, compounded), you would pay no tax on the $120 of appreciation. 

What if the Value of the QOZF Goes Down?

If you lose money on the QOZF, then your tax on the original capital gain also goes down. 

EXAMPLE:  You sell appreciated stock for a $100 profit, and invest $75 in a QOZF. Three years later, you sell your interest in the QOZF for $50 (I’m assuming your tax basis in the QOZF hasn’t changed). You pay tax on only $50 of capital gain, not the whole $75.

Thus, it’s heads-you-win, tails-the-government-loses. 

What’s A Qualified Opportunity Zone Fund?

A qualified opportunity zone fund means a corporation or partnership that holds 90% of its assets in any mix of the following assets:

  • Stock of a corporation that is a “qualified opportunity zone business.”
  • An interest in a partnership that is a “qualified opportunity zone business.”
  • “Qualified opportunity zone property.”

A “qualified opportunity zone business” is a business substantially all of the assets of which are qualified opportunity zone property.”

”Qualified opportunity zone property” means property that is:

  • Located in a “qualified opportunity zone”;
  • Used by the QOZF in a trade or business; and
  •  Either:
    • The property is brand new (g., ground-up construction); or
    • Within 30 months, the QOZF or the qualified opportunity zone business spends at least as much to renovated the property as it paid to buy it.

Boiled down version:  A qualified opportunity zone fund means a fund that, directly or indirectly, owns new or substantially renovated business assets in a qualified opportunity zone.

Only New Businesses or Assets Count

In figuring out whether a fund is a qualified opportunity zone fund, you take into account only property acquired after 12/31/2017.

Does it Matter Where the Capital Gain Came From?

No. The capital gain you’re deferring could come from the sale of appreciated stock, the sale of real estate, the sale of artwork, or anywhere else.

An Alternative to A Like-Kind Exchange

Under section 1031 of the Internal Revenue Code, the owner of appreciated real estate (only real estate) can defer paying tax on sale by exchanging the real estate for different real estate. In fact, a whole industry has grown up around these so-called “like-kind exchanges.”

For as long as it lasts, the QOZF provides a simpler and possibly better alternative.

What is a Qualified Opportunity Zone?

A “qualified opportunity zone” means a low-income area that has been nominated as such by the Governor of a state and approved by the U.S. Treasury. A list is of current qualified opportunity zones is available here.

No Massage Parlors

In a crippling blow to my own business plans, a “qualified opportunity zone business” does not include massage parlors or hot tub facilities. Nor does it include golf courses, country clubs, suntan facilities, racetracks or other facilities used for gambling, or liquor stores.

Can I Use an LLC?

Section 1400Z-2 itself defines “qualified opportunity zone fund” as a “corporation or partnership.” However, section 7701(a)(2) of the Internal Revenue Code defines “partnership” follows:

The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.

Based on that definition, a limited liability company should work.

What if I Invest More in a QOZF?

Suppose you sell appreciated stock for a $100 capital gain, and within six months invested $150 in a QOZF. The favorable tax rules apply only to two-thirds of your investment. The other one-third is just a regular investment.

Who Can Form a Qualified Opportunity Zone Fund?

Anyone, literally. If you sell appreciated stock and want to defer or avoid tax on all or part of the gain, you can form your own QOZF.

Conversely, large companies, including large investment managers and large real estate developers, have already formed QOZFs, taking advantage of the tax benefits and the media buzz to raise capital.

Investment Company Act Limits

When Congress enacted the tax benefits for qualified opportunity zone funds, it could have created an exception to the investment company rules at the same time, making the funds even more appealing and effective. But it didn’t.

Consequently, and perhaps paradoxically, larger QOZFs — those with more than 100 investors — will have to own property directly, or take controlling interests in other businesses, to avoid being treated as investment companies. They will not be allowed to hold minority, non-controlling interests in businesses owned by others, such as, say, the residents of the qualified opportunity zone. 

How Can I Raise Capital for My QOZF?

You can raise capital using any method you like, including Title II Crowdfunding (Rule 506(c)), Title III Crowdfunding (Regulation CF), Title IV Crowdfunding (Regulation A), or Rule 506(b).

Qualified opportunity zone funds are about saving taxes, specifically capital gain taxes. They make less sense for non-accredited investors who, by definition, earn less money and pay tax at lower rates. Consequently, we will probably see fewer QOZFs using Title III or Regulation A to raise capital, and many using Rule 506(b).

More Rules to Come

The Internal Revenue Service hasn’t yet issued guidance on the details of this complicated legislation. Expect complicated regulations and at least a few surprises.

Waiting for the Other Shoe to Drop

How long will it take before a QOZF is sold using tokens?

Questions? Let me know.

 

REALCROWD Podcast – An Attorney’s Take On Real Estate Crowdfunding

Roderick Podcast Image

Listen as Adam Hooper and Mark Roderick discuss crowdfunding for real estate and the legal documents investors sign when investing in a real estate deal.

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