Crowdfunding Intermediaries or Funding portals (the terms are interchangeable) are hurrying up to be ready to implement rules that will be enacted in early 2013 while at the same time, waiting to find out what those rules will be.  On May 7, 2012, the SEC issued limited guidance for crowdfunding intermediaries.  As has been the case since enactment of the JOBS Act, the SEC continues to ask for public comments and input on its regulatory initiative.  The full text of the guidance discussed in this blog is available on the SEC website.

For my information on funding portals and details of the JOBS Act text related to them, please see my blog entitled Jobs Act Intermediaries – hurry up and wait.

Intermediary Use and Registration Requirements

The Crowdfunding Act amends Section 4 by of the Securities Act of 1933 (the Securities Act) to create a new exemption to the registration requirements of Section 5 of the Securities Act.  The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities as long as no individual investment exceeds certain threshold amounts.  In addition, Section 302 of the Crowdfunding Act requires that all

Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and are members of a registered self regulatory organization (SRO).  Currently that SRO is Financial Industry Regulatory Authority (FINRA).

• The Crowdfunding Act carves out a new class of “broker dealer” called “Funding Portals” that can act as Crowdfunding intermediaries.  Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such registration and ongoing rule and reporting requirements.  In accordance with Section 304, Funding Portals must be “subject to the examination, enforcement and other rulemaking authority” of the SEC and must be a member of an SRO, such as FINRA.

Funding Portal Defined

Subject to additional requirements that the SEC may by rule draft, a funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities it lists; or (iv) hold, manage, possess, or otherwise handle investor funds.

SEC Guidance

The SEC guidance reminds all potential funding portals that they may not act as such until when and if the SEC has drafted and enacted the Crowdfunding rules and regulations and each funding portal has registered with the SEC.  The SEC reminded broker dealers that they are under the same restriction.  Crowdfunding is not yet legal and the SEC has issued many reminders to people to not jump the gun.

The SEC further stated the obvious, they don’t know yet what the forms or process will be for registration, as the rules have not yet been written, nor the forms drafted.

Although it is unclear if FINRA or a new SRO will ultimately act as the regulatory for funding portals, the SEC reminded us that as of today, FINRA is the only SRO in existence registered with the SEC and accordingly, unless and until a new SRO registers under Section 15A of the Securities Exchange Act, FINRA will be the regulating SRO.

The SEC set forth the general terms of the JOBS Act related to funding portals, including that a Funding Portal must:

1. Provide disclosures, including disclosures related to risks;
2. Ensure that each investor reviews investor education information and positively affirms that they understand that they risk losing their entire investment and can afford such loss;
3. Ensure that each investor answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups; emerging businesses, and small issuers;
4. Ensure that each investor answers questions demonstrating an understanding of the risk of illiquidity;
5. Take measures to reduce the risk of fraud by establishing rules and procedures including obtaining background and securities enforcement history checks on each officer, director and person holding more than 20% of the outstanding equity of an Issuer;
6. Not later than 21 days prior to the first day securities are sold file with the SEC and make available to potential investors all disclosure information required and provided by the Issuer
7. Ensure that no offering proceeds are given or available to the Issuer until the target offering amount has been raised and allow investors to cancel their investment during that time;
8. Make efforts to ensure that no investor exceeds its allowable investment amount in any 12 month period, including from all Issuers, and all Funding Portals (i.e. $2,000 or 5% of annual net income or net worth if net income or net worth is less than $100,000 or 10% of annual income or net worth up to $100,000 if annual income or net worth is over $100,000)
9. Take steps to protect the privacy of information collected from investors;
10. Not compensate promoters, finders, or lead generators for providing the broker or Funding Portal with personal indentifying information of any potential investor; and
11. Prohibit its directors, officers or partners from having any financial interest in any Issuer using its service.
12. Not offer investment advice or make recommendations or solicit purchases, sales or offers of securities
13. Not compensate employees, agent, or other persons for soliciting purchases, sales or offers of securities
14. Not hold, manage, possess or otherwise handle investor funds or securities

