Crowdfunding Overview. Investor Protection vs Capital Raising.
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Transcript of Crowdfunding Overview. Investor Protection vs Capital Raising.
Crowdfunding Overview
Investor Protection vs Capital Raising
Crowdfunding
Era of legalizing things that prior generations thought were bad ideas
The gateway to crowdfunding = beer
Crowdfunding
New registration exemption under Section 4 of the Securities Act
Intended to allow capital raising – from a large number of people– with relatively small investment amounts– typically through the internet and social media
No final rules yet; no stated deadline for final rules either
Exemption
May not exceed $1 million in any 12 month period Limited purchases per investor:
– greater of $2,000 or 5% of annual income or net worth (if investor annual income or net worth is below $100,000)
– 10% of the annual income or net worth of the investor, up to a maximum of $100,000
Sales conducted through registered broker or funding portal; limited advertising or promotion
Specific disclosure requirements
Intermediaries
Must register with the SEC and applicable self-regulatory organization (FINRA)
Provide disclosure required by SEC Ensure investors review disclosure materials and confirm
their understanding of investment risk Take certain measures to reduce the risk of fraud,
including limited background checks on officers, directors and 20% shareholders
Allow 21 day review period Ensure offering and investor minimums Protect privacy of investors
Funding Portals
May not:– Offer investment advice – Solicit purchases, sales or offers– Compensate employees, agents or others for solicitation
or based on the sale of securities– hold, manage, possess or otherwise handle investor
funds
Disclosure
Directors, officers and 20% owners Business plan Financial condition
– income tax return for last year and financial statements certified by PEO (for offers of $100,000 or less)
– financial statements reviewed by independent public accountant (for offers of $500,000 or less)
– audited financial statements (for offers over $500,000)
Use of Proceeds
Disclosure (continued)
Target offering amount and deadline Ownership and capital structure of the issuer
– terms of offer and terms of other classes of issuer securities
– rights of principal shareholders and impact on purchasers of securities being offered
– information regarding shareholders owning more than 20% of any class of the issuer’s securities
– current and future valuation methodology
Annual financial statements and reports of results of operations
Restricted Securities
Securities purchased in crowdfunding offering may not be transferred for one year, unless transferred:– to the issuer– to an accredited investor– pursuant to a registration statement– to a family member in connection with death or divorce
Securities sold in crowdfunding offering will be considered “covered securities” exempt from blue sky registration requirements
Public Co. threshold exemption
Securities acquired in crowdfunding offerings will not count towards the determination of whether a company is a “public” company by virtue of having 2,000 shareholders of record (or 500 unaccredited shareholders)
Things to think about
Thoughtful initial structure and internal controls are important (act like a public company)
Shareholder Agreements and other reasonable restrictions should be considered
Anticipate annual meetings and other shareholder communications
Some VCs think this is a good litmus test for emerging companies who will seek VC financing
Will VCs and similar types of investors effectively “regulate” the negative space