Crowdcheck Blog
Insights and information for online capital formation
We love crowdfunding here at CrowdCheck, and we really believe it is a great opportunity to invest in some interesting, novel and amazing companies. And you may have sorted through the companies to discover what you believe will be the next Facebook or Google. And you may be right and may have found your pink unicorn with rainbows, sparkles and all things shiny. But then you read what you have purchased, only to discover that the security that you think you have purchased doesn’t hold the windfall that you are expecting. There may be provisions and/or terms in the security or in the subscription agreement that you sign to purchase that security that detract…
This entry is filed under Crowdfunding, Disclosure, Offering materials
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…
This entry is filed under Disclosure, Educational, ICO, Blog
Often, companies are started with just an idea. A founder may decide to quickly form a limited liability company to help protect assets, or operate as a sole proprietor for a period of time. Prior to taking on funds from outside investors, that company may decide to form a corporation. For companies that follow that early stage cycle, the financial statements to be included in a Reg CF filing may not just be the financials of the corporation. If the previous entity or sole proprietorship was operating in the period required to be covered by GAAP financials, those activities must be represented in the financial statements as well.
In Reg CF, the SEC provides…
This entry is filed under Crowdfunding, Disclosure, Financial Statements, Section 4(a)(6)
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…
This entry is filed under Crowdfunding, Regulation, Regulation A, SEC, Blog
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…
This entry is filed under ICO, Types of Securities, Blog
With the approval by the House of Representatives of the Senate version of S. 2155, a number of financial regulatory reform measures were sent to the President’s desk for signature and became law on May 24. While some of these measures, especially those related to banking, are more controversial, there are a few provisions related to US securities law that have received broad support. These changes include allowing issuers to better use smaller national stock exchanges, increasing the Investment Company Act exemption threshold for venture capital funds, increasing the annual limit for exempt issuances for employee stock plans, and allowing Exchange Act…
This entry is filed under Capital Raising, Regulation A, Securities Law
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…
This entry is filed under Crowdfunding, Disclosure, SEC, Blog
As previously identified in a CrowdCheck investor alert here, a significant number of companies that have raised funds under Regulation Crowdfunding are no longer in business. That is to be expected. Early stage companies have a high rate of failure, and investors should understand that risk before investing.
It is a general principle that a business failure itself is not fraud. Maybe revenues never grew the way the company thought. Perhaps larger competitors entered the space and out-competed the company. Maybe the company could not effectively scale its operations to bring down its cost of revenue. These, and an almost infinite variety of factors, can lead to…
This entry is filed under Crowdfunding, Fraud, Section 4(a)(6)
All companies that accept investments under Reg CF need to provide an annual update to their investors, to be filed on the SEC’s EDGAR system on Form C-AR and posted on the company's own website. It’s really important that as an investor, you know what the company has done with your money in any given year.
We searched for all companies that completed a successful fundraising (filed a Form C-U), from the date Regulation CF launched in 2016 to April 30, 2017, and found 29.3% of them did not file a Form C-AR or post an annual report on their website, meaning approximately one in three investors did not receive any updates from the company they invested in. In…
This entry is filed under Crowdfunding, Disclosure, Section 4(a)(6), Blog
We are doing a new series on Investor Alerts, focusing on what investors should pay particular attention to when investing in early stage companies. Today’s issue is whether a company is in Good Standing. The SEC has highlighted this issue as one of the red flags that the offering might be scam.
Every company must file and pay annual taxes in order to maintain its good standing in the state in which it was incorporated. If a company is not listed as active or in good standing, it could have wide-ranging implications, including not being able to enforce its contracts, and not being able to issue shares.
We analyzed companies that had launched a Reg CF offering…
This entry is filed under Crowdfunding, Blog