Tag: Crowdfunding

IOSCO Releases Report on Fintech

IOSCO Fintech financial technologyThe International Organisation of Securities Commissions (IOSCO) has released a new report that says that changes resulting from FinTech are testing the boundaries of full disintermediation through the use of technology.  IOSCO is the international body that brings together the world’s securities regulators and is a global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognised standards for securities regulation. It works with the G20 and the Financial Stability Board on the global regulatory reform agenda.

The report incorporates the finding of three surveys:

  1. the Committee on Emerging Risks (CER) and the Growth and Emerging Markets Committee (GEMC) survey to gain further insight on the types of FinTech firms in respective jurisdictions, key regulatory actions taken by members, and the practices of FinTech firms in onboarding investors;

  2. the CER, the Affiliate Members Consultative Committee, and World Federation of Exchanges survey on distributed ledger technology; and

  3. a GEMC survey reviewing the state of development of FinTech in emerging markets, including existing and potential regulatory implications.

The report particularly examines:

  • Financing Platforms, including Peer-to-Peer (P2P) lending and equity crowdfunding (ECF)

  • Retail Trading and Investment Platforms, including robo-advisers and social trading and investing platforms

  • Institutional Trading Platforms, with a specific focus on innovation in bond trading platforms

  • Distributed Ledger Technologies (DLT), including application of the blockchain technology and shared ledgers to the securities markets.

ARTICLE BY Jonathan Lawrence of K&L Gates

Copyright 2017 K & L Gates

SEC Releases Crowdfunding Rules for Securities Offerings

Investors will be able to purchase securities through Internet crowdfunding platforms under new final rules released by the Securities and Exchange Commission (SEC) in October. The final rules, known as “Regulation Crowdfunding,” originated in Title III of the Jumpstart Our Business Startups Act of 2012 (JOBS Act). The rules will take effect in May 2016.

Alongside Regulation Crowdfunding, the SEC also proposed amendments to Rules 147 and 504 under the Securities Act of 1933 (the Proposed Amendments). A brief review of Regulation Crowdfunding and the Proposed Amendments is provided below for companies or investors eager to discover new capital raising or investment opportunities and for broker-dealers interested in expanding into the crowdfund arena.

Key Points: What to Know About Regulation Crowdfunding

The Regulation Crowdfunding rules are extensive, but they can be more readily understood and categorized as: 1) operative provisions; 2) disclosure mandates; and 3) crowdfunding platforms.

Operative Provisions

Regulation Crowdfunding will: i) enable companies to raise up to $1 million, in the aggregate, over a 12-month period; ii) for individual investors whose annual income or net worth is less than $100,000, enable such investors to spend the greater of $2,000 or five percent of the lesser of their annual income or net worth on crowdfunding investments over a 12-month period; iii) for individual investors whose annual income or net worth equals or exceeds $100,000, enable such investors to spend ten percent of the lesser of their income or net worth on crowdfunding investments over a 12-month period. The goal is to allow more people to dabble in investments, and to level the playing field for investments by ensuring that even the wealthiest of individual investors cannot spend more than ten percent of their income or net worth on crowdfunding offerings in a given 12-month period. Also crucial to note are the following points:

  • Securities purchased in a crowdfunding transaction will be considered restricted securities and will be subject to resale restrictions for one year in most circumstances;

  • All of the new crowdfunding offerings will need to be completed with the assistance of a registered broker-dealer or done through a registered “funding portal,” to be discussed in greater depth below; and

  • Some companies are unable to use the exemption, including foreign companies, publicly-traded companies, and companies that are subject to disqualification under Regulation Crowdfunding.

