Crowdcheck Blog
Insights and information for online capital formation
One area of Title III of the JOBS Act that was rather vague was the ability of a company to offer securities through an offer relying on Regulation D at the same time as a crowdfunding offer. The statute was ambiguous on the matter, with provisions that were contradictory. The SEC cleared up the ambiguity and made a clear declaration that, under the proposed rule, "[a]n issuer could complete an offering made in reliance on Section 4(a)(6) that occurs simultaneously with ... another exempt offering."
Of all the provisions of the proposed rule, this one may have the most impact on early-stage companies. This provision will allow companies to continue to focus…
This entry is filed under Crowdfunding, Rule 506(c), Section 4(a)(6), Blog
Caveat emptor is Latin for "let the buyer beware." The principle is most often applied in the sale of property — the buyer has sufficient amount of time to discover any defects and must live with those defects after the sale closes. There is no remedy available for a buyer that merely phones in the research and buys something unfit for use. The only exception to the principle is if the seller actively conceals defects or makes misrepresentations about the property. That is fraud.
While securities fraud is gussied up in statutes and rules — Securities Act Section 11, Securities Act Section 12(a)(2), Securities Act Section 17(a), Exchange Act Section 9,…
This entry is filed under Disclosure, Due Diligence, Fraud, Rule 506(c), Blog
Back in June, CrowdCheck opened up its "What due diligence looks like" series with a fundamental concept: checking whether offered shares of stock are "duly authorized, validly issued, fully paid and non-assessable." This is not just boilerplate language, but an actual legal requirement that gives investors confidence that they will be entitled to all the rights of stockholders to the full extent provided by the articles of incorporation and applicable corporations statues.
Digging a bit deeper, there is a specific element within this requirement that the prudent investor must establish—whether existing shareholders have preemptive rights and, if so, whether…
This entry is filed under Disclosure, Due Diligence, Blog
Limited Liability Companies (LLCs) are a very popular form of organizing small businesses. In essence, they are a hybrid entity that provides the limited liability protection of a C corporation with the tax benefits of a partnership. LLCs are also incredibly easy to set up. While a C corporation requires the entrepreneur to think ahead about stock authorizations and board composition when filing the articles of incorporation, nothing of the sort is requires for an LLC articles of organization. Step one, check the company name is available. Step two, file the articles of organization. And now the LLC exists.
Some of the entrepreneurs we’ve come across have not…
This entry is filed under Crowdfunding, Offering materials, Blog
The internet has gone through radical changes since the year 2000. Google became a verb, Facebook became a thing, cat memes come and go every 5 minutes, and everyone has their own blog (just like this one!). What has not changed since the year 2000 is the Securities and Exchange Commission's opinion on what constitutes a public offer of securities over the internet (which is the same opinion the SEC held before there was even an internet to make offers on).
Way back in the year 2000, the SEC addressed the use of the internet through an interpretation of the rules currently in place as they apply to electronic media. At that time, 7 million people had…
This entry is filed under Blog
As a devoted fan of Sid Meier's Civilization series working in the crowdfunding area, I couldn't help but stumble across an interview with Sid Meier in which he is expresses his uneasiness about using a crowdfunding platform to fund a game. According to Meier, he would "be a little concerned with [crowdfunding] if [he] committed to X, Y and Z and [he] found out down the road that Z didn't work well."
In business speak, Meier's concern is over the pivot—after moving forward with one concept, pivoting to another that is more feasible and potentially profitable. Meier's concerns about the pivot are laudable. He feels an obligation to his funders who were…
This entry is filed under Blog
The New Year has come and gone and we are done with the first quarter of 2013, and yet we are still without SEC rules to implement crowdfunding as authorized by the JOBS Act. While some commenters on the SEC JOBS Act comment section have resorted to unproductive heckling of the SEC to get a move on, the rest of us understand what is at stake for crowdfunding and the need to get the rules right.
On April 8, 2013, CrowdCheck hosted our Second Annual Crowdfunding Conference. The conference title was "Fraud and Red Tape: Risks to the Potential of Securities Crowdfunding". We spent some time working on the title in order to highlight that there are two competing…
This entry is filed under Crowdfunding, Fraud, SEC, Securities Law, Blog
Last Friday, the Department of Justice and the Consumer Protection Working Group held their annual summit on consumer protection. The summit highlighted the latest scams and what consumers can do to protect themselves.
The Internet and social media have made it easier for scammers to contact and fool unsuspecting individuals with lottery scams, romance scams, unlawful debt collection practices, and health scams. Common features of all of these scams are unsolicited contacts and advance fees paid to an organization the individual has never dealt with before.
These common features—unsolicited contacts and advance fees—distinguish these frauds from securities…
Ever since the Internet became a medium for communication, fraudsters and scammers have tried to use it to steal money from overly-trusting individuals. When it comes to the sale of securities, the SEC warns that fraudsters commonly try to trick investors through online investment newsletters, bulletin boards, and pump and dump schemes.
Fraudulent online offers of securities are a commonly used scam because the promise of receiving a return may blind the investor to the holes in an otherwise reasonable sounding proposal. For example, online investment scammers can take advantage of cognitive biases that will make their proposal sound even better merely…
On Friday at the "SEC Speaks" conference, Securities and Exchange Commissioner Troy Paredes observed that the information companies disclose to investors leads to "disclosure overload" that hampers the ability of investors to gauge the importance of the data. Commissioner Paredes went on to say "what we need is a top-to-bottom review of our disclosure regime."
At CrowdCheck, we agree with Commissioner Paredes. The value of disclosure is significantly increased when presented in a readable format that does not overwhelm the investor. While the information presented in an opaque document may be the same as that of a readable document, the impact is very…
This entry is filed under Disclosure, SEC, Blog