Regulation Crowdfunding FAQs

Regulation Crowdfunding FAQs

When did it become legal to raise money under Title III of the JOBS Act?

The regulations went into effect in May 2016.

What are some other names for Title III of the JOBS Act?

You may hear it referred to as “Regulation Crowdfunding” or the federal investment crowdfunding exemption.

How much can you raise?

You can raise up to $1,070,000 per year (this cap is adjusted for inflation regularly.

Do you have to use a crowdfunding platform?

Yes.  You can only raise money under Title III by posting your offering on an online platform that has been licensed by the Securities and Exchange Commission.  In fact, communications with potential investors about your offering must take place through the platform (there are very limited things you can say about your offering outside of the platform – see below).  Here is a list of all of the current platforms: https://www.finra.org/about/funding-portals-we-regulate (there may also be broker-dealers that host platforms that aren’t in this list).  

How much can each investor invest?

Each investor has an annual cap on how much he/she can invest per year under Title III:

(i) If either the investor’s annual income or net worth is less than $107,000, the greater of $2,200 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 $107,000, 10% of the lesser of the investor’s annual income or net worth, not to exceed $100,000.

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.

What regulatory filings are required?

You have to file Form C with the Securities and Exchange Commission.

Under Title III, there are no state level filings required so you can raise from residents of all 50 states without having to worry about state-by-state compliance.  However, under the law, 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.  To date, very few states are requiring any filings from resident companies raising money under Title III.

What information do you have to provide?

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 more than $107,000 you have to provide financials reviewed by a CPA.  It can cost several thousand dollars to prepare the financials required under Title III.  This is also the step that can make the process take longer.  The rest of the process can be completed very quickly.

The second time you raise money under Title III, if you’re raising more than $535,000, you have to provide audited financials.

When can you get the money?

Before you start your campaign, you’ll set a minimum amount that you want to raise and a target amount.  You’ll also set a length of time for the offering to be open.  You can’t collect the money until your offering ends.  And if the offering ends before you’ve reached the minimum, the funds will be returned to the investors.  Investors are required to be informed that they have the right to change their mind about an investment right up until two days before the close.

Do you have to do reports after you complete the raise?

You have to file an annual report (including financial information) which is required to be posted on your web site.  Under certain circumstances, the requirement for filing the annual report terminates after the first year.  The annual report requires that your financials be prepared in accordance with Generally Accepted Accounting Principles.

The annual report, including your financials, must be posted on your company web site.

Can the investors sell their securities to someone else?

Securities purchased under Title III can be re-sold one year after the initial purchase.

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

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

Can you be raising in a different way at the same time or close in time to an offering under Title III?

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 you offer?

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

What can you say during your Title III Crowdfunding campaign?

One way to think about this is that every time you are getting ready to publicly advertise the offering, you have to decide whether or not you want to talk about the terms.  If you do want to talk about the terms, you are very limited in what you can say – you can’t go on and on talking about how great your company is, how it’s better than the competition, etc.  If you don’t feel the need to mention the terms, you can say whatever you want and just direct people to the intermediary for more information.

So, basically, there are two types of allowable communications outside of the platform (you can say whatever you want on the platform):

Type 1: Non-terms communication

You can talk about the offering however you want as long as you don’t mention the TERMS of the offering:

  • the amount of securities offered, i.e. how much you’re raising
  • the nature of the securities, i.e. equity versus debt and details about the economic and governance rights of the investors
  • the price of the securities, and
  • the closing date of the offering period

This means you can make any kind of communication or advertising in which you say you are doing an offering (although not WHAT you are offering; that would be a “term”) and include all sorts of information about the company, its track record, its mission, what it will use the money for, etc.  Of course, you can link to your fundraising page on the crowdfunding platform.

Whether you are identifying a “term” of the offering can be pretty subtle. “We are making an offering so that all our fans can be co-owners,” might indirectly include a term because it’s hinting that you are offering equity.  Try to avoid hints as to what you are offering, and just drive investors to the intermediary’s site to find out more.

Type 2: Communication that includes the terms (aka tombstone advertisement)

If you want to talk about the terms, you have to limit what you say to the short list of permitted items (the terms, the issuer’s name and contact information, a brief description of the business, a statement that you’re conducting the offering pursuant to Section 4(a)(6) of the Securities Act, and a link to your page on the platform).

“Brief description of the business of the issuer” means that you should not say more than just a general description of your principal products and services.