Disclosure Mandates

Companies seeking to raise money through crowdfunding will have to meet specific disclosure requirements under Regulation Crowdfunding including:

  1. The price of the securities to be offered;

  2. How the price was determined;

  3. The target offering amount;

  4. The deadline to reach the target offering amount;

  5. The funding deadline;

  6. Whether the company intends to accept investments that will cause the target offering amount to be exceeded;

  7. A discussion of the company’s financial health;

  8. A discussion of the business and how proceeds from the offering will be used;

  9. Information about directors, officers, and owners of 20 percent or more of the companies;

  10. Certain related-party transactions; and

  11. Financial statements of the company that may or may not need to be audited, depending on a fairly complex set of circumstances.

Crowdfunding Platforms

Regulation Crowdfunding contemplates the creation of crowdfunding portals to facilitate Internet-based transactions that, in theory, reduce costs and boost efficiency. The “funding portals” will need to be registered with the SEC via a new form – Form Funding Portal – and such portals will need to be registered as members of a national securities association (i.e., FINRA). In short, the funding portals will be the intermediary platforms through which all crowdfunding will be conducted, and these portals will need to comply with the following requirements:

  1. Provide investors with informative materials explaining how to use the platform, what is being offered, and all relevant disclosures about the company, resale restrictions, investment limitations, and the like;

  2. Take measures to reduce fraud risks, including by verifying with the companies offering securities that such companies are in compliance with Regulation Crowdfunding and that the companies are maintaining up-to-date records of their security holders;

  3. Post and maintain mandatory disclosures for 21 days before any offerings are live (i.e., a waiting period of 3 weeks) and throughout the actual offering period;

  4. Make available forums or other communication venues for investors to discuss offerings on the platform;

  5. Explain how the intermediary is being compensated for hosting the transactions;

  6. Require investors to set up accounts officially before being allowed to buy securities;

  7. Have a reasonable basis to believe that investors are in compliance with the investment limitations (i.e., they will need to ensure investors are not exceeding their spending limits in a given 12-month period);

  8. Provide adequate notices and confirmations at each step of the investment process;

  9. Comply with maintenance and transmission of funds requirements; and

  10. Comply with any requirements dealing with completion, cancellation, and re-confirmation of offerings requirements.

Crowdfunding intermediaries will be prohibited from providing access to companies they believe pose fraud or other problems that could negatively impact investor protections; holding financial interests in companies offering securities on their platforms, unless such financial interests are being used as consideration to pay the intermediaries for their services (subject to certain conditions); and paying third parties to provide information that will personally identify any investors or potential investors who may be using or planning to use the platform. Specific to funding portals as intermediaries, Regulation Crowdfunding also prohibits such portals from: offering investment advice or making purchase recommendations; soliciting purchases, sales, or offers; soliciting purchases, sales, or offers via promoters or other persons for pay; and holding or handling investors’ funds or securities. Despite the numerous prohibitions, Regulation Crowdfunding is intended to make transactions smoother and provide a safe harbor (i.e., set of guidelines) for funding portals, such that, if the portals follow the guidelines precisely, they can be assured that they are in compliance with Regulation Crowdfunding.

Key Points: What to Know About the Proposed Amendments

In an effort to balance the need to help smaller companies raise capital with the need to protect investors from fraudulent and misleading securities sales, the SEC has proposed amending Rules 147 and 504 as follows:

  • Rule 147 – This rule currently allows a safe harbor for exemption from costly registration for offers and sales made entirely within one state. The amendments are intended to make it easier for companies to make intrastate offerings of their securities by: 1) eliminating restrictions on offers (i.e., general solicitation and advertising will be allowed), though sales would still need to be made only to residents of the issuer’s state or territory; and 2) expanding the meaning of “intrastate offering” and the issuer eligibility requirements. The amended Rule 147 would apply to offerings registered in-state or conducted under an exemption from state law registration that caps the amount of securities allowed to be sold by an issuer at $5 million over a given 12-month period, along with spending limits for investors.

