How to launch an investment crowdfunding platform

How to launch an investment crowdfunding platform

Do you want to launch a funding portal for investment crowdfunding?  Currently, there are only 12 of these that have gone through the process required under the JOBS Act.  Here is a very abbreviated summary of some of the main requirements for starting and operating an investment crowdfunding portal:

Funding Portal Registration

To create a funding portal you have to complete and file “Form Funding Portal” with the SEC.

You also have to become a member of FINRA (see details here: http://www.finra.org/industry/funding-portals).

Limitations on Funding Portals

The funding portal may not

(1) Offer investment advice or recommendations;

(2) Solicit purchases, sales or offers to buy the securities displayed on its platform;

(3) Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or

(4) Hold, manage, possess, or otherwise handle investor funds or securities.

Measures to Reduce Risk of Fraud

Among other things, the funding portal must conduct a background and securities enforcement regulatory history check on each issuer and on each officer, director or beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.

Educational Materials that Must Be Provided to the Investor

In connection with establishing an account for an investor, the portal must deliver educational materials to such investor that explain in plain language and are otherwise designed to communicate effectively and accurately:

(1) The process for the offer, purchase and issuance of securities and the risks associated with purchasing securities;

(2) The types of securities available for purchase on the intermediary’s platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution;

(3) The restrictions on the resale of a security offered and sold in reliance on the crowdfunding exemption;

(4) The types of information that an issuer is required to provide under the rules, the frequency of the delivery of that information and the possibility that those obligations may terminate in the future;

(5) The limitations on the amounts an investor may invest under the rules;

(6) The limitations on an investor’s right to cancel an investment commitment and the circumstances in which an investment commitment may be cancelled by the issuer;

(7) The need for the investor to consider whether investing in a security offered and sold in reliance on the crowdfunding exemption is appropriate for that investor;

(8) That following completion of an offering conducted through the portal, there may or may not be any ongoing relationship between the issuer and the portal; and

(9) That under certain circumstances an issuer may cease to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer.

Promoters and Compensation Disclosure

The portal must inform investors regarding any person who promotes an issuer’s offering for compensation.

When establishing an account for an investor, an intermediary must clearly disclose the manner in which the intermediary is compensated in connection with offerings and sales of securities.

Investor Qualification

Each time before accepting any investment commitment (including any additional investment commitment from the same person), an intermediary must obtain from the investor

(a) A representation that the investor has reviewed the intermediary’s educational materials, understands that the entire amount of his or her investment may be lost, and is in a financial condition to bear the loss of the investment; and

(b) A questionnaire completed by the investor demonstrating the investor’s understanding that:

(i) There are restrictions on the investor’s ability to cancel an investment commitment and obtain a return of his or her investment;

(ii) It may be difficult for the investor to resell the securities; and

(iii) Investing in securities offered and sold in reliance on the crowdfunding exemption involves risk, and the investor should not invest any funds unless he or she can afford to lose the entire amount of his or her investment.

Communication Channels

The portal must provide communication channels by which persons can communicate with one another and with representatives of the issuer.  The portal may not participate in these communications.  Anyone may view the discussions but only investors that have opened accounts may post comments.

Maintenance and Transmission of Funds

The portal may not handle funds.  It must direct investors to transmit the money directly to a qualified third party, such as a registered broker or dealer or a bank or credit union.

Compliance

A funding portal must implement written policies and procedures reasonably designed to achieve compliance with the federal securities laws and the rules and regulations thereunder relating to its business as a funding portal.

A funding portal must also comply with federal rules related to privacy of consumer financial information and safeguarding personal information; limitations on affiliate marketing; identity theft red flags).[1]

A funding portal must permit the examination and inspection of all of its business and business operations that relate to its activities as a funding portal, such as its premises, systems, platforms, and records by representatives of the Commission and of the registered national securities association of which it is a member.

 

[1] https://www.law.cornell.edu/cfr/text/17/part-248

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Who should be allowed to invest?

Who should be allowed to invest?

Have you heard of the term “accredited investor”?

An accredited investor is defined under federal law, in general terms, as an individual with at least $1 million in net worth (excluding her primary residence) or $200,000 in annual income.

If you qualify as an accredited investor, there are many more investment opportunities open to you than to everyone else.

This definition has not been updated significantly since 1982.

The definition has been criticized from two opposite sides: advocates for investor protection believe the dollar amounts should be increased to reflect inflation, while advocates for greater investor access argue that the definition should be expanded to allow more people to invest wherever they want.

There are some proposals on the table to update the definition that have nothing to do with dollar amounts.  These include

  1. allowing people with a certain amount of past investment experience to be included in the definition
  2. allowing people with certain professional credentials, such as licensed securities brokers, to be included
  3. allowing people who pass an exam that demonstrates financial sophistication to be included.

What do you think?!  How do we balance the need to protect investors with fewer resources and less sophistication with the benefits of allowing everyone to make his or her own decisions about how to invest?