An advertisement that includes terms should not be included with other communications because that will likely mean that you are including more information that you are supposed to.  For example, if you have a notice that includes terms on your web site and your web site has all kinds of detailed information about your company, the whole communication taken together will have way too much information to be counted as a tombstone ad.

A tombstone ad should not contain any links other than the link to your crowdfunding page.

Here is some more useful information from CrowdCheck:

Interviews with the media can be thorny because participation with a journalist makes the resulting article a communication of the company.  In fact, the SEC Staff have stated that they don’t see how interviews can easily be conducted, because even if the company personnel stick to the tombstone information (which would make for a pretty weird interview), the journalist could add non-tombstone information later, which would result in the article being a notice that didn’t comply with the tombstone rule.

The same thing could happen with interviews where the company tries to keep the interview on a non- terms basis.  The company personnel could refrain from mentioning any terms (again, it’s going to be pretty odd saying, “Yes, we are making an offering of securities but I can’t say what we are offering”), but the first thing the journalist is going to do is get the detailed terms from the company’s campaign page on the platform’s site, and again the result is that the article becomes a non-complying notice.

These rules apply to all articles that the company “participates in.”  This means that if you (or your publicists) tell the press, “Hey, take a look at the Company X crowdfunding campaign” any resulting article is probably going to result in a violation of the rules.  By you.

If you link to an article, [it is basically the same as if you made all of the statements in the article yourself].  If the article mentions the terms of the offering then you can’t link to it from a non-terms communication (such as your website) and if it includes soft non-terms information, then you can’t link to it from a tombstone communication.  And if it includes misleading statements, you are now making those statements.

In general, if you (or your publicists) didn’t participate in or suggest to a journalist that he or she write an article, it’s not your problem.  You aren’t required to monitor the media or correct mistakes.

 

If you’d like our help deciding whether investment crowdfunding is right for you, click here.

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How to fairly split the equity pie

How to fairly split the equity pie

You’ve founded a company and you want to bring on some helpers and compensate them with equity. How much equity should you give them?

Most founders pull a number out of a hat when making this decision and hope for the best. This can lead to lots of problems, especially when you give different amounts to different people. Someone who gets less than someone else might feel undervalued and lose motivation. Hurt feelings and resentments can poison the company culture.

One of my clients recently told me about an approach to this issue called Slicing Pie. Slicing Pie works by tracking everyone’s contributions of time, money, resources, etc. and does not split the equity until a trigger event, such as raising money from investors, occurs. This means that the equity you receive reflects the actual contributions you made to the company.

I recently drafted a legal agreement for Slicing Pie. The way it works is that all early company helpers receive an equal amount of equity, but the equity doesn’t vest (i.e. become truly owned by the shareholder) until a trigger event. The amount of equity that vests depends on how much time, money, and resources each helper ACTUALLY contributed before the trigger event.

This method of dividing equity makes so much more sense because everyone understands up front what they need to do to earn more equity – there is nothing arbitrary or unfair about it. It also serves as a great motivator for contribution.

To your success!

Interested in learning more? Get in touch!

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You’ve founded a company and you want to bring on some helpers and compensate them with equity. How much equity should you give them?

Most founders pull a number out of a hat when making this decision and hope for the best. This can lead to lots of problems, especially when you give different amounts to different people. Someone who gets less than someone else might feel undervalued and lose motivation. Hurt feelings and resentments can poison the company culture.

One of my clients recently told me about an approach to this issue called Slicing Pie. Slicing Pie works by tracking everyone’s contributions of time, money, resources, etc. and does not split the equity until a trigger event, such as raising money from investors, occurs. This means that the equity you receive reflects the actual contributions you made to the company.

I recently drafted a legal agreement for Slicing Pie. The way it works is that all early company helpers receive an equal amount of equity, but the equity doesn’t vest (i.e. become truly owned by the shareholder) until a trigger event. The amount of equity that vests depends on how much time, money, and resources each helper ACTUALLY contributed before the trigger event.

This method of dividing equity makes so much more sense because everyone understands up front what they need to do to earn more equity – there is nothing arbitrary or unfair about it. It also serves as a great motivator for contribution.

To your success!

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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The Fastest Path to Cash for Your Business

The Fastest Path to Cash for Your Business

I have been working with entrepreneurs to raise capital for over 10 years.  This is the cheapest, fastest (legal) way to raise money from investors that I’ve found (and it only became available a couple of months ago)!

