How would a President Trump affect small business finance?

How would a President Trump affect small business finance?

One thing is certain.  Trump has an awkward relationship with the chair of the Securities and Exchange Commission, Mary Jo White.

According to this fascinating article in the Washington Post, Mary Jo White, when in private practice, deposed the Donald on behalf of her client, a New York Times reporter that Trump had sued for writing that his net worth was far less than what he claimed.

Apparently the deposition was quite challenging for Trump – he was caught in about 30 lies.

So, Mary Joe White is not likely to be our SEC chair for much longer.

What else might happen?

At a recent crowdfunding conference, some of the speakers expressed optimism that deregulation will make capital raising and secondary trading easier for small business.  It is certainly true that it has become so expensive to be a public company that very few companies are choosing to go public these days and some are choosing to go private.

It’s hard to know what might change under a Trump presidency, but one possibility is that the restrictions on who can invest in a small business could be loosened.

As the Republican member of the SEC says, “I want to move beyond the artificial distinction between so-called “accredited” and “non-accredited” investors and challenge the notion that non-accredited investors are “being protected” when the government prohibits them from investing in high-risk securities. . . .  Because most investors are risk averse, riskier securities must offer investors higher returns. This means that prohibiting non-accredited investors from investing in high-risk securities is the same thing as prohibiting them from investing in high-return securities. . . .  [E]ven a well-intentioned investor protection policy can ultimately harm the very investors the policy is intended to protect. . . .  Remarkably, if you think about it, by allowing only high-income and high-net-worth individuals to reap the risk and return benefits from investing in certain securities, the government may actually exacerbate wealth inequality.”

What do you think?  How do we balance the need to protect “un-sophisticated” investors with the need to make it possible for small businesses to raise capital from their communities, customers, and fans?

Interested in learning more? Get in touch!

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Investment Crowdfunding under the JOBS Act six months in

Investment Crowdfunding under the JOBS Act six months in

It’s been over four years since the JOBS Act was signed by President Obama and finally, starting on May 16, 2016, companies are raising money under the federal crowdfunding exemption that the JOBS Act created (Title III of the JOBS Act).

Here are some things to know to help you decide whether it’s right for you!

Fun Fact! What does the CROWDFUND Act stand for?

Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act.

Do I have to have a U.S. company?

Yes, only U.S. companies can take advantage of the crowdfunding exemption.

How much can I raise?

You can raise up to $1 million in any one year period.

Do I have to use an online platform?

Yes. You can only raise money under the Crowdfunding Exemption by posting your offering on an online platform that has been licensed by the Securities and Exchange Commission. In fact, communications with potential investors must take place through the platform (there are very limited things you can say about your offering outside of the platform).  Here is a list of the current platforms: https://www.finra.org/about/funding-portals-we-regulate (there may be some others that are Broker-Dealers as well – this is a list of the ones that are not Broker-Dealers).

What is the per-investor cap?

(i) If either the investor’s annual income or net worth is less than $100,000, the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth; or

(ii) If both the investor’s annual income and net worth are equal to or more than $100,000, 10% of the lesser of the investor’s annual income or net worth, not to exceed $100,000.

Note that this is a cap on what an investor can invest in all crowdfunding campaigns in a year.

How am I supposed to know if an investor is within the per year cap?

You can rely on the efforts of the crowdfunding intermediary to ensure that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the limits, provided that you don’t know that the investor has exceeded the investor limits or would exceed the investor limits as a result of purchasing securities in your offering.

Are state level filings required?

Only the state of your principal place of business and the state where more than 50% of your investment comes from can require a notice filing and a fee.  Not many states are requiring anything at this time.

Can I be raising in a different way at the same time?

Yes! Unlike many other capital raising strategies, you are allowed to raise money under the crowdfunding exemption at the same time that you are raising money in another way, such as through a different kind of direct public offering or an offering to all accredited investors under Rule 506(c).

What can I offer?

Even though some people call this “equity crowdfunding,” you can offer any type of security – you don’t have to offer equity.

What filings are required?

When you set up your offering on a platform, you have to provide detailed information about your company and your offering.

If you’re raising $100,000 or less, you have to provide tax returns.  You also have to provide financials that are prepared in accordance with Generally Accepted Accounting Principles – most companies don’t have GAAP compliant financials and it can be expensive to get these done.

If you’re raising more than $100,000 you have to provide financials reviewed by a CPA. Reviewed financials can cost several thousand dollars.

After the first time you raise money under Title III, you have to provide audited financials if you’re raising more than $500,000.

You also have to file an annual report (including your financials) which is required to be posted on your web site.  You have to continue to post your annual report for as long as you have investors that invested under Title III (there are some exceptions that allow you to stop reporting sooner than that).

Can people who buy securities in my offering re-sell them to someone else?

Yes, but not before one year after the initial purchase.

What are some examples of successful campaigns?

Here are some that I’m following:

Spotlight: Girls

Farm from a Box

Maestroconference

Be sure to subscribe to my newsletter below to get up to date information as the crowdfunding exemption starts to get tested in the real world!

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New easier ways to raise capital – Part 2 – Multi-state Offerings up to $5 million

New easier ways to raise capital – Part 2 – Multi-state Offerings up to $5 million

The Securities and Exchange Commission just amended Rule 504 to increase the amount you can raise from $1 million to $5 million.