(Source: Report on the Review of the Definition of “Accredited Investor,” a report by the staff of the U.S. Securities and Exchange Commission, December 18, 2015)

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Insights for Women on Raising Money from the Right Investors

Insights for Women on Raising Money from the Right Investors

The JOBS Act Title III provisions making it easier to crowdfund investments from ordinary investors finally went into effect in May, four years after the bipartisan bill was signed into law by President Obama in April 2012.

The Securities and Exchange Commission issued “Regulation Crowdfunding” last fall with an effective date of May 16, 2016. Those wishing to take advantage of the new law are required to issue their securities through a FINRA-registered broker dealer (investment bank) or via a registered “portal.”

My clients, Lynn Johnson and Jessica Nowlan, offered some insights based on their experience. Lynn is the Co-Founder and CEO of Spotlight:Girls. Jessica is the Founder of Create Shoppe.

  1. Get Clear: “Get clear on your values, goals, and projections for the exact kind of business you want to lead,” Lynn says.
  2. Identify Ideal: “Identify your ideal investor so that you don’t waste time chasing after opportunities that don’t match your values,” she adds.
  3. Ignore VC: “Venture Capital, although that is mostly what you hear about, isn’t necessarily the right way to get capital for every business, especially for smaller businesses and in particular for low income women,” Jessica says.
  4. Believe in Yourself: “Believe in what you are doing and believe in yourself. Seek the advice and guidance of trusted mentors that understand the diversity of funding options available and also your personal circumstances,” Jessica adds.
  5. Mine Community: “Mine your existing community for potential investors – friends, family, customers, supporters, etc. – through a crowdfunding model,” Lynn notes.
  6. Network, Network, Network: “You have to believe in what you are doing and yourself, and you need to get other people on board. When you don’t have the same networks as people with access, you have to build them yourself,” Jessica concludes.

Check out our video with details on our tips here: http://goodcrowd.info/women-raising-money-investors/

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The JOBS Act 101

The JOBS Act 101

Back in 2010, I was running the Community Supported Enterprise (CSE) Program at the nonprofit Sustainable Economies Law Center (SELC).

I had co-founded SELC with another attorney, Janelle Orsi, to help changemakers navigate the rules that could get in their way as they try to create a healthy, just, and sustainable economy.

That summer the CSE program had some great law student interns.  We decided to focus on changing the securities laws – the laws that govern how enterprises can raise capital from investors.

The interns drafted and I signed a petition for rulemaking to the Securities and Exchange Commission.  Our request was simple: exempt from any regulatory requirements an offering of an investment opportunity in which no investor could invest more than $100.  We figured that if the most that anyone could possibly lose was $100, requiring the enterprise to jump through a bunch of regulatory hoops was unnecessary.

The American Sustainable Business Council was an early supporter of the idea and they helped to promote it.  Amazingly enough, the idea started to spread and the White House endorsed the idea of an exemption from securities law requirements for investment crowdfunding.

On April 5, 2012, President Obama signed the JOBS Act.  It had changed quite a bit from our original proposal, but it did create several new exemptions for different types of investment crowdfunding.

Below is a summary of the new tools in the tool box created under the JOBS Act.  Note that even before the JOBS Act passed, investment crowdfunding was legal and had been legal for decades (see this post for more details on the pre- versus post-JOBS Act options).  However, the JOBS Act added some new legal compliance options for enterprises that want to be able to advertise their investment opportunities to everyone.

Title II of the JOBS Act – Rule 506(c)

This exemption allows a company to publicly advertise an investment opportunity and there is no cap on the amount that can be invested by each investor or the total amount raised.  However, under this Rule, all the investors must be accredited, which generally means individuals with at least $1 million in net worth (excluding their primary residence) or $200,000 in annual income.

Title IV of the JOBS Act – Regulation A+

This exemption allows a company to raise up to $50 million and ANYONE can invest – not just accredited investors.  The offering can be publicly advertised in all 50 states.  The downside is that the company must have audited financials and must complete a filing process with the Securities and Exchange Commission that can take approximately four months and costs $75-$125,000 in legal fees.  Once a company has raised money under Regulation A+, it can file to become a public company and its securities can be freely traded on an exchange.

Title III of the JOBS Act – Crowdfunding Exemption

This is the part of the JOBS Act that took the longest to go into effect – it took over four years for the Securities and Exchange Commission to complete the detailed rules governing how this exemption could be used and for the crowdfunding platforms authorized under the law to go through the registration process.

Starting on May 16, 2016, this part of the JOBS Act finally became available.  Here are the basic requirements:

  • You can raise up to $1 million per year
  • There is a per investor cap on the amount that can be invested: 5% of the lesser of the investor’s annual income or net worth (or 10% if the investor’s net worth and annual income are greater than $100,000)
  • Offerings must be conducted through a registered intermediary – you are not allowed to talk about the offering outside of the registered online crowdfunding portal
  • You can accept investors from all 50 states
  • If you’re raising more than $100,000, you have to get reviewed financials from a CPA
  • Your financials are public and must be available on your web site

These three new tools obviously all have their pros and cons as all capital raising strategies do.  It’s important to understand all of the options before choosing your strategy.

For a comparison chart of various crowdfunding options, click here.

