Crowdcheck Blog

The ongoing government shutdown is hurting startups. Regulation A was amended in 2015 to give early-stage companies a way to raise funds from the general public, including online. While Reg A offerings are often referred to as “mini IPOs,” they really aren’t, for a number of reasons. IPOs are held when a company is ready to become a fully-registered company. They typically involve a cast of thousands, a long timeline, an extensive price discovery process and they generally aren’t held when the company is in desperate need of money. Reg A offerings, in contrast, are more usually used as an alternative to an angel or VC funding for startups, especially for…

I wrote this and posted it on my personal blog at the time of the Christmas 2012 Shutdown. Unfortunately, it seems just as relevant today. I am particularly struck by the reference to the Dow performance. Merry Christmas to all those who celebrate it. Sara [Date: many years in the future] Many memories have faded now.  But the clearest memories I have are of the events one Christmas that nobody quite agrees about.  All of us who were there know that something happened, but when we try to describe it, the facts and details slide through our minds and become insubstantial, inchoate.  Like things you see from the corner of your eye; when you turn, they aren’t…

Confucius had some thoughts on precision of language: Tsze-lu said, “The ruler of Wei has been waiting for you, in order with you to administer the government. What will you consider the first thing to be done?” The Master replied, “What is necessary is to rectify names.” “So! Indeed!” said Tsze-lu. “You are wide of the mark! Why must there be such rectification?” The Master said, “How uncultivated you are, Yu! A superior man, in regard to what he does not know, shows a cautious reserve. “If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to…

We’ve noticed something interesting recently: Regulation A filings by companies that used to be SEC-reporting companies with quotes on the OTC Pink market, who have ceased to file reports with the SEC and whose trading activity on OTC has flatlined. Why would such companies file for a Reg A offering? Especially since so many of them are complete losers with weird agglomerations of business lines resulting from multiple reverse mergers (“We are a holding company operating in the mattress, muffin and blockchain businesses”)? Because someone can make money, and it’s not the issuer and it’s not investors. Here’s how. You start with an existing OTC-quoted shell…

Part of the whole point of crowdfunding is that you leverage the “wisdom of the crowd.” That is, a start-up company presents the relevant information about its idea, its team, and its financials to the crowd, and the crowd weighs in with questions and commentary. The crowd may ask about the company’s competitors, challenge the valuation, ask for further information about the company’s plans and draw the company’s attention to issues management hadn’t thought about. Crowd comments have the ability to improve disclosure and increase the knowledge of potential investors. This is why the regulators insist on crowd communication channels being clear, and examine…

Well, actually nothing of the sort, but did I get your attention? The SEC is continuing to bring suit against ICO scammers. This one got my attention because (a) the scammers stuck the SEC seal on their website and tried to make out that they were a regulated entity and (b) said they could sell under Regulation A, when they hadn’t filed a Form 1-A with the SEC. Two things here: First, these are dumb criminals. If you can’t work out that the SEC really likes its seal and takes it terribly personally when people who are not the SEC plaster it all over their offerings, or that it takes two seconds for folks to work out whether or not an offering has been qualified…

We are seeing a lot of references to KYC/AML in the ICO/STO space. Lots of shops include this function as part of their pitch to create smart contracts and host the offering on their platform. The problem is that what they are doing in most cases isn’t actually KYC/AML and this could lead to confusion in the future. KYC, or “know your client,” is the process that a regulated entity like a broker-dealer goes through in order to establish not just the identity of its client, but also that client’s risk tolerance and the suitability of the investment for the client in question. Online platforms that are brokers routinely do this through a series of questions when…

Early-stage companies often fail. They often get acquired, too, sometimes in distressed circumstances and sometimes in circumstances leading to Lambos all round (most often the former). Companies who have raised funds under Reg A and Reg CF are no exceptions. Unlike companies that made only private offerings to investors, companies that have made Reg A or Reg CF offerings are required to make reports to the SEC. Reg A companies must file an annual report on Form 1-K (together with audited financials), a semi-annual report on Form 1-SA (with unaudited financials) and report material events on a Form 1-U. Companies that have made Reg CF offerings must make annual…

I’ve never been a fan of the “the SAFT is a security but the token isn’t” theory. As a refresher, the Simple Agreement for Future Tokens (“SAFT”) is an investment contract where funds will be used by the issuer to develop its blockchain platform and issue digital tokens that can be used on that platform as repayment for the SAFT. If you are selling contracts to obtain tokens which will eventually do a thing, but can’t yet, on a platform that is yet to be built, chances are those tokens issued to repay the SAFTs are securities. That being the case, if you are issuing SAFTs or SAFEs  (Simple Agreement for Future Equity) or any form of convertible instrument that…

As of Friday night, when the SEC’s EDGAR system went to bed, there had been 61 filings of Form C-AR made (with the rest due Monday for all companies with a 12/31 fiscal year-end). This is the form that companies have to file to keep their investors updated when they have sold securities under Regulation Crowdfunding. Form C-AR requires updated information about the company’s business and its financial performance and, most importantly, the provision of financial statements. The information that companies need to provide on Form C-AR is set out in Rule 202(a) under the Securities Act and can be found here. Only 13 of those 61 companies to have filed a Form C-AR…