Rule 504 is an exemption that allows you to raise capital in as many states as you want and does not limit who can invest or how the offering can be advertised.

So, for example, you could do an offering under Rule 504 and register to do a public offering in both Massachusetts and Vermont.  This is what my former client Real Pickles did.  But back then, they could only raise up to $1 million.  If they did it now, they could raise up to $5 million.

This is huge!!!  Keep in mind that you can only raise up to $1 million under Title III of the JOBS Act (the investment crowdfunding exemption).  So Rule 504 offers an alternative way to raise investment capital from the crowd that allows you to raise five times more.

If you’d like to learn more about raising money under Rule 504, please contact us.

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New easier ways to raise capital – Part 1 – Intrastate Offerings

New easier ways to raise capital – Part 1 – Intrastate Offerings

The SEC just adopted a new rule called Rule 147A that allows companies to raise capital from investors within a single state (it is a new safe harbor under the intrastate exemption from the registration requirements of the 1933 Securities Act).

We already had a safe harbor for the federal intrastate exemption (Rule 147), but this one is new and improved!

Who can use it?

The company making the offering has to be “resident” and “doing business within” the state or territory in which all of the sales are made.

“Resident” means that the company has its principal place of business within that state (this is wherever the officers, partners, or managers of the business primarily direct, control and coordinate the activities of the issuer).

“Doing business within” means that one of the following is true:

  • The company derived at least 80% of its gross revenues from business operations located within the state;
  • The company has at least 80% of its assets located within that state;
  • The company intends to use and uses at least 80% of the net proceeds from the offering in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within that state; or
  • A majority of the company’s employees are based in that state.

Who can invest?

All of the purchasers of securities must be residents of that state.  You need to do some due diligence to establish a “reasonable belief” that the purchasers are actually state residents.[1]

Where can you advertise?

There are no restrictions on where the offer can be made, just the sales.  This means that you can promote the offering online, using press releases, etc.

Can the securities be resold?

For a period of six months from the date of the sale of a security, any resale of such security shall be made only to persons resident within the same state.  After that, resales are unrestricted under federal law.

The company is required to place a legend on the security stating that

“Offers and sales of these securities were made under an exemption from registration and have not been registered under the Securities Act of 1933. For a period of six months from the date of the sale by the issuer of these securities, any resale of these securities (or the underlying securities in the case of convertible securities) shall be made only to persons resident within the state or territory of [identify the name of the state or territory in which the issuer was resident at the time of the sale of the securities by the issuer].”

The company must also make a notation in its records of the transfer restriction and obtain a written representation from each purchaser as to his or her residence.

Required disclosures

The issuer is required to prominently disclose to each potential investor the following:

“Sales will be made only to residents of the state or territory of [identify the name of the state or territory in which the issuer was resident at the time of the sale of the securities by the issuer]. Offers and sales of these securities are made under an exemption from registration and have not been registered under the Securities Act of 1933. For a period of six months from the date of the sale by the issuer of the securities, any resale of the securities (or the underlying securities in the case of convertible securities) shall be made only to persons resident within the state or territory of [identify the name of the state or territory in which the issuer was resident at the time of the sale of the securities by the issuer].”

Timing with other offerings

Unlike before, you don’t have to have a six-month separation between another offering and your offering under this exemption.  You can use this exemption anytime after another type of offering.  So, for example, you could do a private offering and then immediately start an intrastate public offering.

State level compliance

You still have to make sure you comply with state level requirements for your offering.  So, for example, if you want to do a public offering in California, you need to comply with the California registration requirements for public offerings.

If you’d like to learn more about using this new tool, contact us!

[1] This can be established through a pre-existing relationship between the issuer and the prospective purchaser that provides the issuer with sufficient knowledge about the prospective purchaser’s principal residence; evidence of the home address of the prospective purchaser, as documented by a recently dated utility bill, pay-stub, information contained in state or federal tax returns, or other documentation.

Interested in learning more? Get in touch!

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The Party is Over – Time to Invest Local

The Party is Over – Time to Invest Local

I was lucky enough to participate in the “Battle in Seattle” – a giant protest again globalization at the meeting of the World Trade Organization.  The protesters were worried that trade agreements would massively shift wealth to giant multinational corporations and away from workers and communities and we were right.

Well, now those who partied for the last 25 years are starting to worry.  Finally, governments are listening to the cries of citizens about the redistribution of wealth to the richest 0.1%.  “Some big global investors worry that the broad slowdown in world trade and growing populist opposition to new trade agreements are undermining corporate profits and could be the next big drag on the stock market,” according to the Wall Street Journal.

“U.S. equity prices have been supported for the past three decades by an acceleration of global trade and a freer flow of capital. . . .  But now there is worry that the party is ending. “We believe globalization has probably reached its peak,” said Marino Valensise, head of the multiasset team at Barings, a member of the MassMutual Financial Group with $275 billion in assets under management.

One expert expects that if the trend continues, stocks traded on Wall Street could fall by 17%.

It might be a good time to start shifting your money to the parts of the economy that do not depend on liberal global trade deals!  How about your local camp, restaurant, or newspaper?

Let’s start investing in the real economy, rather than the opaque, complex, financialized Wall Street economy.

Interested in learning more? Get in touch!

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