Crowdfunding Update and What to Do for Now by Bruce E. Methven

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If you missed it during the holidays, unfortunately the SEC has indicated that it will not issue its final rules for crowdfunding or for Reg. A+ offerings until October of 2015.  In addition, final regulations generally take effect 60 days after being officially published in the Federal Register.  That means the earliest that these types of offerings will be allowed is a year from now, in January 2016. 

 

"Crowdfunding" here means offerings where lower-level investors can purchase stock, LLC units or promissory notes.  This is different than what is touted currently as "crowdfunding."  The current version is advance sales of goods (pay now, often at a discount, and receive the goods later when they've been manufactured) or promotional items or recognition for the money. 

 

In addition, the tea leaves indicate that the SEC is under immense pressure to NOT follow its preliminary Reg. A+ rule.  That preliminary rule would prevent the states from requiring that an offeror also obtain state approval of an offering in excess of $5 million even though the SEC has already approved it.  It's possible that the recent Republican capture of the U.S. Senate might cause a different result, but that seems unlikely given that state regulators and specific Senators are vehemently opposed to the preliminary rule. 

 

In any case, the question for now is:  What can companies and real-estate funds do now to raise investor money that both allows full public advertising and does not require that the investors all be accredited (as the year-old Rule 506c offering does)? 

 

The practical choices are a federal S-1 offering or the current Reg. A offering – both of which can lead to the securities being traded on the over-the-counter market – or a single state qualification by permit.  These require some explanation and will be discussed in the next email/blog-post after this one. 

 

Companies that DON'T need full public advertising can make a traditional Rule 506b offering.  Basically a company can contact potential investors it reasonably believes to be accredited or sophisticated and any type of foreign investor about the offering.  A company can also post information on web sites and social-media sites about what the company does and about this type of investing.  (It cannot provide information about past, current or future offerings, though.)  Those sites can also ask viewers to respond to an investor questionnaire – and the company can provide information about the offering if the responder seems to be accredited or sophisticated (or foreign).  This should not be done without guidance from an attorney, though, as it's easy to cross over into prohibited solicitation.  A subsequent email/blog-post will discuss this in more detail as well.   

 

Bruce E. Methven

 

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Disclaimer and Distribution

The foregoing content constitutes general information only and should not be relied upon as legal advice.
You are welcome to copy and distribute this document for non-commercial purposes, but it may not be edited and the prior warning and the following must be left on it:

Bruce E. Methven, 2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
www.TheCaliforniaSecuritiesAttorneys.com
CaliforniaSecuritiesAttorneys[at]gmail.com
Copyright 2015 Bruce E. Methven, All Rights Reserved.

 

 

Amendments to Offerings by Bruce E. Methven

Amendments to Offerings by Bruce E. Methven

 

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What does a company do if it has started an offering and then finds that it needs to significantly alter the information provided to investors or change the terms of the offering?  Those changes call for action regarding two groups, the securities regulators and the investors. 

 

With respect to the securities regulators, much depends on whether the offering is using registration or an exemption from registration.  Registrations require prior approval from a regulator and include things like a federal S-1 offering or a state qualification by permit.  Exemptions, for example a federal Rule 506 offering, do not require approval but do require that forms be filed with the regulator(s). 

 

If the offering is registered, generally the amendment first must be presented to the securities regulator for approval. 

 

If the offering is using an exemption from registration, frequently nothing needs to be done unless the change affects information on any forms that have been filed.  In that case an amended form needs to be submitted.  With a Rule 506 offering, for example, Form D must be filed with the SEC.  If the change to the offering requires changes in the prior information provided on Form D, an amended Form D must be filed.  No approval is needed from the regulator, though; all that has to be done is make the filing. 

 

Investors are another matter.  If there are updates or material changes to an offering, the private placement memorandum (aka the offering circular or prospectus) should be amended or revised -- at least for those who have not yet invested. 

 

For those who have already invested, if there are changes that negatively affect a prior investor's rights or there is information that should have been disclosed previously (versus new information), often the best approach is to make the new disclosures to the prior investors and give them an opportunity to withdraw their investment if they wish.  Assuming a prior investor wishes to stay despite the changes, something in writing signed by that investor should be obtained. 

 

On the other hand, if the changes positively affect prior investors' rights (or are neutral) and do not constitute information that was required to be disclosed originally (perhaps because those events had not yet taken place), there likely is no legal requirement that they be informed, much less that their additional consent be obtained.  Still, it is always good practice to keep investors current regarding developments with the offeror, so in most cases the changes are presented to the prior investors in the form of a letter or an email.   

 

Bruce E. Methven

 

*****************************************

 

Ebook

My eBook "Raising Money – Legally" is available at Amazon.

(To see the table of contents, click on the image of the book and then scroll down.)

There are "free Kindle reading apps" for many devices online.

 

More Articles Online
For more information on securities laws, head to Background on the Securities Laws:

www.thecaliforniasecuritiesattorneys..com

 

Disclaimer and Distribution

The foregoing content constitutes general information only and should not be relied upon as legal advice.
You are welcome to copy and distribute this document for non-commercial purposes, but it may not be edited and the prior warning and the following must be left on it:

Bruce E. Methven, 2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
www.TheCaliforniaSecuritiesAttorneys.com
CaliforniaSecuritiesAttorneys[at]gmail.com
Copyright 2013 Bruce E. Methven, All Rights Reserved.

SEC Releases Proposed Regs for Crowdfunding – Bruce E. Methven

SEC Releases Proposed Regs for Crowdfunding – Bruce E. Methven

 

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Finally there are proposed SEC regulations for "true" crowdfunding as established by the JOBS Act!  (These are way past the deadlines set by the Act.)  We now have a much better idea how the SEC will handle crowdfunding that involves the sale of stock or promissory notes. 