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Follow me on Facebook and LinkedIn

The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Once a company is suspended from trading, it cannot be quoted again until it provides updated information including complete disclosure of its business and accurate financial statements.  In addition to providing the necessary information, to begin to trade again, a company must enlist a market maker to file a new 15c2-11 application with FINRA.  For a Company with a trading suspension this is a difficult process.  Many market makers are unwilling to take on the assignment and when they do, the comment process with FINRA can be lengthy.  Moreover, even if a 211 application is approved by FINRA, DTC may still refuse to qualify the security for electronic trading.

I expect that the SEC is not finished sending its very loud message that companies without current information will not be allowed to trade.  Just as when the SEC first began suspending the trading of delinquent filers, I believe this is the first in many sweeping trading suspensions of shell companies.

The message is clear; either have current information available on OTC Markets or become a reporting entity on EDGAR, and remain current in your reporting obligations, or face a trading suspension.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Pursuant to the new rule, a security would qualify for listing on the NASDAQ Capital Market if, for at least five consecutive business days prior to approval, the security has a minimum closing price of:

A. At least $3 per share, if the issuer meets either of the following standards determined as follows:

I. Under the Equity Standard, the Issuer would need to meet, among other things:

(i) stockholders’ equity of at least $5 million;

(ii) market value of publicly held shares of at least $15 million; and

(iii) two year operating history.

II. Under the Net Income Standard, the Issuer would have to meet, among other things:

(i) net income from continuing operations of $750,000 in the most recently completed fiscal year or in two of the three most recently completed fiscal years;

(ii) stockholders’ equity of at least $4 million; and

(iii) market value of publicly held shares of at least $5 million.

or

B. At least $2 per share, if the issuer meets the Market Value of Listed Securities Standard, which requires, among other things, that:

(i) market value of listed securities of at least $50 million (this requirement and the price requirement must be met for 90 consecutive trading days prior to applying for listing under this standard);

(ii) stockholders’ equity of at least $4 million; and

(iii) market value of publicly held shares of at least $15 million.

In addition, all issuers applying based on the new standards set forth above, must have either (a) net tangible assets as follows: (i) in excess of $2 million, if it has been in continuous operation for at least three years; or (ii) in excess of $5 million, if it has been in continuous operation for less than three years; or (b) average revenue of at least $6 million for the last three years.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Summary of JOBS Act Changes Effecting General Solicitation and Advertising of Private Offerings

Title II of the JOBS Act provides that, within 90 days of the passage of the JOBS Act (i.e. July 5, 2012), the SEC will amend Section 4(2) of the Securities Act of 1933 and Regulation D promulgated there under, to eliminate the prohibition on general solicitation and general advertising in a Rule 506 offering, so long as all purchasers in such offering are accredited investors.  The JOBS Act directs the SEC to make the same amendment to Rule 144A so long as all purchasers in the Rule 144A offering are qualified institutional buyers.  Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively.  Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.

The SEC will need to formulate rules to determine what “reasonable steps” will be required from issuers to verify a purchaser’s status as either an accredited investor or a qualified institutional buyer.

JOBS Act Changes Number of Shareholders Requiring Registration

The JOBS Act amends Section 12(g) and Section 15(d) of the Exchange Act as to threshold shareholder requirements and registration and deregistration requirements such that the shareholder threshold before requiring registration and subsequent reporting with the SEC has been increased from 500 to either (a) 2,000 or more, or (b) 500 or more unaccredited shareholders;

Impact on Hedge Funds

The impact on hedge funds is obvious – they can now advertise for both accredited and qualified institutional investors.  Moreover, with the increased number of shareholders allowed before registration, a fund qualified for an exemption under Section 3(c)(7) of the Investment Company Act of 1940, can now advertise, and have 1999 accredited shareholders before they would have to register with the SEC and become reporting.