  • Rule 504 – This rule currently provides a safe harbor exemption from registration for certain small offerings. The amendments would boost capital-raising by increasing the aggregate amount of securities allowed to be offered and sold under Rule 504 from $1 million to $5 million, during any 12-month period. The amendments would boost protection for investors by prohibiting a set of defined “bad actors” from participating in such offerings.

Conclusion: Timelines for Regulation Crowdfunding and the Proposed Amendments

The new Regulation Crowdfunding rules and forms will be effective 180 days after they get published in the Federal Register (i.e., in May 2016). The forms that will enable funding portals to get registered with the SEC will become effective on January 29, 2016, thereby allowing the funding portals to be active or ready for transactions months before any transactions under the new rules are allowed by law.

Regarding the Proposed Amendments to Rules 147 and 504, the SEC is welcoming public comments, and will continue to do so for a 60-day period, which will end approximately by the end of the year. Crowdfunding has been the subject of much discussion and debate as evidenced by the nearly three years it took the SEC to promulgate Regulation Crowdfunding. It is still too early to predict whether crowdfunding will emerge in 2016 as a successful alternate path for capital-raising for small companies. Indeed, only time will tell whether the SEC will manage to balance its primary goal of investor protection with the ambitious aim of offering a more grassroots-level option of raising money.

To review the text of Regulation Crowdfunding and the Proposed Amendments, see the following links from the SEC: http://www.sec.gov/rules/final/2015/33-9974.pdf and http://www.sec.gov/rules/proposed/2015/33-9973.pdf.

Article By Corporate Services at Dickinson Wright of Dickinson Wright PLLC

© Copyright 2015 Dickinson Wright PLLC

Crowdfunding? Really? Crowdfunding Rule under the JOBS Act

Lewis Roca Rothgerber LLP

Count me a Luddite when it comes to social media in general, and more specifically, the supposed potential for crowdfunding and raising capital for start-ups and small businesses. My skepticism about crowdfunding admittedly has its roots in the resistance to public solicitation of non-public offerings that 20 years in state securities regulation embedded in me. Publicly solicited “private placements” before the advent of Rule 506(c) were all but certainly fraudulent. But, times (and exemptions) change.

Now, the word on the street is that the SEC has dragged its feet too long on promulgating its Congressionally mandated rule on crowdfunding under the JOBS Act, so the Republican House is going to take matters into its own hands and legislate a more rational crowdfunding exemption than the provision in the JOBS Act and proposed rule, without the need for SEC action. I can’t wait to see that hummer!

Since the subject of allowing crowdfunding for investments first arose in the initial rumblings that preceded the JOBS Act, there have been literally hundreds of articles, blogs and other commentaries tooting crowdfunding as the panacea for raising capital for start-ups and small businesses with the result that all sorts of new jobs would be created (a claim based more in hyperbole than empirical evidence.) Jobs? Perhaps some, but enough to make a national economic difference? Really? There has been at least one University of Colorado law review article on comparable legislation in Great Britain, and I have assisted a former securities law student of mine at the James E. Rogers College of Law, University of Arizona, in preparing her own article on crowdfunding that includes a review of British as well as other European capital raising crowdfunding regimes.

Most of these articles on crowdfunding appear to have been written by people who hope to profit providing services to general public crowdfunding principals once it’s lawful. A good share of them have been observations and opinions written by lawyers who regularly critique federal and state regulations, proposals and market developments. To one extent or another, the articles focus on Congress versus the SEC, or the needs for capital raising versus securities regulations.

These proselytizers and commentators have all but ignored what is truly the other side of the investment equation—the investors. I’m not talking about fraudsters. That dirty element will worm its way into whatever system is finally implemented, to one extent or another. I’m focusing here on the people who send their money to hopeful, legal crowdfunding issuers.

If the proponents of investment crowdfunding can run the “start-up businesses create jobs” pennant up the rhetorical flagpole, it’s only fair to allow me to hoist the “most start-up enterprises fail within five years” banner up right along next to it.

