Navigating the SEC’s Action Against Zymergen: Key Takeaways on Market Size Disclosures
On September 13, 2024, the SEC settled charges against Zymergen Inc. for misleading investors in its IPO by overstating market
JASON W. PARSONT
SARA HANKS
The Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’) was signed by the President on April5, 2012.
SARA HANKS AND ANDREW STEPHENSON
SARA HANKS, GIOVANNI ROMANO, ENRICO TONELLI
European Company Law
Madness of Crowds or Regulatory Preconception?
STEVEN BRADFORD
Intermediary liability in the crowdfunding industry.
JOAN MACLEOD HEMINWAY
This article focuses on disclosure regulation in a specific context: securities crowdfunding (also known as crowdfund investing or investment crowdfunding).
SARA HANKS
The economic impetus for easing the burden on small- and medium-sized companies raising small amounts of capital from numerous investors.
ANDREW STEPHENSON AND SARA HANKS
Bloomberg BNA: Securities Regulation and Law Report – An Overlooked Class of Private Offerings: Independent Rule 506(c) Raises
ANDREW A. SCHWARTZ
A new federal statute authorizes the online “crowdfunding” of securities, a new idea based on the concept of “reward” crowdfunding practiced on Kickstarter and other websites.
MICHAEL B. DORFF
The JOBS Act opened a new frontier in start-up financing, for the first time allowing small companies to sell stock the way Kickstarter and RocketHub have raised donations: on the web, without registration.
JOAN MACLEOD HEMINWAY
With the advent of the crowdfunding era, financial interests in business enterprises may look less like investment instruments commonly known as common stock
THAYA BROOK KNIGHT, HUIWEN LEO, AND ADRIAN OHMER
Since the early 2000s, “crowdfunding” has emerged as a means of obtaining funds for new and innovative projects.
SARA HANKS & ANDREW STEPHENSON
ROBERT B. THOMPSON AND DONALD C. LANGEVOORT
The JOBS Act is the most far-reaching legislative reform in what it means to be a public company or to make a public offering
THOMAS LEE HAZEN
Social networks have been used as a medium for financing films and other performing arts, as well as for charitable solicitations.
C. STEVEN BRADFORD
On April 5, 2012, President Barack Obama signed into law a new federal securities law exemption for crowdfunded securities offerings.
JOAN MACLEOD HEMINWAY AND SHELDEN RYAN HOFFMAN
A promising Web-based funding model for small business firms has emerged over the past few years.
On September 13, 2024, the SEC settled charges against Zymergen Inc. for misleading investors in its IPO by overstating market
Understanding Reg CF Resale Restrictions General rule: if you read the SEC rules with blinders on, you are probably well
One of the exciting things about securities law is that rules can and do change in response to concerns raised
Sara Hanks
The Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’) was signed by the President on April5, 2012. Title III of the JOBS Act creates a new exemption (Section 4(a)(6)) from registration under the Securities Act of 1933 for the crowdfunding of investment opportunities. In this context, crowdfunding is generally defined as the selling of debt and equity securities, in small amounts, to large numbers of people over the internet. It is in some ways an extension of the ‘‘friends and family’’ financing traditionally relied upon by small businesses before they accessed more formal sources of capital.
Prior to the JOBS Act, unregistered offers to the public in this manner would have been a violation of Section 5 of the Securities Act. Indeed, to the frustration of many lawyers that have ever prepared a company for an IPO, friends and family financing in the early days of a company’s existence is frequently made in violation of Section 5’s registration requirements. Although not all companies that raise funds through crowdfunding will ever progress to an IPO, the existence of a clear exemption for early-stage capital-raising may remove at least this source of uncertainty. In fact, even where a small company knows the identity of all the people that it intends to offer securities to (and thus does not need to solicit investment over the internet), Section 4(a)(6) may prove an attractive option, providing that intermediaries can price their services accordingly.
http://www.scribd.com/doc/106159796/Hanks-Jobs-Act-Article-Bloomberg
Expert Q&A on Equity Crowdfunding with Sara Hanks will appear in the October 2015 edition of Thomson Rueters Practical Law
The proliferation of social media and the liberalization of the securities laws have given rise to an increasing use of equity crowdfunding offerings to raise capital. These offerings are made over the internet to a large group of people, with each investor investing a relatively small amount. For a startup company, crowdfunding can provide additional capital to supplement what the company can raise from its network of friends and family and can also offer an alternative to working with professional investors. Practical Law asked Sara Hanks of CrowdCheck, Inc. to weigh in on trends in equity crowdfunding and key issues for companies considering a crowdfunding offering.
Steven Bradford
Intermediary liability in the crowdfunding industry.