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New Crowdfunding law creates access for women/underserved entrepreneurs

New Crowdfunding law creates access for women/underserved entrepreneurs

On May 16, Title III of the JOBS Act comes into effect, the landmark federal crowdfunding exemption allowing businesses to raise money through online platforms from both accredited and non-accredited investors. This change provides greater access to capital for entrepreneurs, especially women, minorities, and others who have not succeeded in finding money from more traditional sources.

“When I first started looking for capital, it seemed like every investor was only interested in tech start-ups with sexy exit strategies,” says Lynn Johnson, an Oakland-based entrepreneur and “I am building a business that is about compassion and connection and community. I am not afraid of slow growth and am in this for the long haul. I hope my daughter will take over the business one day.”

Johnson and her wife, writer/blogger Allison Kenny, are the co-founders of Go Girls! Camp, a summer day camp for young girls to learn and practice social/emotional skills through the arts. “As an artist and a woman of color, I was never encouraged to go out and make any real money. I was supposed to be a starving artist. But, I’m not into that. I am more interested in growing a thriving and socially responsible business. Now, I can get the capital I need from the people who support our mission.”

Jessica Nowlan, also of Oakland and Founder and CEO of Create Shoppe, an online platform that allows customers to design handmade gifts that are created by Artisan Crafters, is also optimistic about investment crowdfunding because it expands her options for who can invest in her business. “When you are building a business, they always tell you to reach out to your friends and family for help. But, I grew up poor. My friends and family were poor and I didn’t go to college so I didn’t have the networks. That wasn’t working for me.”

Nowlan launched her first business in 2010. “I had no money, no savings, and bad credit. I was living in subsidized housing and receiving public assistance, but I was determined to make it work. I had read so many stories about bootstrapping and entrepreneurs that made it and I was determined. I tried to go for loans, went through programs to access capital, and even asked friends and family, but I was either denied or told to be realistic and get a real job. I was depressed and felt like a failure. Without capital, I knew I couldn’t fund my dreams.”

Both Johnson and Nowlan are now prepared to raise $100,000 on the WeFunder platform starting on May 16 and they give a lot of credit to their work with Jenny Kassan, a Fremont-based attorney, consultant and recent appointee to the Securities and Exchange Commission’s (SEC) Small Business Advisory Committee, who worked diligently to help pass this legislation in 2012. “Fewer than .01% of entrepreneurs raise money from venture capitalists and yet that is the only narrative we hear about,” says Kassan. “There are so many amazing entrepreneurs out there who are building businesses designed for social and environmental impact, not just financial return. And, many of these entrepreneurs are women.”

Kassan believes, “Investing in these kind of entrepreneurs is so important because they are really the backbone of our economy. Unlike the overvalued unicorns that get so much attention, small mission-driven businesses invest back into their own communities and create local jobs and wealth.”

“When you grow up a girl in poverty, you are not taught to fail,” states Nowlan. “Instead you are taught that succeeding comes from playing it safe. There is a certain level of entitlement in that “just go do it” attitude that entrepreneurs need to have to succeed. Not everyone has a net. Getting this access to capital means that we can now participate in that process of trying and failing and trying again. That might be the most important part.”

 

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Insights from Hint Water Founder Kara Goldin

Insights from Hint Water Founder Kara Goldin

Kara Goldin started Hint Water 11 years ago because she was passionate about encouraging more people to drink water instead of unhealthy sweetened drinks.

She financed the company with her own funds for the first two years but soon realized she would need outside funding to continue her early success.

Her first investor was a wealthy family that was passionate about her mission and willing to be patient because they knew that the brand represented a whole new product category and would take some time to gain traction.

When she needed to raise more money, she listed her offering on the online angel investing platform, AngelList.

Hint Water raised $2.5 million in two weeks! It turned out that a lot of the investors on AngelList drank Hint Water and were huge fans of the brand. They especially loved the mission of the company. By the end of the raise, Hint Water had added about 100 new equity investors! Kara made sure to talk to every one of them before allowing them to invest to make sure there was values and personality alignment. Kara’s advice: don’t accept any investor that you wouldn’t want to go out to dinner or go on a hike with.

These investors purchased non-voting common stock. This means that there were no rights associated with the stock – no preferred dividends, no liquidation preference, no right to elect a board member, etc. Kara does make sure they receive cases of Hint Water every month! She also sends them quarterly financial reports. Some of the investors have asked for more detailed information or have asked her to present specific company to information. She has had to decline these requests and reminds them that it would be impossible to accommodate these kinds of requests for all 100 of her investors! She feels the best way to serve her investors is to build a great company and brand, and not to spend time responding to individual investor requests for information.

Many of the investors come from the world of tech and have been willing to offer advice on Hint Water’s online strategy.

After 11 years in business, Hint Water is on track to have its first profitable quarter.

I asked Kara what her plans are for the future of the company. She isn’t certain at this time, but said she would be interested in exploring an IPO. She knows that being the CEO of a public company can be a very tough job, especially since it is not a world known to be very friendly for women, but she is up for the challenge!

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