Crowdcheck Blog
Insights and information for online capital formation
Well that didn’t take long. You know those Nigerian scams where someone emails you and asks you to help him spirit millions of dollars out the country, except you have to front him the bank fees? Well, it’s turned up in crowdfunding.
We are aware of a couple of instances like this: Company posts its offering on a crowdfunding site. Investor who claims to be a money manager contacts company for details. The investor may come from a respectable country where a lot of money managers are based, and it may have an online presence that seems to check out. Anti-money laundering and sanctions checks may come back negative. But then the investor raises an issue. It…
This entry is filed under Due Diligence, Fraud, Blog
Sounds so disreputable, doesn’t it? But some of the SEC rules that apply to stock touts apply to several types of activity in the new online markets.
Back in Ye Olden Tymes (the tech bubble days of the late 1990s) the SEC’s newly formed internet task force brought 23 enforcement actions against 44 companies and individuals in one epic event. All 23 cases involved allegations of illegal touting of securities under Section 17(b) of the Securities Act.
This is what Section 17(b) says:
It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give…
This entry is filed under Disclosure, Offering materials, Rule 506(c), SEC, Securities Law, Blog
I first started going on about Regulation S and online offerings back in 2012, when I noticed that US companies were doing offerings theoretically "outside" the United States without paying any attention to the requirements of US securities law. Then CrowdCheck started working on EB-5 offerings, and we were absolutely appalled at the ignorance of securities law in general and the extraterritorial application of securities law in particular. And it's still going on. We've seen a couple of deals recently where securities are being offered simultaneously on US and non-US online platforms and seen some "issues" there. So we are working on a series of memos and…
This entry is filed under Crowdfunding overseas, Offerings: EB5, Securities Law, Blog
Wait, what? You thought intrastate offerings were exempt from federal securities law? Only bits of it.
The "intrastate exemption" for offerings made within a specific state is only an exemption from the laws that govern registration with the SEC. There is NEVER any exemption from the antifraud laws. If you use the "jurisdictional means" (eg telephones or the intertubes, even behind a firewall) then any offer or sale of securities is subject to the federal securities antifraud laws (as well as the state laws, which can sometimes be a lot stricter).
And as we've discussed in the past, "fraud" in securities law land is a lot broader than running away with the…
This entry is filed under Crowdfunding, Fraud, Securities Law, Blog
Here's another sad story from our "fail files" although it has a happy ending. Entrepreneurs seeking outside investment may have seen references in subscription agreements (the agreements in which the investors agree to invest in the company and the company agrees to sell them shares or notes) to "being in good standing". This means being properly incorporated under the laws of a state and being up to date with the payment of franchise fees, or whatever the state calls its annual fees. Paying annual fees to a state may not seem like a big deal, and sometimes the bill from the state gets set aside, or the company doesn't have the funds to pay a few hundred bucks…
This entry is filed under Due Diligence, Failure, Securities Law, Blog
How’s that for a title for a senior thesis at a liberal arts college? Point is, though, that there is no crowd in crowdfunding. There’s not one crowd but many crowds, and whether securities crowdfunding is going to work as expected depends which crowd shows up on any given day.
Advocates of securities crowdfunding long argued that the wisdom of the crowd would expose and prevent fraud. We don’t think that always works; the most notorious exposures of fraud in donation/rewards campaigns so far have been effected by journalists, not the crowd, and as we’ve pointed out for a long time, misleading statements or false promises are also “fraud” and we are seeing the…
This entry is filed under Crowdfunding, Fraud, Blog
Lawyers will know the name of Louis Loss, one of the gods of securities regulation. From one of his key works, writing about the Securities Act of 1933:
In short, Congress did not take away from the citizen “his inalienable right to make a fool of himself.” It simply attempted to prevent others from making a fool of him.
Loss was writing about one of the underlying principles of the Securities Act, which is full disclosure. A blog is not the place to get into the nitty gritty of disclosure versus merit regulation, and the impact that disclosure has on on the merits of an offering, but here’s the basic theory: if you tell the truth, the whole truth and nothing…
This entry is filed under Crowdfunding, Failure, Fraud, Securities Law, Blog
Got your attention?
Good, because it doesn’t seem that anything else has. Look small businesses, here’s the thing. Congress told the SEC to propose rules for securities crowdfunding. The SEC’s rules have been posted here for a while and the comment period ends in a few days. There have been quite a few comments. Some are sensible, many of them address things that the SEC can’t change (like the $1 million limit – that’s in the statute and the SEC can’t change it) and some of them are advertisements for some book that some dude wrote. Only a couple address a very important issue, which is “basis of accounting.”
OK, I lost you again. I said “accounting.” But this…
This entry is filed under Crowdfunding, SEC, Section 4(a)(6), Securities Law, Blog
Not everyone outside CrowdCheck HQ has finished reading the SEC’s 6,000 page proposals for securities crowdfunding yet. So they may not have picked up on the fact that yes, indeed, crowdfunding portals would be able to charge commissions to companies raising money on their platforms under the proposals. (And although the SEC hasn’t said it, they will probably be able to receive those commissions in dollars, bitcoin or UberKittens.) So as soon as securities crowdfunding is legal, funding portals will be able to compete with broker-dealers with respect to this important aspect of their business plans.
This entry is filed under Crowdfunding, SEC, Blog
The SEC’s proposals for crowdfunding are out, and entrepreneurs are getting advice about how to be ready for securities crowdfunding. One good piece of advice is to start building that crowd now. Another piece of advice that is sometimes omitted? Do not tell the crowd that you will be pursuing crowdfunding. See, telling people that you are going to be raising funds is an “offer” of securities, and offers have to be registered with the SEC unless an exemption from registration is available. There WILL be an exemption from registration for offers of securities when Regulation Crowdfunding is finalized and adopted. It isn’t available yet.
So remember the first…
This entry is filed under Crowdfunding, Offering materials, Section 4(a)(6), Blog