The unfortunate reality is that start-up businesses make horrible investments. Few of them survive at all, let alone turn a profit any time soon, let alone provide a return to investors. Investing in start-ups is like hunting ducks with a rifle, and few investors have enough “bullets” to fire.

Entrepreneurs are eternally enthusiastic, energetic and optimistic. They have to be. For many years, the dreamers (and their counsel) urged Congress and the SEC that “if only the ban on public solicitation and advertising were lifted, we could all fund our private placements.” Now that that cat is out of the bag with Rule 506(c), at least for accredited investors, the chant has shifted (predictably) to, “if only we could use crowdfunding to publicly solicit and advertise to reach non-accredited investors.”

If a start-up entrepreneur—I’ll call him “Fred”—is ready to turn to looking for funding from strangers, I think it fair to draw an inference or three about what has happened to date. First, Fred is tapped out on his own funds. Second, the bank has said or would say “no” to a loan, based on Fred’s lack of collateral or some other deficiency. Third, anyone Fred knows (and he may not know anyone) who might invest in his business—those people and businesses with whom he has a “pre-existing business or personal relationship”—have either invested as much as they are going to, or have found ways to be “on vacation in the Australian outback and hard to reach” when Fred has come calling for money the first time or for more later.

At this point, many entrepreneurs would keep working until they had saved up enough money of their own, or grew to qualify for that bank loan. A lot of business owners I’ve encountered have no interest in selling equity in their businesses to investors. But there are certainly those who are willing to do so. Whatever, at this point, “Fred” has now gone through all his own cash. His business and personal profile are insufficient to qualify for a bank loan, even if government subsidized. In other words, the professional lenders won’t touch him. Further, anyone who knows him and/or his business who might invest have either done so or won’t. With investment crowdfunding, Congress and several state legislatures and regulators have made the public policy decision to let Fred now turn to perfect strangers, the general public. So, the smallest, riskiest, least sophisticated, most poorly funded, most likely to fail business owners can turn now to the general public for investments when all the professionals and close-in people, those in the best position to know Fred and evaluate his company’s investment potential, have said “no” or “no more.”

To me, this is a public policy that makes no sense. If Congress wants to promote investment in start-ups and small businesses to create jobs, let them direct the Small Business Administration to ease their guarantee standards for SBA loans. Oh, we can’t do that because the SBA would go broke guaranteeing bad loans, thus requiring more federal funding? What’s wrong with this picture?

“Investing” in start-ups is akin to a parent “lending” money to her 24 year old. Good luck ever seeing that money again! At least she’ll get a Mother’s Day card. The non-investment crowdfunding successes to date have usually involved donors getting a sample product, a discount, or a souvenir tee shirt, baseball cap or the like in exchange for their donation. Perhaps Congress should take a hint from these crowdfunding success stories in fashioning its investment crowdfunding legislation, and mandate that investment crowdfunders distribute a commemorative sweatshirt along with their securities. That would at least give the investors something tangible to remember their investment by, and would create jobs by increasing demand for commemorative sweatshirts! Oh, wait, those are made in Malaysia.

ARTICLE BY

Philip A Feigin
Lewis Roca Rothgerber LLP

North Carolina General Assembly Fails to Jump Start Our Businesses with Crowdfunding Legislation

Poyner Spruill Law firm

Crowdfunding is a relatively new capital raising tool, which was generally used in the past as a financing method for such ventures as films and music recordings.  To date, crowdfunding has not been a popular method for offering and selling securities because offering a share of financial returns or profits from business activities would subject the transaction to federal and state securities laws, requiring certain registrations with the Securities and Exchange Commission (SEC) and state securities regulators. U.S. Securities and Exchange Commission, SEC Issues Proposal on Crowdfunding (October 23, 2013).