The lift on advertising goes beyond your basic ability to promote on the internet.  It is a lift on the ban for general solicitation, advertising and marketing in general.  For instance, for the first time, hedgefunds will be able to sponsor sporting events and sporting teams.

One caveat of the new rules is that advertising is only allowed where ALL investors are accredited or qualified institutions.  Accordingly, a fund with 35 unaccredited investors, would not be able to advertise, while those unaccredited investors remain in the fund.

Right now, many hedgefunds do not provide any details at all about their investment strategies, historical performance or forecasts of future performance for fear that such open information could be viewed as a solicitation and therefore a violation of the rules.  Upon enactment of the new rules (around mid July) that will all change.

Hedge Funds May Discuss Strategies and Performance

Now, not only will hedge funds be able to discuss their strategies, deal and performance in depth on their website, but on a broader scale, amongst each other.  Broker dealers will be able to pitch investors with glossy brochures.  Open invitation seminars, together with all the trimmings will make a comeback.

Of course the SEC and state anti-fraud rules stay in place (and I expect will be beefed up) as do FDA standard truth in advertising rules.

It is widely agreed that these changes will have a dramatic impact on smaller hedgefunds.  Now the big boys turn away investors; the smaller ones now have a way to find them.  Established hedgefunds think the idea of advertising is not only ludicrous, but somehow below them – a sign of weakness.   Although in the short term, they will not feel the impact, I would bet that in two years’ time, the entire hedge fund landscape will have evolved.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Neither a Rule 506 offering nor a Rule 144A offering will be considered a public offering (i.e. will lose its exemption) by virtue of a general solicitation or general advertising so long as the issuer has taken reasonable steps to verify that purchasers are either accredited investors or qualified institutional buyers, respectively.  Since it would be impossible to ensure that only accredited investors, or qualified institutional buyers, receive, review or become aware of general solicitations and advertisements, the rule focuses on ensuring that the purchasers qualify.

The SEC will need to formulate rules to determine what “reasonable steps” will be required from issuers to verify a purchaser’s status as either an accredited investor or a qualified institutional buyer.

Allowing Middlemen that are not Broker Dealers

In addition, the JOBS Act opens the door for third parties to use general solicitation and advertising to sell and Issuer’s securities without being a registered broker dealer.  In particular, for a Rule 506 offering, a new exemption to the broker dealer registration requirements is added for:

(A) a person that  maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means (i.e. has a website to advertise and sell other companies securities)

(B) that person or any person associated with that person co-invests in such securities; or

(C) that person or any person associated with that person provides ancillary services with respect to such securities.

Ancillary services are defined in the JOBS Act as (A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

Finally, the exemption from registration as a broker or dealer also requires that such person and each person associated with such person (A) receives no compensation in connection with the purchase or sale of the security; (B) does not have possession of customer funds or securities in connection with the purchase or sale; and (C) is not subject to statutory disqualification pursuant to Section 3(a)(39) of the Exchange Act (i.e. bad boy provisions).

CONCLUSION

Title II of the JOBS Act allows the use of general solicitation and advertising to raise private funds for Issuers and hedgefunds.  It also removes any doubt that a website or middle man can introduce accredited investors to Issuers and be compensated for their services.  They still can’t collect a commission on the sale, but clearly now non-licensed individuals can make introductions for a fee (presumably an upfront or flat non-performance based fee).  Of course, this rule will allow crowdfunding sites to advertise offerings that will be limited to accredited investors.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Under an ATM offering program, an exchange-listed company incrementally sells newly issued shares into the trading market through a designated broker-dealer at prevailing market prices, rather than via a traditional underwritten offering of a fixed number of shares at a fixed price all at once.  To complete an ATM, an Issuer must qualify to use Form S-3 for a shelf registration.  Although there are many ways for a larger company to qualify to use an S-3, generally an Issuer must have a public float valued in excess of $75 million.

