It’s Official!

It’s Official!

Things just got a lot easier for you if you are looking to invest or raise money via Investment Crowdfunding. The following is a summary of changes that went into effect on March 15 and will improve Investment Crowdfunding for both companies and investors:

  • The maximum amount that companies can raise each year is $5M, up from $1.07M.
  • The investment cap no longer applies to accredited investors. They are free to invest any amount they choose.
  • The formula for determining the investment cap for non-accredited investors has improved. If an investor has income or net worth below $107,000, the investment cap is the greater of $2,200 or 5% of the higher of income or net worth. If the investor has income and net worth above $107,000, they may invest up to 10% of the greater of income or net worth, up to $107,000.
  • A new ‘Test the Waters’ rule allows companies to solicit interest in an offering prior to the filing of the mandatory Form C.
  • The use of Special Purpose Vehicles is now permitted. This will be useful for companies that are concerned about having a large number of investors on their cap table.
  • The temporary relief measure allowing companies to raise up to $250,000 without the need for reviewed financials has been extended to offerings started before August 28, 2022.
  • The SEC has clarified that offline oral communications with investors are permitted providing the communications are compliant.
  • Communications about the terms of the offering may now include progress (% of goal reached, for example) in addition to the amount of securities being offered; the type of security being offered (debt or equity); the price of the securities; and the closing date of the offering. All communications must include a link to the campaign.

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.

Integration

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.

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.

There’s no going back – a way forward

There’s no going back – a way forward

My colleague Angela Barbash of Revalue wrote a great blog post with some practical resources for those of us who want to use the COVID 19 crisis as an opportunity to move toward a healthier, just, and sustainable economy that creates wealth and prosperity for all.

Here is an excerpt.  For the full post, click here.

As each town and state considers the logistics of reopening, there will be a void in our collective consciousness where once a flawed-yet-understood socioeconomic infrastructure existed, but now there is only a vast, open landscape of opportunity for a newly reconstructed infrastructure that will, hopefully, carry us all into a more equitable future for generations to come.

We need a different way forward, what we might call the Theory of Comparative Resilience. My basic proposition is simple: Those communities that are best able to withstand future crises—whether pandemics, climate disruptions, or financial meltdowns—will be the ones that thrive economically. They will be the best places for investors to park their money. They will attract the best and the brightest people. They will be the places where residents feel secure enough to innovate. As your community begins the long road of rebuilding, here are eight criteria by which you might measure your community’s comparative resilience.

Local Ownership

Local Investment

Economic Diversity

Regeneration

Innovation

Social Equity

Connectivity

Social Performance of Business

Major Changes to Securities Rules

Major Changes to Securities Rules

For those of us who care about moving investment dollars into the businesses we love, March 4, 2020 was like Christmas, New Year’s Eve, and the Fourth of July all wrapped into one. The Securities and Exchange Commission (SEC) released proposed rule changes that will make raising funds from investors easier for smaller businesses. The new rules aren’t perfect, and there are some things we wish they had included but didn’t, but these changes are really exciting! 

We are currently in a comment period, and we expect the new rules to take effect in the next couple of months. Please let us know if you have any comments you’d like us to add to our comment letter!

Here is a summary of the most exciting changes. But first, a big caveat: these rules do not preempt state law. So, for example, even though the new federal rule may allow you to publicly announce that you’re raising money at a pitch event, the law of the state you’re in very well may not.

Integration of Securities Offerings

Under current rules, if you switch from one type of offering to another (e.g. from a private offering that includes unaccredited investors to a publicly advertised offering under Rule 506(c)), you generally have to let six months pass between the end of the first offering and the beginning of the second. Under the new rules, the maximum amount of time you would have to wait between two offerings is 30 days. Unfortunately, state level integration rules could still prevent this.

Speaking at Pitch Events

We have often told our clients that if they speak at a pitch event, they cannot mention they are raising money without violating the rules against public solicitation of an investment offering. The new rules state that if you speak at certain types of events and publicly say that you are raising money, this will not be considered a public solicitation. The event has to be sponsored by a college, university, or other institution of higher education; a local government; a nonprofit organization; or an angel investor group, incubator, or accelerator. The sponsor would not be permitted to charge a fee to attendees of the event, other than reasonable administrative fees.

Testing the Waters

Under the current rules, you cannot offer an investment opportunity unless you have determined what compliance strategy you plan to use and, in many cases, complete compliance filings. The new rules propose to permit the solicitation of interest in an investment opportunity before having to incur the expense and effort associated with securities compliance. This is especially exciting if you are planning to raise under Regulation Crowdfunding because you will now be able to talk about a potential Reg CF offering without first having to complete all of the compliance requirements. And Reg CF preempts state requirements so you will be able to do this country-wide.

Offering and Investment Limits

The proposed rules increase the limit of how much you can raise under Rule 504 from $5 million to $10 million. This exemption allows you to include both accredited and unaccredited investors. The proposed rules also increase the amount you can raise under Reg CF from $1.07 million to $5 million, increase the cap on what each investor can invest, as well as remove caps altogether for accredited investors.

Crowdfunding Vehicles

The rules allow the creation of a special type of entity called a Crowdfunding Vehicle. The purpose of this entity is to hold equity investments that are then invested in the company that is raising money under Reg CF.  This means that all of the equity investors in a Reg CF raise can be combined into a single entity. There are significant limitations on the nature and scope of the crowdfunding vehicle’s permitted activities under the proposed rule.

Regulation Crowdfunding Eligible Securities

The rules propose to prohibit the offering of SAFEs (Simple Agreements for Future Equity) under Reg CF.

Stay tuned for updates on the final rules!

2019 Social Venture Circle Conference Highlights

2019 Social Venture Circle Conference Highlights

I have been attending Social Venture Circle (fka Social Venture Network) conferences for about 10 years, and they never disappoint. These conferences attract business and finance leaders of all ages to discuss how business and investing can transform our world and hasten the arrival of the “next economy”—one that provides health, happiness, and sustainable prosperity for all.

One of the highlights of the 2019 conference was a conversation between SVC Executive Director Valerie Red-Horse Mohl and Anand Giridharadas, author of Winners Take All.

Anand’s book was difficult for many in the impact investing and social enterprise space to read. Anand called out changemakers for “falling prey to . . . a belief in ‘changing the world’ in ways that tend to keep it the same, in using the tools of hypercapitalism to soften its blows, all while refusing to question the system generating the problems.”

Presentations by Morgan Simon, Diana Marie Lee, Taij Kumarie Moteelall, Hope Lehman, Nathalie Molina Niño, Derek Razo, and many more (including me!) provided glimpses of what a truly just, sustainable, and regenerative economy and financial system would look like.

While it is true that some who call themselves impact investors are doing more harm than good by providing a fig leaf of respectability for rapacious, extractive finance, many speakers at the SVC conference delved into the hard questions and put forth radical ideas—exactly what is needed in this time of growing wealth inequality, economic insecurity, and political disengagement.