Submitted by Anonymous (not verified) on Mon, 05/12/2014 – 00:00
Joan MacLeod Heminway
This article focuses on disclosure regulation in a specific context: securities crowdfunding (also known as crowdfund investing or investment crowdfunding). The intended primary audience for disclosures made in the crowdfund investing setting is the “crowd,” an ill-defined group of potential and actual investors in securities offered and sold through crowdfunding. Securities crowdfunding, for purposes of this article, refers to an offering of securities made over the Internet to a broad-based, unstructured group of investors who are not qualified by geography, financial wherewithal, access to information, investment experience or acumen, or any other criterion.
To assess disclosure to and for the crowd, this short symposium piece proceeds in three principal parts before concluding. First, the article briefly describes securities crowdfundin and the related disclosure and regulatory environments. Next, the article summarizes basic principles from scholarly literature on the nature of investment crowds. This literature outlines two principal ways in which the behavioral psychology of crowds interacts with securities markets. On the one hand, crowds can be “mad” — irrational, foolish, and even stupid. On the other hand, crowds can be “wise” — rational, sensible, and intelligent. After outlining these two strains in the literature on the behavioral attributes of crowds, the article assesses the possible implications of that body of literature for the regulation of disclosure in the securities crowdfunding setting. The work concludes by asserting that, when considering and designing disclosure to and for the securities- crowdfunding crowd, the insights from this behavioral literature should be taken into account.
Submitted by Anonymous (not verified) on Wed, 06/19/2013 – 00:00
Sara Hanks
The economic impetus for easing the burden on small- and medium-sized companies raising small amounts of capital from numerous investors, or crowdfunding, that led to the JOBS Act in the USA is similar to that in the European Union. Technology offers a way to connect sources and users of funding that was not previously available. In both the USA and European Union, the offer and sale of securities is heavily regulated, burdening issuers and intermediaries with legal obligations. The JOBS Act eased some of the burdens on small crowdfunding offerings so long as the issuer meets specific statutory requirements, such as using a registered broker-dealer or new ‘funding portal’ as an intermediary. In Europe, varied national regulations make cross-border crowdfunding more difficult to implement, but that does not prevent the national crowdfunding schemes that are starting to appear.
http://cmlj.oxfordjournals.org/cgi/content/full/kmt010?ijkey=hkw9VOzJMj19euP&keytype=ref
Andrew Stephenson and Sara Hanks
Bloomberg BNA: Securities Regulation and Law Report – An Overlooked Class of Private Offerings: Independent Rule 506(c) Raises
Andrew A. Schwartz
A new federal statute authorizes the online “crowdfunding” of securities, a new idea based on the concept of “reward” crowdfunding practiced on Kickstarter and other websites. This method of selling securities had previously been banned by federal securities law but the new CROWDFUND Act overturns that prohibition.
This Article introduces the CROWDFUND Act and explains that it can be expected to have two primary effects on securities law and capital markets. First, it will liberate startup companies to use peer networks and the Internet to obtain modest amounts of capital at low cost. Second, it will help democratize the market for financing speculative startup companies and allow investors of modest means to make investments that had previously been offered solely to wealthy, so-called “accredited” investors.
This Article also offers two predictions as to how securities crowdfunding will play out in practice. First, it predicts that companies that sell equity via crowdfunding may find themselves the subject of hostile takeovers (though the founders of such companies can easily avoid that outcome if they act with a little foresight). Second, it predicts that issuers may prefer to crowdfund debt securities, such as bonds, rather than equity. The Article concludes with a few thoughts on the SEC’s implementation of the Act in light of the potential for fraud.
Michael B. Dorff
The JOBS Act opened a new frontier in start-up financing, for the first time allowing small companies to sell stock the way Kickstarter and RocketHub have raised donations: on the web, without registration. President Obama promised this novel form of crowdfunding would generate jobs from small businesses while simultaneously opening up exciting new investment opportunities to the middle class. While the new exemption has its critics, their concern has largely been confined to the limited amount of disclosure issuers must provide. They worry that investors will lack the information they need to separate out the Facebooks from the frauds. This is the wrong concern. The problem with equity crowdfunding is not the extent of disclosure. The problem is that the companies that participate will be terrible prospects. As a result, crowdfunding investors are virtually certain to lose their money. This essay examines the data on angel investing – the closest analogue to equity crowdfunding – and concludes that the majority of the issuers that sell stock to the middle class over the internet will lose money for investors, with many failing entirely. The strategies that help the best angels profit will not be available to crowdfunders. Plus, the losses most issuers inflict will not be offset by a few huge winners. Investors will not find tomorrow’s Googles on crowdfunding portals because they will not be there; instead, start-ups with real potential will continue to use other programs, such as the newly expanded Rule 506 exemption. This outcome is the inevitable result of the nature of start-up investing and crowdfunding. No amendments to the Act or rule-making by the SEC can prevent it. The only solution that will protect investors is to abolish equity crowdfunding for the unaccredited.