Generally, the Issuer enters into a sales agreement with a market maker or broker dealer that agrees to “place” the shares that have been registered under the shelf registration statement when requested by the Issuer.  The Issuer must keep the shelf registration statement current until the offering is completed.

An ATM is a fantastic vehicle for both the qualifying Issuer and placement agent.  The qualifying Issuer can raise money on an as needed basis, basically there stock as a form of currency.  The placement agent can earn a fee for placing the stock, without the risk associated with a firm commitment underwriting.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

I have been blogging extensively on the JOBS Act and Crowdfunding Act.  My last blog addressed Herculean effort the SEC must undertake to write the laws and rules which will bring the Crowdfunding Act to fruition by early 2013.  In addition to fashioning the exemption that will allow companies to raise funds using the Crowdfunding Act, the SEC must also fashion rules to govern the funding portals that companies will be required to use in the process.

Funding Portals are popping up everywhere, at least in name and concept.  All of these portals are busy putting together systems internally, but all of those systems are subject to the SEC rules that have yet to be drafted.  Funding portals are hurrying up to be ready to implement rules that will be enacted in early 2013 while at the same time, waiting to find out what those rules will be.

Intermediary Use and Registration Requirements

Section 302 of the Crowdfunding Act requires that all Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC.  As of today, all entities that effect small transactions in securities between an investor and Issuer company (Issuer) must be licensed broker dealers, registered with the SEC and members of a self regulatory organization (SRO) that is a national securities association.  Currently that SRO is Financial Industry Regulatory Authority (FINRA).

The Crowdfunding Act carves out a new class of “broker dealer” called “Funding Portals” that can act as Crowdfunding intermediaries.  Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such registration and ongoing rule and reporting requirements.  As with other aspects of the new law, these rules and ongoing reporting requirements have yet to be drafted.   In accordance with Section 304, Funding Portals must be “subject to the examination, enforcement and other rulemaking authority” of the SEC and must be a member of an SRO, such as FINRA.

FINRA or CFIRA?

Shortly after the signing of the JOBS Act, The Crowdfunding Intermediary Regulatory Association (CFIRA) was created to act as an SRO for Funding Portals.  However, the SEC has yet to decide if CFIRA will be the sole Funding Portal SRO body or whether it will be FINRA.  Moreover, FINRA, who opposed the JOBS Act and Crowdfunding Act, has yet to decide if it is willing to take on the role and responsibility of the Funding Portals new master and chief.

Funding Portal Requirements

Whether ultimately a Funding Portal becomes a member of FINRA or the CFIRA, they will have to follow rules and regulation, meet reporting requirements, and impose requirements on Issuers seeking to use their intermediary services. The Crowdfunding Act creates a new Section 4A of the Securities Act of 1933, entitled “Requirements with Respect to Certain Small Transactions.”  New Section 4A(a) sets forth the requirements for Funding Portals.  Each of the requirements is subject to the more detailed rules that will be drafted by the SEC and for which we are all waiting.

In addition to being registered with the SEC and the applicable SRO, and a Funding

Portal must:

1)    Provide disclosures, including disclosures related to risks;

2)    Ensure that each investor reviews investor education information and positively affirms that they understand that they risk losing their entire investment and can afford such loss;

3)    Ensure that each investor answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups; emerging businesses, and small issuers;

4)    Ensure that each investor answers questions demonstrating an understanding of the risk of illiquidity;

5)    Take measures to reduce the risk of fraud by establishing rules and procedures including obtaining background and securities enforcement history checks on each officer, director and person holding more than 20% of the outstanding equity of an Issuer;

6)    Not later than 21 days prior to the first day securities are sold file with the SEC and make available to potential investors all disclosure information required and provided by the Issuer

7)    Ensure that no offering proceeds are given or available to the Issuer until the target offering amount has been raised and allow investors to cancel their investment during that time;

8)    Make efforts to ensure that no investor exceeds its allowable investment amount in any 12 month period, including from all Issuers, and all Funding Portals (i.e. $2,000 or 5% of annual net income or net worth if net income or net worth is less than $100,000 or 10% of annual income or net worth up to $100,000 if annual income or net worth is over $100,000)

9)    Take steps to protect the privacy of information collected from investors;

10) Not compensate promoters, finders, or lead generators for providing the broker or Funding Portal with personal indentifying information of any potential investor; and

11) Prohibit its directors, officers or partners from having any financial interest in any Issuer using its service.

