New rules—New possibilities!

New rules—New possibilities!

The Securities and Exchange Commission has made some changes to the rules governing private offerings of securities.  These are some of the biggest changes we’ve seen in a while and many of them will make fundraising much easier! The new rules are expected to go into effect by February 2021. Note that none of these rules pre-empt state law, so it is always necessary to determine whether applicable state laws may limit the usefulness of these new rules.


The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings, such that Securities Act exemptions would apply to the multiple offerings that would not be available for the combined offering.  In practice, the integration doctrine often results in us telling our clients that they must have a six-month quiet period between two types of offerings. The SEC has done away with all of the old integration rules and created a new rule that will make things a bit easier for anyone doing a series of offerings under different rules. The new rule creates some “safe harbors,” which, if you comply with any of them, you don’t have to worry about your offerings being integrated.  Below are two of the more important safe harbors:

  1. If two offerings are separated by 30 days they won’t be integrated, provided that for an exempt offering for which general solicitation is not permitted, the safe harbor would require either: (i) that the purchasers were not solicited through the use of general solicitation, or (ii) that the issuer established a substantive relationship with the purchasers prior to the commencement of the offering.  Where an issuer conducts more than one offering under Rule 506(b), the number of non-accredited investors purchasing in all such offerings within 90 calendar days of each other would be limited to 35.
  2. An offering made in reliance on an exemption for which general solicitation is permitted will not be integrated with a previous terminated or completed offering. 

If none of the safe harbors apply to your situation, there is a general principle that you may be able to use.  The general principle under the new rule is that offers and sales will not be integrated if, based on the particular facts and circumstances, the issuer can establish that each offering complies with an exemption from registration. However, there is a caveat related to whether one of the offerings involves public solicitation.  For example, let’s say you start with a Rule 506(c) offering (which permits public solicitation) and then you stop that offering and switch to an offering under Rule 504 (which does not permit public solicitation).  In that case, you can only avoid integration of the two offerings if you have a reasonable belief, based on the facts and circumstances, that none of the purchasers in the Rule 504 offering were solicited through public solicitation or that you have a substantive relationship with each purchaser that was established before you started the Rule 504 offering.

General Solicitation

Exemption from General Solicitation for “Demo Days” and Similar Events  The new rules provide that certain “demo day” communications will not be deemed general solicitation.  This means that if you are conducting an offering under Rule 506(b) (which prohibits general solicitation) for example, you can go to a demo day that meets the requirements of the new rule and tell the people in attendance that you are raising money without worrying about whether you are violating the rules against general solicitation. The event sponsor must be a college, university, or other institution of higher education; state or local government; a nonprofit organization; or an angel investor group, incubator, or accelerator.  The event sponsor is not permitted to: 

  • Make investment recommendations or provide investment advice to attendees of the event
  • Engage in any investment negotiations between the issuer and investors attending the event
  • Charge attendees of the event any fees, other than reasonable administrative fees
  • Receive any compensation for making introductions between event attendees and issuers, or for investment negotiations between the parties
  • Receive any compensation with respect to the event that would require it to register as a broker or dealer under the Exchange Act, or as an investment adviser under the Advisers Act

Advertising for the event may not reference any specific offering of securities by the issuer, and the information conveyed at the event regarding the offering of securities by or on behalf of the issuer is limited to: 

  • Notification that the issuer is in the process of offering or planning to offer securities 
  • The type and amount of securities being offered
  • The intended use of the proceeds of the offering 
  • The unsubscribed amount in an offering

Online participation in the event is limited to: (a) individuals who are members of, or otherwise associated with the sponsor organization (for example, members of an angel investor group or students, faculty, or alumni of a college or university); (b) individuals that the sponsor reasonably believes are accredited investors; or (c) individuals who have been invited to the event by the sponsor based on industry or investment-related experience reasonably selected by the sponsor in good faith and disclosed in the public communications about the event. 

Testing the Waters:  The new rules create some ways that a business can “test the waters” with potential investors before doing any legal filings.  This means that you can talk to potential investors about your offering and gauge interest and solicit feedback before doing the legal work required to formally launch your offering.  There are two new rules for testing the waters—one applies to the situation where you still don’t know what exemption you plan to use for your offering, and the other one applies when you plan to use Regulation Crowdfunding.