Joan MacLeod Heminway
With the advent of the crowdfunding era, financial interests in business enterprises may look less like investment instruments commonly known as common stock or debentures, and more like loans, gambling bets, rights to consumable products or services or charitable or other nonprofit donations. A closer look at innovations in interests, instruments and offerings in the crowdfunding era preceding the enactment of the Jumpstart Our Business Startups Act (JOBS Act) offers a basis for comparisons and contrasts that raises questions about the categorization of instruments regulated as securities. These and other questions are important to a rethinking of the structure of financial and financially related regulation in and outside the realm of U.S. securities law.
Specifically, innovations in financial interests and instruments that immediately preceded the JOBS Act raise a number of important questions about regulatory authority and interpretation. How do we classify the instruments that represent complex or hybrid financial interests in business enterprises? What area of regulation should apply to them? Why? What do the answers to those questions tell us, if anything, about the current (and possible future) structure and function of domestic and international financial regulation? This essay preliminarily explores the features of certain financial instruments in an effort to begin to answer these questions by focusing on what a security — a statutory and regulatory category including specific financial instruments — is and should be under federal securities law.
Thaya Brook Knight, Huiwen Leo, and Adrian Ohmer
Since the early 2000s, “crowdfunding” has emerged as a means of obtaining funds for new and innovative projects. Until the recent passing of the Jumpstart Our Business Startups Act (the JOBS Act), there was no legal way for businesses to tap this network to offer a financial interest to the public without registering the offering with the Securities and Exchange Commission (SEC). With the President’s signing of the JOBS Act in April 2012, however, there is a new exemption under the securities laws that will permit the sale of securities via crowdfunding, thus opening the doors to those businesses that have been unable to utilize existing crowdfunding methods. While the concept of crowdfunding securities offerings through the Internet is very 21st century, the regulatory regime that will govern these offerings is the same 80 year-old framework that governs the sale of all securities, no matter how small the offeror. This essay introduces this complex regulatory regime and is intended as a rudimentary roadmap for the start-up or its counsel. It will, hopefully, help to illuminate the traps for the unwary while providing an overview of the regulatory universe in which securities crowdfunding will operate.
Sara Hanks & Andrew Stephenson
Sara Hanks and Andrew Stephenson of CrowdCheck offer their view and insights on the SEC’s revised Regulation A exemption.
http://www.locavesting.com/featured/companies-begin-testing-the-reg-a-waters/
Robert B. Thompson and Donald C. Langevoort
The JOBS Act is the most far-reaching legislative reform in what it means to be a public company or to make a public offering in the almost 80 years of American securities regulation. More generally, though, it exposes the shaky foundation of existing theory that guides how we have thought about dividing public from private obligations in this area of the law. And for the ’33 Act, which regulates the capital-raising portion of securities regulation, the changes spotlight a lingering identity crisis: Given the ever-expanding presence of ’34 Act regulation over the last half-century, why is there any place left for the additional regulation traditionally found in the ’33 Act?
To better understand these issues we look at the evolution of two somewhat out of the way securities transactions — reverse mergers and PIPEs — located in the transition space as companies move between the ’33 and ’34 Acts. What we see are innovative hybrid forms of capital-raising (a ’33 Act function), although clothed in a transactional setting that takes advantage of the less intense regulation of the ’34 Act. We compare these transactions against the core functions visible in securities regulation: mandatory disclosure, SEC review, restrictions on sales pressure, and liability aimed to force due diligence. When one or more of these is compromised or abandoned we ask why and if we are comfortable with what compensates for the loss? More specifically, we identify the particular concern that motivates additional regulation drawn from the ’33 Act for issuer or affiliates sales: will there be a “dump” of a large quantity of stock that will require special selling efforts, with the potential for abuse that entails? We note that these fundamental questions do not always get asked when creative lawyers and their clients claim open spaces created by technological change and aggressive marketplace innovation. Here they assume favorable regulatory treatment, of which the SEC only becomes fully aware after the practice has already been established and when it is very hard to undo the occupation.
This same structure animates our analysis of the changes made by the JOBS Act to the exemptions available under the ’33 Act. For the two new exemptions added (crowdfunding and Reg. A+) we see a balance between the efforts to promote due diligence that will protect investors and the scaled back requirements for disclosure, review and liability — perhaps so much that those exemptions will get very little use, at least by serious issuers. However, for the third major change of the Act, the removal of the general solicitation ban for offerings under Rule 506, the legislation flew in the face of the fundamentals — permitting what is likely to be intense selling efforts on the Internet and elsewhere with no due diligence or liability constraints.