Funding Portal Fees

It is undisputed that a Funding Portal will be able to charge a fee to an Issuer for using its service.  However, how that fee will be determined and how much that fee can be is currently unknown.  Only licensed registered broker dealers can charge a commission for raising money.  Moreover, Section 304 of the Crowdfunding Act defines a Funding Portal as “any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to Section 4(6) of the Securities Act of 1933” (i..e the new Crowdfunding section).

Moreover, Section 304 continues, specifically excluding from the definition of a Funding Portal any entity that (i) offers investment advice or recommendations; (ii) solicits purchases, sales, or offers to buy the securities offered or displayed on its website or portal; (iii) compensates employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; or (iv) holds, manages, possesses, or otherwise handles investor funds or securities.

Clearly only licensed registered broker dealers will be able to offer the foregoing services and charge fees for same.  Moreover, I note that a Funding Portal has to ensure that Issuers do not receive money until a target offering is made, but at the same time can’t hold the investors money during that time.   It seems the SEC will have to require the use of a broker dealer or clearing firm by Funding Portals to address this quandary.

In addition to all of the above, each of the rules and requirements set forth in the Crowdfunding Act contains language to the extent that the SEC shall determine, by rule, other rules and practices that are appropriate.  No one outside the SEC (and perhaps inside) knows what these are yet.

Conclusion

Funding Portals will have to meet a plethora of requirements, including registration with the SEC and at least one SRO.  They will have to have websites that operate proficiently and meet all these requirements.  However, other than broad strokes, they don’t know what these rules and requirements will be.  They must hurry up, and wait….

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

The SEC’s Rulemaking Duty

Some of the rules went into effect immediately; others are in the drafting process.   Within 90 days of the signing of the Act (i.e. mid July), the SEC is required to issue enabling rules as to other portions of the Act, including rules related to general solicitation and advertising of accredited investors under Rule 506 of Regulation D. For the SEC that is the easy part.

Finally, the SEC has up to 270 days (beginning of 2013) to release rules relating to the new crowdfunding exemption and crowdfunding platform portal regulations. That will be difficult part.  As a matter of background, the biggest opponents of the crowdfunding bill were the SEC and FINRA.  It is easy to see why, the SEC’s mission, direct from their website is:

“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

The SEC carries out its mission by regulating who may invest, how an issuer can approach an investor and what information and disclosure they must provide to the potential investor.  Up until now, that mission has been difficult and complicated to carry out.  I have been practicing securities law for nineteen years and can attest that the area is a complicated quagmire of rules and regulations that a practitioner must immerse themselves in on a daily basis to stay proficient.

The Crowdfunding impact

Up until now, the average person, with an average income, could only invest in a company once it is public and generally only once it is subject to the reporting requirements of the Exchange Act of 1934 and then only through a FINRA regulated broker dealer.  Restricting the “who may invest”, has been a key component of the furtherance of the SEC mission.

Crowdfunding opens up equity investment in non-public start-up entities to everyone and anyone on some level.  Although, personally, I am 100% behind the crowdfunding bill and excited to see how things evolve, I can also 100% see how, to a regulator the crowdfunding bill is a Nightmare with a capital “N”.  The SEC now must formulate and create rules and regulations that enact the crowdfunding bill while continuing its mission.

The SEC is however, taking an excellent approach to its daunting task.  It is utilizing crowdsourcing to help formulate the crowdfunding rules.  That is, it is asking for public input and comments, including any draft rules, and allowing the public to see and comment on the comments.  Comments can be submitted and viewed at http://www.sec.gov/spotlight/jobsactcomments.shtml.