Generic Testing the Waters Exemption—before you know what exemption you want to use

This new rule allows you to tell potential investors that you plan to raise money and ask for their feedback.  You must provide the following disclosures to anyone you talk to: (1) You are considering an offering of securities exempt from registration under the Act, but have not determined a specific exemption from registration you intend to rely on for the subsequent offer and sale of the securities.  (2) No money or other consideration is being solicited, and if sent in response, will not be accepted. (3) No offer to buy the securities can be accepted and no part of the purchase price can be received until it is determined which exemption will be used and, where applicable, the filing, disclosure, or qualification requirements of such exemption are met.  (4) A person’s indication of interest involves no obligation or commitment of any kind.  Under the new integration rules, you will not be able to follow a generic solicitation of interest that constituted a general solicitation with an offering pursuant to an exemption that does not permit general solicitation, unless you have a reasonable belief that the purchasers were not solicited via general solicitation or you have established a substantive relationship with them.

Regulation Crowdfunding Testing the Waters Exemption

Under the current rules, you are not allowed to tell anyone that you are raising money under Regulation Crowdfunding until you have filed your Form C.  Under this new rule, you can talk to potential investors to gauge their interest as soon as you decide that you want to do a Regulation Crowdfunding campaign. You need to provide everyone you talk to with the following disclosures:

  • No money or other consideration is being solicited, and if sent, will not be accepted. 
  • No sales will be made or commitments to purchase accepted until the Form C offering statement is filed with the Commission and only through an intermediary’s platform. 
  • Prospective purchaser’s indications of interest are non-binding.

Regulation Crowdfunding Offering Communications 

The new rules slightly expand what you are allowed to say during your Regulation Crowdfunding campaign.  The rules now explicitly permit oral communications with potential investors and expand the information you can provide outside of the platform to include:

  • A brief description of the planned use of proceeds of the offering
  • Information on the issuer’s progress toward meeting its funding goals

Rule 506(c) Verification Requirements 

This is a very minor change that is helpful for anyone who does more than one offering under Rule 506(c) which requires you to take reasonable steps to verify that all of your investors are accredited.  If you do more than one 506(c) offering in a 5-year period and someone from the first offering wants to invest in the second offering, you don’t have to re-verify their status as accredited as long as they provide a written representation that they continue to qualify as an accredited investor and you are not aware of information to the contrary.  

Harmonization of Disclosure Requirements 

Participation of Unaccredited Investors in a 506(b) Offering:  Under the current rules, you are allowed to have up to 35 unaccredited investors in a Rule 506(b) offering.  In practice, very few businesses allowed any unaccredited investors in these offerings because the disclosure requirements are increased if you make the offering to even a single unaccredited investor and the disclosure requirements include an audited balance sheet which most businesses don’t have.  Under the new rules, if you are raising up to $30 million under Rule 506(b), you will no longer need to provide an audited balance sheet, although the disclosure requirements are still relatively extensive.

Proposed Amendments to Simplify Compliance with Regulation A:  These are a handful of technical rule changes to make Reg A filings easier.  They address things like whether you are allowed to redact sensitive information from contracts included in Reg A filings and simplification of other filing requirements.

Offering and Investment Limits

Reg A:  The maximum offering amount under Tier 2 of Reg A is being increased to $75 mill.  The maximum offering amount for secondary sales under Tier 2 of Regulation A is being increased from $15 million to $22.5 million.

Rule 504:  The offering limit is being increased from $5 million to $10 million. 

Reg CF:  The offering limit is being increased from $1.07 million to $5 million. Investment limits no longer apply to accredited investors—in other words there is no cap on how much an accredited investor can invest in a Regulation Crowdfunding offering. Unaccredited investors may rely on the greater of their income or net worth in calculating their investment limit (under the current rule they had to rely on the lower number). 

Crowdfunding Vehicles

The new rules authorize a new type of entity called a “crowdfunding vehicle.”  This is a special type of entity that can be used when a company conducting a raise under Regulation Crowdfunding wants to avoid having all of its crowdfunding investors having a direct investment in the issuer.  The issuer can form a crowdfunding vehicle and the investors invest in the vehicle rather than the issuer.  The vehicle then becomes the owner of the securities in the issuer.

5-Day Challenge:  Create a Golden Opportunity for Investors

5-Day Challenge: Create a Golden Opportunity for Investors

We just wrapped up a LIVE 5-day challenge—Create a Golden Opportunity for Investors: How to Design a Win-Win Investment Offering.

It was awesome! Hundreds of people joined the challenge where we taught how to design a customized investment offering.  Here’s what they learned:

Day 1—We talked about why it’s so important to design your own offering and how to lay the groundwork to ensure you design the right offering for you.