Step 1: Decide what you want to offer

There are many different types of investment instruments you can offer.

If you offer something simple, you don’t necessarily need to hire a lawyer to create your offering.

For example, you can download a simple promissory note which commits you to pay your investors a set interest rate (I recommend an annual payment, rather than monthly or quarterly, to make life easier) and pay back the principal on the maturity date which you should select based on your reasonable projection of when you will be able to afford to make that payment.

Step 2: Begin public offering under Rule 506(c)

Rule 506(c) allows you to publicly advertise your offering however you want.  Before anyone invests, however, you have to make sure they are accredited.

Under Rule 506(c)

  • There is no maximum raise amount
  • All investors must be accredited
  • You can do public advertising (email blasts, announcements at public events, social media, press releases, etc.)
  • You must file Form D with the SEC within 15 days after the first sale of securities
  • You must complete notice filings and pay fees in all states from which investments are made – this is where you might need to get help from a lawyer! Or you can call the relevant states for instructions

You can start reaching out to potential investors IMMEDIATELY under Rule 506(c) because there are no filing requirements until AFTER you have actually raised money.

You are not required to use any particular method to verify that all investors are accredited, but the SEC has deemed certain methods to be acceptable.

Step 3: Launch investment crowdfunding campaign on a JOBS Act Title III platform

To be able to launch under Title III, you need to make sure your financials meet the requirements for financials under Title III.  Once you have that in place, you just need to create your profile on the crowdfunding platform site.

Before launching under Title III, it is important to understand all of the requirements that go along with it such as ongoing reporting obligations that require you to post your company financials on your web site for anyone to see.

If you’d like to explore the options for raising capital for your business, apply for a strategy session.

Or attend our two-day training for women entrepreneurs, Fund and Fuel Your Dreams.

Interested in learning more? Get in touch!

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Five elements of a great investor presentation

Five elements of a great investor presentation

1. Authenticity

A lot of entrepreneurs think that they need to be someone that they’re not in order to impress an investor. That is not a good idea and can backfire. First of all, people can usually sense when someone’s not being authentic. They may not be totally conscious of what is going on, but something will not feel right and they will not invest.

Second, you have a much better chance of attracting investors that are going to be a great fit for you if you’re really honest about who you are and what’s important to you. Just as lying on your online dating profile only leads to heartache when you end up attracting someone based on deception, the same holds true in the world of capital raising.

2. Passion

Don’t water down your message – show your passion! Be proud of what makes you unique and yes, maybe, a little different and quirky.

Very few people want to invest in something generic. Highlight what makes you, your company, and your product or service truly special and inspired.

Every entrepreneur I know that has successfully raised money has told me that this was the key to their success.

Your presentation should make it clear that you are passionate about your business. Passion is attractive because it demonstrates commitment – this is not something that you are going to give up on at the first sign of hardship!

3. Story

Maybe there’s something about your personal story that led you to develop this business that makes you all the more passionate and committed. For example, I have a client whose children have multiple allergies. She became passionate about finding healthy foods for them and built her whole business around that. The story behind her business is really interesting and it adds to her credibility in the eyes of potential investors.

4. Integrity

It is essential to make sure that your potential investors know that you have integrity, that you’re going to be a careful steward of their money, and that you’re going to always act with the highest ethics. These are attributes that are important to investors and somewhat rare in the world of business. You may take these things for granted, but you need to remember that they add value to your investment proposition and so should be emphasized in your presentation. If you can, share stories or examples of how important integrity is to you.

5. Willingness to Walk Away

As you go through the capital raising process, commit to yourself that you will walk away from a potential investor if the fit does not feel right. This can happen for many reasons. For example, you get a sense from the investor that he or she has a vision for the future of your business that is not consistent with yours. Or he or she is already pressuring you to lower your wages and stop paying one percent of your revenues to charity when those things are really important to you. Or maybe it’s just a gut feeling that you really don’t like this person.

Being prepared to walk away reduces that chances that you will end up with a horror story situation in which you lose control, get fired from your own business, your investor makes your life miserable, etc. I have heard lots of these stories and believe me, you don’t want them to happen to you!

Another benefit of being prepared to walk away and really owning that mindset is that potential investors will be far more attracted to your offer because they will sense that they have to work to be accepted into your inner circle.

Interested in learning more? Get in touch!

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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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