In addition, Friday, the SEC had its first, in what will be regular meetings with professionals in the crowdfunding industry, including representative from the Crowdfund Intermediary Regulatory Association (CFIRA) and FINRA.  From an informative article on crowdsourcing.org, the following is a summary of Friday’s meeting:

All players have the common goals of transparency and protections for both issuers and investors.

• The SEC is looking at possible requirements to use third-party escrow rather than allowing platforms to hold cash.
• The issue of what will be considered “investment advice” when it comes to screening and other measures taken by platforms was also a topic of interest. What the SEC decides with regard to this topic will impact what services platforms will be allowed to provide and/or charge fees for.
• There was discussion of how and when a 21-day “cooling off” period between initial offerings and the beginning of actual sales will take place.
• It seems likely that platforms will need to register with both FINRA and the SEC.
• The SEC made clear that it is interested in means of verifying and vetting not only platforms, but individual investors as well. The possibility of a “do not invest list” was also mentioned.
• FINRA is currently considering whether it sees itself as a potential regulatory body for crowdfunding.
• There was also discussion at the FINRA meeting of whether or not it will be possible for credit cards to be used on crowdfunding platforms.

Conclusion

The SEC has a huge task in front of them.  They must fashion rules that follow the legislative direction passed in the JOBS Act while reasonably continuing to fill their mission.  Moreover, and probably most difficulty is that the SEC must fashion rules that not only protect the everyday person investor but that the everyday person can understand, without a law degree.  To accomplish this goal, the SEC must have understand the four corners of the Act and have foresight on its execution.  As Albert Einstein said “If you can’t explain it simply, you don’t understand it well enough.”

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

On April 16, 2012, the SEC issued guidance on Title 1 of the JOBS Act.  The full text of this guidance is available on the SEC website.  Title 1 of the JOBS Act provides scaled- down business disclosure for Emerging Growth Companies (EGC’s) effectively treating them as small business issuers.  In particular, EGC’s need only provide two years of audited financials (instead of 3) for a registration of an IPO; are treated as small businesses for the reporting of executive compensation; have no Sarbanes-Oxley Act 404(b) auditor attestation requirements and are able to test the waters with communications to QIB’s and institutional accredited investors prior to an offering.

Determining When and If a Company Qualifies As An EGC

An EGC is defined in both the Securities Act of 1933 and Exchange Act of 1934 as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year.  Total revenues are as posted on the Company’s income statement prepared in accordance with US GAAP.  The EGC definition, and therefore benefit of the reduced reporting rules, only applies to Companies that complete its “first sale of equity securities” after December 8, 2011.

Currently the SEC is making the determination of whether a Company qualifies as an EGC at the time it makes a submittal asking for such qualification.  Accordingly, if a Company filed a registration statement today, asking to be treated as an EGC and asking to be allowed to use the scaled down disclosure requirements and avail itself of confidentiality during the review process, the SEC would confirm that it qualified as of today.   If during the review process, the Company no longer qualifies as an EGC, it would be required to publicly file a new registration statement meeting the full disclosure requirements.

EGC Status Going Forward

On, the other hand, if a Company filed a registration statement prior to April 5, 2012, it would be allowed to amend to provide the scaled down disclosure.  Moreover, if an EGC completed its IPO after December 8, 2011 but prior to April 5, 2012, it may used the scaled down disclosure in its periodic reports (Q’s and K’s) going forward, as long as it continues to qualify as an EGC.  Once a company is established as an ECG, it must follow the accounting standards set forth for an EGC (Section 7(a)(2)(B) of the Securities Act and Section 107(b) of the JOBS Act), but it may voluntarily comply with some of the other regular disclosure requirements.   A decision to be an ECG for accounting purposes is irrevocable and the appropriate transition accounting rules must be filed.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Some of the rules went into effect immediately, such as the ability of an Emerging Growth Company to file a registration statement and seek confidential treatment during the review process.  For this process the EGC would avail itself of the new Securities Act Section 6(e).  The SEC issued, albeit limited, guidance on this process for EGC’s yesterday, April 10, 2012.