In 2012, Congress passed the JOBS Act (Jumpstart Our Business Startups Act).  The JOBS Act, among other things, added a new section, 4(a)(6), to the Securities Act of 1933, creating a new exemption for certain crowdfunding offerings from SEC and state law registration requirements.  However, before the law can become effective the SEC must promulgate and implement rules regulating the exemption.  For further information on the JOBS Act, please see The JOBS Act—An Overview and Some Recent Developments, written by Michael E. Slipsky and David R. Krosner.

As of this summer, the SEC has proposed rules for crowdfunding, but those rules are not final. A dozen states are making an effort to join Georgia, Kansas, Michigan, Alabama, Maine, Washington, Wisconsin, and Indiana by developing their own regulations allowing crowdfunding within the states. States are growing frustrated and tired of waiting for the SEC to adopt federal regulations.  See Posting of Bill Meagher to TheDeal.com, States make own crowdfunding rules, rather than wait for SEC (May 5, 2014, 15:03 EST).

In response to the federal delay, Representative Tom Murry of Wake County sponsored state legislation attempting to allow and regulate crowdfunding in North Carolina, filing House Bill 680, the JOBS Act, on April 9, 2013.  House Bill 680 did not pass the Senate and was not eligible for consideration in the 2014 short session.  For that reason, in June the House added the crowdfunding provisions, titled, “Jump-Start Our Business Start-Ups Act,” to the 32 page fifth edition of Senate Bill 734, Regulatory Reform Act of 2014. 

When compromise discussions between the House and Senate on Senate Bill 734 stalled, the Senate added to House Bill 1224 various provisions regarding modifications to the local government sales and use tax rate as well as other provisions including the crowdfunding provisions.  House Bill 1224 had been filed at the beginning of the short session as a bill modifying the Job Maintenance and Capital Development Fund.  The House rejected the Senate’s modifications of House Bill 1224.  As a result, the House and Senate appointed a conference committee, and the committee made its report on July 31, 2014.  The Proposed Conference Committee Substitute was passed by the Senate, however it failed in the House. 

The final version of House Bill 1224, the Proposed Conference Committee Substitute, would have allowed North Carolina residents to invest up to only $2,000 per purchaser – unless the purchaser is an accredited investor as defined by rule 501 of SEC regulation D, 17 C.F.R. § 230.501 – in new in-state ventures through the crowdfunding mechanism.  It would have allowed most companies to raise up to $1 million in capital through unregistered securities without a financial audit and up to $2 million in capital if the issuer has undergone and made available to each prospective investor and the Secretary of State the documentation resulting from a financial audit.  Essentially companies would have been able to sell securities directly to the North Carolina public without having to incur the expense of conducting a registered securities offering.  The NC Secretary of State would have been tasked with the regulation of these types of transactions and would have collected quarterly reports.  See Posting of Mark Binker to WRAL TechWire, Crowdfunding bill clears N.C. Senate Committee,  (July 16, 2014 14:08 EST).

The General Assembly has adjourned sine die.  Although crowdfunding provision had an opportunity to become law during the 2014 short session in either Senate Bill 734 or the Proposed Conference Committee Substitute of House Bill 1224, the General Assembly did not pass the crowdfunding provision.  House Bill 1224 failed in the House and the compromise finally reached for Senate Bill 734 in the ratified bill excluded the crowdfunding provision.  There is a possibility the crowdfunding provision could again be considered before the 2015 session, scheduled for late January, if three-fifths of all members of the Senate and three-fifths of all members of the House vote to do so, as provided in Section 11(2) of Article II of the North Carolina Constitution.  However, the more likely scenario for the General Assembly to return would be for a “special session” by call of the Governor.  As provided in Section 5(7) of Article 3 of North Carolina Constitution, “[t]he Governor may, on extraordinary occasions, by and with the advice of the Council of State, convene the General Assembly in extra session by his proclamation, stating therein the purpose or purposes for which they are thus convened.”

ARTICLE BY

Jillian DeCamp
 
OF 
Poyner Spruill LLP