Having identified special sales effort as what justifies ’33 Act regulation, we ask whether this concern might better be addressed with a more technology-driven, forward-looking rethinking of how we regulate sales practices in the securities industry that would be outside of the ’33 Act context to which we are accustomed. Our conclusion here is positive, with a condition so unlikely as to perhaps destroy its value — that sufficient regulatory resources exist for such a repositioning.
Thomas Lee Hazen
Social networks have been used as a medium for financing films and other performing arts, as well as for charitable solicitations. These and similar fundraising endeavors are known as crowdfunding. Social networks have the potential for using crowdfunding to reach large numbers of people. Since crowdfunding is designed to reach a large number of people, limiting the fund-raising request to a small amount from each donor can provide meaningful funding. The solicitation of funds as gifts or donations is a substantially unregulated activity. Crowdfunding can also be used to finance small business enterprises, which in contrast is a highly regulated activity by virtue of the securities laws.
Securities laws are designed to provide investor protection by requiring disclosure and in many instances registration. The securities laws come into play when social networks are used to make a widespread solicitation of funds for business enterprises, regardless of the amount being sought from each investor. For the most part, the exemptions from the more burdensome securities law disclosures do not apply when there is a general solicitation as is the case with crowdfunding efforts. There are a few exemptions permitting a general solicitation exist but those exemptions are conditioned on the use of an offering circular or other mandated disclosure to potential investors. The difficulty in evaluating an exemption is trying to balance the policy of encouraging small business formation against the investor protection goals of the securities laws. This article includes an overview of the applicable securities laws and evaluates the various proposals which their proponents argue would provide a workable exemption that would not unduly compromise investor protection.
There was much discussion of providing a less onerous exemption from the securities laws to facilitate crowdfunding of business ventures. In fact, there were a number of proposals to the SEC and Congress urging the adoption of an exemption for crowdfunding efforts. Those proposals eventually led to the JOBS Act which includes a crowdfunding exemption. The article discusses the proposals and the ensuing legislation and concludes that the only appropriate exemption for crowdfunding is one conditioned on meaningful disclosures about the company and the terms of the offering.
C. Steven Bradford
On April 5, 2012, President Barack Obama signed into law a new federal securities law exemption for crowdfunded securities offerings. Crowdfunding — the use of the Internet to raise small amounts of money from a large number of contributors — has become incredibly popular outside the securities context. But the use of crowdfunding to sell securities has been stymied by federal securities regulation. Securities Act registration is simply too expensive for small, crowdfunded offerings, and, until now, none of the registration exemptions fit crowdfunding well. Moreover, the web sites that facilitate crowdfunding could be considered brokers if they hosted securities offerings, imposing additional regulatory costs.
The new crowdfunding exemption attempts to resolve both of those regulatory problems — by exempting crowdfunded offerings from the registration requirement of the Securities Act and by providing that crowdfunding sites that meet certain requirements will not be treated as brokers. However, the new exemption imposes substantial regulatory costs of its own and, therefore, will not be the panacea crowdfunding supporters hoped for. The regulatory cost of selling securities through crowdfunding may still be too high.
This article analyzes the requirements of the new crowdfunding exemption and discusses its flaws.
Joan MacLeod Heminway and Shelden Ryan Hoffman
A promising Web-based funding model for small business firms has emerged over the past few years. Crowdfunding (as this model has come to be known) actually includes a variety of business models, all of which use the Internet to fund business ventures by connecting promoters of businesses or projects needing funding with potential funders. Most of these funders are not professional investors; instead, they are just members of the Internet “crowd” that like the business idea of a particular entrepreneur and want to help him or her out with a nominal amount of funding — even $10.
Some (but not all) manifestations of crowdfunding result in the offer and sale of interests that are securities under the Securities Act of 1933, as amended. Offers and sales of securities that are neither registered nor exempt from registration violate the Securities Act. The high cost of registration is prohibitive for small businesses that might benefit from crowdfunding. Accordingly, if crowdfunding is to achieve its optimal benefit (or even just survive or thrive), there must be some intervention. This dilemma has caught the attention of many, including the U.S. Congress and Securities and Exchange Commission (SEC).
This article first shows how crowdfunding interests may be securities under the Securities Act and describes key legal effects of that security status – including the requirement of registration (absent an exemption). The article then explains why the offer and sale of crowdfunding interests under certain conditions should not require registration and offers the principles, process, and substantive parameters of a possible solution in the form of a new registration exemption adopted by the SEC under Section 3(b) of the Securities Act.