Within 90 days of the signing of the Act (i.e. mid July), the SEC is required to issue enabling rules as to other portions of the Act, including rules related to general solicitation and advertising under Regulation D.  Finally, the SEC has up to 270 days (beginning of 2013) to release rules relating to the new crowdfunding exemption and crowdfunding platform portal regulations.

Crowdfunding Has Been Around For Several Years

It seems to many that the JOBS Act appeared, was enacted into law and is zooming forward practically overnight.  That is not the case.  In fact, crowdfunding, in various forms, has been around for several years.  Up until now it was illegal to offer equity in return for the investment, but preselling products was ok (even for start-ups) and donations were ok as examples.

Thankfully, a band of visionaries recognized an opportunity, defined their goal, and saw it through into law.  One of those groups is Startup Exemption, an organization consisting of three individuals.  Sherwood Neiss one of the founders of Startup

Exemption gave an interview to crowdsourcing.org which I had the pleasure of reading yesterday.  As an aside I recommend crowdsourcing.org as an intellectual, credible source of both positive and negative information on the JOBS Act.  In his interview, Mr. Neiss artfully explained why many of the naysayers concerns about rampant fraud resulting from crowdfunding, are unfounded and in my opinion just attention seeking pessimism (the three most outspoken opponents are William Black, Eliot Spitzer and Andrew Ross Sorkin – enough said!

Crowdfunding as a Fraud Deterrent

Anyway, as explained by Mr. Neiss, the way crowdfunding works, really sets up a deterrent for fraud.  As we all know, equity based crowdfunding will only occur through accredited intermediaries who are regulated by the SEC and the new SRO, The Crowdfund Intermediary Regulatory Association (CFIRA).  So as only those sites that have been accredited and submitted applications and gone through an approval process with the SEC and CFIRA will be able to act as intermediaries for crowdfunding.

In addition, to seek crowdfunding on an accredited, regulated site, an Issuer must go through an application and approval process.  This process includes background checks on the Issuers and its officers, directors and principals.  The current bad boy provisions associated with Rules 504 and 505 offerings will apply and it is expected the SEC will enact additional prerequisites, including possibly a minimum credit score.  Those with negative administrative or criminal backgrounds related to fraud will be excluded.

In addition, the offering amounts are limited.  Yes, you can seek to raise up to $1million but most offerings will be much less (many as low as $50,000).  A criminal would have to go through a complete application process and background check and create a fake business plan and detailed documentation, with the penalty of jail time, for a relatively small amount of money.  For real criminals, there are easier ways.

The most important deterrent is that the money raised comes from friends, families and people already known by the Issuer.  There isn’t some unknown pool of investors waiting to write checks for a business enterprise that may or may not be legitimate.  The intermediary uses the Issuer’s own social media contacts to solicit an investment.  That is, it is the Issuer’s Facebook, LinkedIn, IGoogle, databases, etc., are solicited for investment dollars. By shear design, entrepreneurs are less likely to take advantage of people they actually know, and unscrupulous players won’t be able to exploit unsuspecting strangers.

Crowdfunding will be the hero, not the culprit.

Of course, as with any private offering, investors will have to traverse some minor hurdles in order to invest. They will be required to provide detailed personal information, including financial statements, and will have to respond to multiple questions acknowledging that they genuinely know the issuer and understand the nature of the investment.

There are built-in protections against fraud.  That doesn’t mean it won’t happen, but crowdfunding has more deterrents to fraud than many areas of the traditional, widely accepted securities industry including, short selling and options trading. Crowdfunding scenarios are far more difficult to exploit and manipulate.

As noted above, the information in this blog came mainly from the interview Mr. Neiss gave to crowdsourcing.org.  It is a paraphrase that includes my own words and feelings, thus the lack of quotations.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.