Funding Portal Rules for Regulation Crowdfunding a/k/a Equity Crowdfunding

Geefunding_crowdfundingThe JOBS Act from way back in 2012, set forth the Crowdfunding exemption to the securities laws, and required that any Funding Portal that engaged in Crowdfunding registered with the SEC and became a member of FINRA.  In late 2015, the SEC came out with the Regulation Crowdfunding Final Rules and forms to permit companies to offer and sell securities through Crowdfunding and to regulate the intermediaries which can sell the crowdfunded securities.  The latest Funding Portal rules have been finalized by the SEC and FINRA.

Intermediaries can be either the traditional broker-dealers who register with the SEC using Form BD, or the newly created designation of a “Funding Portal” which has to register with the SEC using Form Funding Portal.  Registration for Funding Portals opened on January 29, 2016. SEC Forms here, and note that most require filing a Form ID first.

While a Funding Portal can act as the platform through which crowdfunding securities are advertised and sold, a registered Funding Portal is prohibited from:

  • offering investment advice or recommendations;
  • soliciting purchases, sales or offers to buy the securities displayed on its platform;
  • compensating employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or
  • holding, managing, possessing or handling investor funds or securities.

If you were planning on incorporating any of the above activities into your business plan to serve as an intermediary for Crowdfunding, then you should register as a broker-dealer and not as a Funding Portal.

A Funding Portal’s registration is good to go on the later of 30 days after the registration is received by the SEC or the date the Funding Portal is approved as a member of FINRA.

On January 29, 2016 the Securities and Exchange Commission approved FINRA’s Funding Portal Rules and Related Forms.  A summary of the approval is available in FINRA’s Regulatory Notice 16-06 available here.

Also, and importantly, the JOBS Act preempted any state laws (by amending Section 15(I) of the Exchange Act) so that funding portals and brokers for Crowdfunding issuances will not have to comply with state registration or other requirements applicable to broker-dealers with respect to Crowdfunding activities.

Crowdfunding Investor Alert from SEC

On February 16, 2016, the Securities and Exchange Commission issued an investor bulletin addressing the new crowdfunding opportunities that will be available to investors starting as of May 2016.  The SEC issues these alerts so that investors will be knowledgeable about such offerings, especially the risks inherent in same.

The full bulletin can be found here – SEC Crowdfunding Investor Alert.

The alert does a good job breaking down the ways investors calculate their net worth and how much can be invested in any twelve month period. It also cautions investors on the risks of crowdfunding investing and the structure of how such offering can be conducted through portals.

Equity Crowdfunding a/k/a Regulation Crowdfunding Coming Soon (May 16, 2016) to a Startup Near You

crowdfunding imageThe SEC’s Final Rules for Regulation Crowdfunding were published on October 31, 2015, and are  considered effective 180 days after such publication.  Meaning that on May 16, 2016, Regulation Crowdfunding will be a go.

On that date, a company will be able to raise money under the new rules and file Form C (which still does not appear on the SEC’s Form Page).

To get a head start prior to the final rules allowing sales, and to catch up to broker-dealers who can also act as intermediaries and sell securities through the Regulation Crowdfunding final rules, Funding Portals were allowed to begin registering with the SEC on January 29, 2016, by filing the Form Funding Portal, among other things.

I’ve blogged on this before (here and here) and will be doing a number of posts solely on Regulation Crowdfunding in the near future to make sure that the basics are covered and will dig into some advanced topics.

Anyone company looking to take advantage of the new rules should start getting its house in order, by preparing its financials, its legal structure and investigating which intermediary it wishes to use for the sale of its shares, whether a broker-dealer or a funding portal.

After a further review of the new Regulation Crowdfunding rules I think they exemption provided may best serve companies looking to raise smaller amounts, such as below $500,000 (to avoid the audited financial requirement), or who are raising equity capital for the first time.  There is a huge need for smaller companies to get access to capital.   The Regulation Crowdfunding rules may allow investments to happen which otherwise wouldn’t, which is what Congress intended by passing the JOBS Act to modernize the antiquated securities laws.  Companies that can attract accredited investors will likely continue to rely on the private placement exemption under Rule 506(b) due to its relative simplicity compared to other offerings. But again, I do think the Regulation Crowdfunding rules have a specific subset of issuers that can benefit from them.

Is your Trademark License Agreement really a Franchise Agreement? In New York the answer is “Yes”

franchise picMost companies licensing the use of their trademarks would not think that a simple license agreement, which provides nothing more than use of the trademark in exchange for a fee, would for legal purposes be treated as a franchise agreement.  But if the trademark licensor is in New York then what it thought was a simple trademark license agreement relationship is likely really a franchise arrangement.

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Using “Tested” or “Market” Contract Language

This is a response to a post by Ken Adams of Adams on Drafting.   In one of my earlier posts about the desires of certain clients to have as short a contract as possible, I stated that it was beneficial to draft an agreement a certain way, including certain terms and language, because judges have seen similar items before. Ken identified this and he reiterated his position that a contract drafter should not rely on what he deems “tested” contract language.

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There are a host of areas that people in the United States think of as “privacy” rights, some of which are (1) our individual right to choosing to be alone (to not be taped or viewed in private), (2) decisional privacy (right to contraception, access to abortion, right to marry whomever you choose, right to procreate), (3) information privacy (right to not have your information disclosed to third parties), and (4) others. Each of the privacy rights that we hold as individuals may arise from different areas of law including constitutional law, statutory law, agency regulations and even social norms.

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SEC’s Final Rules on Regulation Crowdfunding (Finally) @ Paper This Deal

So on October 30, 2015, the SEC adopted final rules which will, after the comment period is done (60) days and they are adopted, allow crowdfunding a/k/a Regulation Crowdfunding a/k/a Equity Crowdfunding in the United States.

At first glance the final rules appear similar to the previously issued versions, with individuals only authorized to invest a portion of their annual salary or net worth through crowdfunding each year.  See the press release here.

Portals which will offer the securities of companies offering same through Regulation Crowdfunding will be effective January 29, 2016 so hopefully a decent number of platforms will be available to start the party in early 2016.

The final rules will be effective 180 days after they are published in the Federal Register. The below is a brief summary in FAQ form covering the Regulation Crowdfunding rules.

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