SECURITIES 2020

MAY 7, 2018
 What is Crowdfunding?
• Generally speaking, “Crowdfunding” refers to the pooling of small
amounts of capital from many individuals.

Social/Rewards Investment/Securities
Crowdfunding Crowdfunding
The online funding of a company
The online funding of a campaign or
whereby investors receive a security in
project whereby contributors receive
exchange for their investment.
gifts in exchange for their contribution.

 Not a sale of securities.  Equity or debt or hybrid securities.

 Made popular by services such as  Platforms include Fundable,

Kickstarter, which has raised over CircleUp, and WeFunder.
$2.3 billion since 2009.
 Over $13B raised in 2015 (estimated)
 MN ranked consistently ranked • $2B+ equity
among top states.
• $11B+ P2P lending

2
 Securities Laws
• Other than donation-based crowdfunding, almost every means by which
your company raises capital will involve securities laws.

• Securities laws regulate:

HOW MUCH HOW YOU TARGET

MONEY YOU CAN POTENTIAL
RAISE INVESTORS

HOW YOU SELL WHO YOU CAN RIGHTS OF

THE SECURITIES TALK TO ABOUT INVESTORS TO
YOUR OFFERING GET THEIR MONEY
BACK

3
 Securities Registrations vs.
Exemptions
• As a general rule, in order to comply with Federal securities laws, an
issuer offering or selling a security must either:

OR

Register the offer or sale with the SEC Identify a specific exemption that
allows the offer or sale to be
conducted without registration.

4
 Federal Securities
Registration

• In most circumstances, Federal

securities registration is time
consuming and expensive.

• Most small businesses are not

able to easily comply with
Federal registration
requirements.

5
 Blue Sky Laws
• In addition to complying with Federal securities laws, an issuer
offering or selling securities must also adhere to blue sky laws
in each state where the securities are being offered or sold, all
of which vary from each other.

6
 Relevant Federal Exemptions
for Crowdfunding

Private Placement Intrastate Offering

Section 4(2) of the Section 3(a)(11) of

Securities Act the Securities Act

Safe Harbors: Safe Harbor:

Rules 504 and 506 Rule 147A

7
 Private Placement Offerings
• Most entrepreneurs rely on the PRIVATE PLACEMENT federal securities law
exemption.

• In order to keep the offering “private,” companies have historically been required
to comply with onerous requirements:

Friends and Family Only

No social media announcements

No TV, radio, newspaper, etc.

No prospective
investor “events”

8
 Traditional Private Placement
Rule 504
Safe Harbors Rule 506 [now Rule 506(b)]
How much money can I Up to $5M (soon to be $5M) Unlimited
raise?
Can I advertise the sale of No, unless coupled with a state exemption or No.
my securities? registration that allows advertising.

To whom can I sell Anyone Unlimited number of accredited investors

securities?
However, counterpart state exemptions or Up to 35 non-accredited investors if you
registrations may impose additional restrictions believe they are “sophisticated”
on number of non-accredited investors.

Do I have to comply with No, but counterpart state exemption or No, if only accredited investors are included
the SEC’s formal registration may impose additional
information delivery requirements.
requirements? Yes, if any non-accredited investors are
included
Do I have to verify that No, accredited investors can “self-certify.” No, accredited investors can “self-certify.”
any accredited investors
are truly accredited?

9
 Congress Responds – JOBS Act

• As part of the JOBS Act of 2012, Congress directed the SEC to

develop new rules that would make it easier for companies to
raise capital from investors.

10
 JOBS Act: Key Components
Advertising in Crowdfunding for All
Connection with Sales to Reg A+ | “Mini-IPOs”
Accredited Investors

Title II Title III Title IV

 Also called Rule 506(c)  SEC released proposed rules in  SEC released final rules in
October 2013. March 2015.
 Became effective in
October 2013  Revised rules were released on  Became effective in June
October 30, 2015 and go into effect 2015
 Growing in popularity today
 Not very useful for small
 Unlimited amount of businesses
funds may be raised

11
 Title III: Regulation
Crowdfunding
 Issuer Offering Limit:
 $1 million in 12 months
 Investor Limits:
 If annual income/net worth < $100,000, limit is
greater of $2,000 or 5% of the lesser of annual
income/net worth
 If annual income/net worth ≥ $100,000, limit is
lesser of $100,000 or 10% of the lesser of annual
income/net worth

12
 Title III: Regulation
Crowdfunding
 Funding Portals:
 Companies must sell through a portal Registered
with the SEC and FINRA Handles funds for the
company Posts company disclosure information

13
 Title III: Regulation
Crowdfunding
 Company Requirements:
 Disclosure document, including MD&A discussion
and annual reporting
 Issuers will be required to file Form C prior to
commencement of the offering, during the
offering if material changes occur, annually after
the offering, and at the conclusion of their
reporting obligations.

14
 Title III: Regulation
Crowdfunding
 Financial information for two previous years:
-- tax return/financials ≤ $100,000
-- reviewed financials ≤ $500,000
-- audited financials > $500,000 (except first time
reviewed financials)

15
 Title III: Regulation
Crowdfunding
 Certain advertising restrictions do apply (see Rule
204)
 Reg CF offerings will not be integrated with other
offerings
 Restrictions on transfer exist within the first year of
purchase (except limited circumstances)

16
Intrastate Investment Crowdfunding
 Intrastate Crowdfunding
• Frustrated by the SEC’s inability to design a useable system,
individual states have adopted their own Crowdfunding laws,
which permit offerings between an issuer and residents
residing within the same state.

Enacted

In process
 Only available to state-based companies.
 All investors must be state residents.
 Offerings must be made online through a “Portal”
registered with the state.
 Expanded advertising via Rule 147A
 Higher Offering Amounts via Rule 504
 Players

Attorneys

Issuers / CPAs

Banks

Investors Portals
Investment Structuring /
Evaluation
 Parting Thoughts

26
 Questions?
Zrobins@messerlikramer.co
m
612-672-3709