Crowdcheck 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…

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…

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…

While Section 4(a)(6) of the Securities Act and Reg CF preempt state regulation of offerings under Reg CF, states are still permitted to require notice filings be made. For Reg CF, rather than all 50 states plus the District of Columbia and other territories being able to require notice filings, only the state of the principal place of business of the company, and the state in which more than 50% of the securities are sold in the offering (if any) may require notice filings. Based on the manner most state securities laws are written, many states must enact specific rules to require notice filings. Some state laws provide for notice filing requirements without…

Following the release of the “Simple Agreement for Future Tokens” or “SAFT” documentation by Protocol Labs and Cooley LLP, the possibility of doing blockchain token sales has been expanded to companies at even earlier stages of development. When selling a token, companies needed to have more architecture developed with respect to their platforms so that they could issue tokens with rights that corresponded to the operations of those platforms. With the SAFT, those companies can sell securities to investors on the promise that tokens will become available to those investors when the platform is operational and the token rights are known. While the SAFT is not…

Every company offering securities to investors under Regulation Crowdfunding (“Reg CF”) is required to provide financial statements that are prepared in accordance with generally accepted accounting principles. For offerings seeking over $107,000, those financial statements are required to be reviewed by an independent public accountant (second helpings under Reg CF may require financial statements audited by an independent public accountant for raises of more than $535,000 in the prior 12 months). While most companies have correctly complied with the review or audit requirement, some companies have failed to engage accountants that are actually independent,…

Our memo regarding issuer-dealer registration for companies considering an offering under Tier 2 of Regulation A has been updated with the inclusion of Nebraska following recent pronouncements from its Department of Banking and Finance. The updated memo can be obtained here, https://www.crowdcheck.com/sites/default/files/Reg%20A%20Issuer-Dealer%….

So far, Regulation Crowdfunding appears to be doing what it was always intended to do. Small businesses are able to raise funds to begin or expand their business operations. Some companies could be categorized as innovative growth companies, others more main street. In any case, a common theme is that issuers are in need of cash and see crowdfunding as a method that provides additional benefits over traditional loans or angel investment – if those options were even available to the issuer to begin with. As offerings under Regulation Crowdfunding can take a few months, often with substantial upfront costs, many issuers find themselves in the position of needing…

One of the great benefits to issuers under the SEC’s rules for offerings under Tier 2 of Regulation A, effectively created by the JOBS Act, is the preemption of state requirements for registration of the offer and sale of securities. Known as “Blue Sky Laws”, these state specific rules added considerable cost to qualifying an offering under Regulation A. The SEC determined it was appropriate to preempt state qualification rules by deeming securities offered and sold under Tier 2 of Regulation A to be sold to “qualified purchasers” under Section 18 of the Securities Act. Under Section 18, states are still given the authority to require filing fees and notice…

Funding portals are governed by unique communication rules under Regulation CF and FINRA’s Funding Portal Rules. These rules derive from the restrictions on funding portals regarding soliciting investors and providing investment advice. Additional information can be found in the memo here.