Day 2—We went over the three basic types of investment offering and how to choose which one you want to offer.

Day 3—We explored how your investors can get paid—spoiler alert: you don’t have to grow fast and hustle for a fast exit!

Day 4—We reviewed the pros and cons of giving investors any control and what that can look like. We also talked about tools to motivate faster and larger investments.

Day 5—We pulled it all together and talked about how designing your offering fits into the larger strategy for raising the right money from the right investors—in a way that lets you stay true to your mission and goals.

It’s not too late to check out the training! The videos and worksheets are still available for FREE for a limited time. Get immediate access to the challenge—start today by signing up here.

How to Make Investing in Your Company a Golden Opportunity

How to Make Investing in Your Company a Golden Opportunity

You’ve built a company with a promising future. You’re ready to start looking for funding. You know there are some folks out there (maybe your customers, suppliers, neighbors, values-aligned supporters, etc.) who will be interested in learning more about the opportunity to invest in your company.

That’s great! But at some point you need to tell them EXACTLY what they will be getting for their investment dollars.

The piece of paper that describes exactly what your investors are entitled to can be called by various names: investment offering, investment instrument, or security. There are many different kinds of offerings, some more commonly known than others. Examples include preferred stock, LLC membership units, convertible notes, revenue-based debt instruments, and SAFEs. Within each category, there are numerous choices to make. For example:

  • Will investors have voting rights and, if so, what specifically can they vote on?
  • How much time can go by before your investors receive payment?
  • How are payments to investors calculated?
  • Are any payments made as the company grows or only when you sell the company?
  • Do all investors have the same rights, or do some have the right to get paid before others?
  • Do you have to set a valuation on the company and, if so, how do you set it?

The options for how your offering can be structured are limitless.

A poorly structured offering can create years of misery when you and your investors butt heads over misaligned expectations, while a well-structured offering can be a win-win for all the stakeholders involved—you, your employees, your investors, your customers, and the long-term success of your business.

So, how do you design a win-win investment offering? We like to break it down into a step-by-step process:

  1. Get clear on the goals, values, and non-negotiables that will inform the design of your offering.
  2. Choose one of the three main categories of offering (equity, debt, or convertible) and make sure it fits with the legal and tax structure of your your business.
  3. Decide on your investors’ rights to get paid—when and how much will they make on their investment.
  4. Decide whether to give your investors any control and, if so, what kind.
  5. Decide whether to offer any perks, in addition to the investment itself, as a way to motivate larger and faster investments.

If you’d like help designing your offering, please watch for our upcoming announcement on a FREE 5-day challenge—Create a Golden Opportunity for Investors: How to Design a Win-Win Investment Offering. During this challenge, we will give you bite-sized lessons and quick daily assignments that will culminate in your having a customized investment offering drafted.

Sign up for our newsletter below to make sure you receive details on how to join the challenge.  

VIDEO: COVID-19 – How has it impacted the world of crowdfunding?

VIDEO: COVID-19 – How has it impacted the world of crowdfunding?

Check out this great video featuring our client Mike Loyd of Dope Coffee who successfully raised funding using Investment Crowdfunding during the pandemic.

Watch the video here:

Do I Really Have to Do This? Yes, and It’s the Right Thing to Do

Do I Really Have to Do This? Yes, and It’s the Right Thing to Do

Raising investment dollars for your business is one of the smartest ways to reach your long-term goals. But like most things that are worthwhile, getting investments is work. And it’s not just the work you have to put into finding your ideal investors and getting them on board.  

It’s the things you have to do so you don’t get in trouble. One thing is disclosing information about your company. If you are doing any capital raise, you have to disclose material information to potential investors1. Beyond that general requirement, what you have to disclose varies according to the type of capital raise you do. Some types of offerings require very specific information. Let’s say you do an offering under Regulation Crowdfunding. In that case, you’ve got to tell everyone in the world: 

  • what your business is
  • how you’re planning to make money
  • what you’re planning to do with the funds you get from the raise
  • how much money you made in the last two years
  • and risks that investors would want to know about before they invest

And you need to be pretty sure about all of this. You can’t guess or give answers that don’t have a reasonable basis—and you can’t make important changes after launching your campaign without telling everyone what those are. You can’t claim you are doing things that really you’re just planning to do. (Close enough, right? No.) You can’t omit important risk factors or important information because you think people won’t invest in you. 

Yes, this can seem like a hassle. Yes, it can take time. And yes, it can take money to hire someone to help you do it right.  

You can’t guess or give answers that don’t have a reasonable basis…and you can’t claim you’re doing things that really you’re just planning to do.