 

The SEC released the proposed regulations on October 23.  There is a 90-day period for comments beginning when the proposed regulations appear in the Federal Register (which will be soon).  This type of crowdfunding will not be available, though, until after the SEC receives comments and issues final regulations. 

 

Although the JOBS Act language was ambiguous, in one bit of good news the SEC has clarified that up to $1 million may be raised by crowdfunding in a 12-month period without counting amounts raised by other exempt offerings.

 

On the other hand, amounts sold by entities controlled by the issuer or under common control with the issuer, as well as any amounts sold by any predecessor of the issuer, all count toward the $1 million crowdfunding limit.  In addition, an issuer cannot solicit purchasers for a concurrent separate offering by way of a crowdfunding offering or vice versa.  In a way, this may be thought of as a prohibition on a "bait and switch" with respect to simultaneous offerings.

 

There was also ambiguity about the two classes of investors for crowdfunding.  In another piece of good news, the SEC has clarified that under the proposed rules, only if both annual income and net worth are less than $100,000, then a limit of $2,000 or 5 percent of the investor's annual income or net worth, whichever is greater, applies. If either annual income or net worth exceeds $100,000, then a limit of 10 percent of the investor's annual income or net worth, whichever is greater, but not to exceed $100,000, applies.

 

The JOBS Act limits crowdfunding to issuers who, among other things, are organized under the laws of a state or territory of the United States or the District of Columbia (no foreign issuers), are not reporting companies (public companies required to file periodic reports with the SEC), and are not investment companies (no crowdfunding hedge funds!).

 

The proposed rules also exclude an issuer that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies – but this is pretty standard for offerings. 

 

Interestingly, the proposed regulations require issuers to disclose the amount of money the intermediary is being paid.  This may lead to some price competition among the intermediaries. 

 

For offerings of more than $500,000, the proposed rules require issuers to provide audited financial statements.  One question is whether this will nudge issuers who wish to raise more than $500,000 to other types of offerings that have no requirement of audited financials. 

 

Although a crowdfunding offering must be conducted through an intermediary, under the proposed rules an issuer could publish a notice advertising the terms of an offering provided that the notice includes the Internet address of the intermediary's platform.  The permitted notices would be similar to a brief "tombstone ad," but the issuer could distribute the notice by any means, including in newspapers or on social media sites.

 

In an intriguing approach, the SEC is not requiring issuers to set a fixed price initially – so dynamic pricing is allowed.  On the other hand, investors would have a reasonable opportunity to cancel the investment commitment after the price is fixed.

 

At least for the time being, crowdfunding portals will have to register both with FINRA and with the SEC.  Also, because of concerns about conflict of interest, an intermediary and its directors, officers and partners cannot have any financial interest in an issuer using its services.

 

The intermediary must obtain a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer. 

 

Because the SEC wants to encourage potential investors to compare notes, the proposed rules require an intermediary to provide channels through which investors can communicate with one another (and with representatives of the issuer) about the offering.

 

Along these lines, the proposed rules would give investors an unconditional right to cancel an investment commitment for any reason until 48 hours prior to the deadline identified in the issuer's offering materials.

 

The proposed regs are available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf and comments may be submitted at

http://www.sec.gov/cgi-bin/ruling-comments?ruling=s70913&rule_path=/comments/s7-09-13&file_num=S7-09-13&action=Show_Form&title=Crowdfunding. 

 

It will be very interesting to see the resulting public comments – and the SEC's final regulations.

 

Bruce E. Methven

 

*****************************************

 

Ebook

Check out the eBook Raising Money – Legally

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Disclaimer and Distribution

The foregoing content constitutes general information only and should not be relied upon as legal advice.
You are welcome to copy and distribute this document for non-commercial purposes, but it may not be edited and the prior warning and the following must be left on it:

Bruce E. Methven, 2232 Sixth Street Berkeley, CA 94710
Phone: (510) 649-4019; Fax: (510) 649-4024
www.TheCaliforniaSecuritiesAttorneys.com
CaliforniaSecuritiesAttorneys[at]gmail.com
Copyright 2013 Bruce E. Methven, All Rights Reserved.

Local Real Estate Deals TV

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Local Real Estate Deals DOT TV Station

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Regards,

Rob Cass
www.LocalRealEstateDeals.com

If you are not part of the solution, you are part of the problem!

I am still amazed at the amount of people out there that are sticking to their old ways and contributing to the same old problems. Frankly, I don't care who is responsible for the mortgage and real estate industry crisis...As far as I am concerned we are all, in some way, responsible for this mess we are in. To be absolutely clear, we don't have time to point fingers anymore, now is the time to stand up and make the decision to be a part of the solution.

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I have had the chance to speak with them and they have great attitudes, even when things aren't going great. They have that "twinkle" in their eye (no, I haven't spoken to them in person) but you just get a sense from the folks at Blazevic that they know what they are doing and they are confident in their abilities and their role in the market place. Those are the kind of people that I need to rub elbows with on a regular basis.

So many individuals and companies are now fearful of becoming over leveraged or are worried that the market will go down even further. When you surround yourselves with the experts in the industry, you don't have to second guess every decision. You already have a team of professionals watching out for you and working with you to make sound decisions. These companies are out there, just talk to them and you will hear it in their voice and see it in their mannerisms. You will either hear scarcity, or abundance, but it is unmistakable.

If you are not sure what I am talking about, take a moment to listen for yourselves to see if you can "feel" the difference. Look them up online and just strike up a conversation with them. They are here for the long haul and they have a great outlook.
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Happy Investing!

Rob

http://www.LocalRealEstateDeals.com

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