The 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.
Tag: securities (Page 1 of 2)
In addition to the other ways we’ve discussed here (stock options, phantom stock, stock appreciation rights), another way to compensate individuals working for a startup is to give them a cash payment upon a change in control of the company, called in the industry a “strip right”.
For example if a startup company has four founders each owning 25% of the shares, and they bring on another but don’t grant him or her shares, the initial founders can agree to pay the new individual a percentage of the “net proceeds” received from a “change in control” of the corporation. “Net proceeds” is usually defined as the gross proceeds received minus transaction costs and brokers commissions as well as some other items. A “change in control” is defined as it normally is in these agreements, and covers if the company merges with another or sells substantially all of the company’s assets. In such a case, the shareholders would receive cash (or assets it can sell for cash, like tradeable shares of the acquirer). The strip right agreement would require the shareholders that granted it to pay to the holder of the strip right, either a percentage or flat fee before they received their cash for the change of control.
In the example, if the four founders grant a 10% strip right, and a couple years down the road the company is sold for one million dollars, with transaction fees of $100,000, the holder of the strip right would receive $90,000 (net proceeds of $900,000 x ten percent). The shareholders would split the rest of the $810,000 and each receive $202,500.
One of the benefits of the granting of the strip right is that it is not taxable to the recipient. The downside, at least to the recipient is that they are not a shareholder of the corporation and they may never receive a cent if there is never a change in control. Due to its tenuous nature, the strip right is usually granted in connection with other compensation awards.
On March 25, 2015, the SEC adopted final rules amending Regulation A, referred to now as Regulation A+. These amendments were required by Congress via Title IV of the JOBS Act which was passed some time ago. (we are all still waiting for the Regulation Crowdfunding rules to be finalized).
The general rule is that when a company offers or sells a security, the security must either be registered or an exemption from registration must be relied upon. Regulation A has been on the books for a long long time and has been relied on very little.
Now the SEC has a tough job, its tasked with allowing companies to raise money via offerings of securities but on the other hand it needs to ensure that fraud does not run rampant. These two goals don’t have to be mutually exclusive, but the SEC has generally focused on the latter of the two at the expense of the first.
First of all, I won’t advise anyone to withdraw their 401(k) funds early as the tax hit the IRS enacts is insane. If you are thinking about doing that, please don’t, or at least don’t do so until you’ve spoken to your accountant.
This post will, however, detail how to use your qualified retirement plan or IRA to start a new, or buy an existing, business. This name given to the process I’ll discuss is rollovers as business startups (“ROBS”). The main gist is that an individual’s current retirement plan is rolled over into a newly established 401(k) plan sponsored by a startup company and then used to purchase the startup company’s stock. The ROBS arrangement allows income taxes and penalties (see IRC Section 72(t))to be avoided because it is a rollover from one qualified plan to another.
I volunteer at a couple of small business incubators and programs. I was sitting in on a mock pitch last week and giving some pointers on how the entrepreneur could polish their pitchdeck and overall presentation. I figured I’d put these up so people can take a look. The below are offered to any startup looking to raise money:
Beginning this year, as described by SEC’s Chair Mary Jo White at the Chair Mary Jo White at the 41st Annual Securities Regulation Institute on January 27, 2014, described some of the new tools and systems the SEC would be using in 2014.
If you export products for sale of any type and don’t know what an IC-DISC (or simply a DISC) is, or think it’s a round piece of plastic you put in your computer’s drive, then keep reading. Any United States business with qualifying export sales can save a large amount of money with the use of a Interest Charge Domestic International Sales Corporation (referred to hereinafter as a “DISC”).
There’s been a lot of discussion about whether online or virtual accounts can be deemed securities under the U.S. federal securities law. The most well known at the moment is Bitcoin.
A case was just decided where the court found that Bitcoin was a currency. Based on that fact, and that the protaganist in the case was offering a money making scheme (you put in money, wait and make more money off Bitcoin), the scheme was subject to the securities laws. We’ll have to parse out the holding. The court did not hold that the Bitcoin itself is a security, but rather that Bitcoins are a type of currency – because they can be converted into currency (which I’m not sure I agree with – any commodity, product or item can somehow be converted to currency – and the distinction between selling and converting seems like a big deal). Here’s the link to the case, its actually rather short and sparse on legal analysis for one that makes such huge leaps in legal doctrine as applied to a concept which the court is probably not overly familiar with. The old adage that bad facts make bad law seems to be the culprit again, as the scheme the guy in Texas was attempting to pull off was not something a judge would let him off on.
I’m pretty sure this isn’t the last we’ve heard of the SEC v. Bitcoin debate. Mark it up as SEC 1, Bitcoin 0 so far, unfortunately.
I’ll give a breakdown of the securities laws and how they could be, and have been, applied to virtual goods, online items, and currency, including Bitcoin (which I’m not conceding is technically a currency).
I wanted to blog on some of the lesser known and relied on securities exemptions. In certain situations they can be very helpful. One of these is the federal Intrastate Securities Offering Exemption. Simply, if you offer and sell in one state and one state only, and some other factors are met, the issuer is exempt from the federal registration requirement. Blue sky laws will still apply but some states have limited offering exemptions or other exemptions the issuer can rely on.