So you might say, “I know my company is great. Do I really have to do all of this?” Yes, you really do. If you don’t, you could get into serious trouble with the federal Securities Exchange Commission (SEC), state regulators, and/or your investors.

But disclosure is not just about staying out of trouble. It’s about building an economy that is based on trust, transparency, cooperation, and compassion. 

People don’t tend to talk about the SEC as a warm and fuzzy institution. But, believe it or not, the SEC exists to protect individuals and our economy—in part by insisting on the truth. In the 1920’s, businesses were making extravagant claims, and people from all walks of life were investing like crazy2. But then stock prices fell dramatically; banks failed; and unemployment and hunger abounded3. We entered the Great Depression in part because companies were dishonest4. The laws governing capital raises were enacted to prevent this5. 

If you’re not being straight with the people supporting you, you run the risk of cheating them. That’s no way to make a better world. 

Of course, put your best foot forward. You are one of those special people who have the courage to start a business and make a difference. Be proud. 

But don’t hide your flaws. And don’t make up reasons why you’re great. Be honest with the people willing to be by your side as you navigate the choppy waters of entrepreneurship: the people willing to take a chance on your dream.  

And seek out investors who really believe in you, who know that no one is perfect, and who know that the future is unpredictable. I guarantee that they are the ones who will have your back when the going gets tough. 

We can’t control the future, but we can control how we treat each other now, and we can work toward a future where we all can thrive. 

Be well, stay safe, and keep going. You can do it.

P.S. If you want help figuring out how to raise money and stay out of trouble, give us a shout. We can help you with marketing, deciding what investment to offer, complying with those pesky laws, and coaching you so you can keep your head in the game no matter what’s going on in the world.

Know All the Investor Types

Know All the Investor Types

I recently got the inspiration to do a 6-session book study program in which we go through one of the key chapters of my book, Raise Capital on Your Own Terms, in each session. I was thrilled when almost 90 people decided to join us!

We’ve had two calls so far, and participants have been incredibly engaged, not only asking great questions, but also sharing resources with each other and creating interest groups where they are taking conversations further.

One of the hot topics we’ve been discussing is “who are investors and how do you find the right ones?” I gave a presentation about the following distinctions that you should be aware of when raising money:

  1. Professional investors versus non-professional investors—Professional investors are people who invest in small businesses on a regular basis. Conservatively, they account for only 0.3% of all investors in our country. Everyone else is a non-professional investor—people who go about their lives without thinking much about investing.
  2. Outside-the-box investors versus conventional investors—Outside-the-box investors are those who have an open mind about what makes a good investment while conventional investors are those who have pre-conceived, rigid ideas about investing. Most professional investors are conventional and most non-professional investors are outside-the-box.
  3. Accredited versus unaccredited investors—Accredited investors are defined under federal law, generally, as those who have at least $1 million in net worth or $200,000 in annual income. They make up approximately 10% of the population; 8% of accredited investors are “active,” meaning that they actively invest in small business, usually by joining an angel group. Depending on your legal compliance strategy, you may be limited to only raising money from accredited investors, but there are options that make it possible to raise money from both accredited and unaccredited investors—what I like to call “the 100%.”
  4. Angel investors versus OPM investors—Angels are those who actively invest their own money in small business. OPM investors invest other people’s money (OPM) and therefore are much more constrained than angels due to their obligations to their investors.

Capital on Your Terms Community

Because the book study has been such a success, we are planning to launch a pilot monthly membership program for those who want to learn more about raising capital on your own terms. Topics will include:

  1. Getting clear on your goals and valueshow much capital to raise, when and how often to raise, long-term plans for your business including exit strategy, understanding what you can offer investors, etc.
  2. Your ideal investors—who they are, where to find them, and designing the ideal relationship with them.
  3. What to offer investorsdifferent business structures and how they affect your relationship with investors, what to put in the term sheet, how to describe the offering, how to get literate on various aspects of investments, etc.
  4. Legal compliance strategy—what are the options and how do you stay compliant.
  5. Investor enrollment strategy—what to show potential investors, how to get meetings, what to say in the meeting, how to follow up and close the deal.
  6. Prepare to address mindset obstacles—know what obstacles may arise along the way and prepare to address them, so they don’t stop you on your fundraising journey.

The membership program will include live monthly office hours and an online platform where you can get your questions answered, get feedback, and share resources.

If you’re interested in learning more about this new offering, please click here to sign up for our waiting list, and we will email you with the details.