The Securities and Exchange Commission has announced that it will be meeting on October 26, 2016 to consider and adopt amendments to Rule 147, the safe harbor for the issuance of securities pursuant to the so called intrastate exemption.  Rule 147 has been problematic for issuers in the past, as it restricts offers and sales of securities solely to residents within a state’s borders.

SEC informal written Staff interpretations issued in 2014 took the position that open internet solicitation by an issuer would preclude the use of this exemption for local businesses, even if sales were limited to residents of that business’s state. Many, including myself, have criticized this Staff position, simply because it was at odds with many prior, longstanding SEC rulings allowing general solicitation via radio and newspaper ads which crossed state borders.

In October 2015 the Commission issued a new proposed rule, Rule 147A, which would have broadened this exemption to allow internet solicitations, but at the same time limited the aggregate amount that could be sold in an offering to $5 million. The Commission also proposed to eliminate the existing Rule 147 in its entirety, something which many commentators pointed out would effectively nullify the majority of the existing state crowdfunding exemptions, now available in approximately 35 states.  Moreover, most securities practitioners agree that the statutory intrastate exemption, without a “safe harbor” rule, would render the exemption unusable, leaving issuers with a single option: relying on the new Rule 147A – with its $5 million cap.

Though most comments on the proposed rule welcomed the modernization of the intrastate exemption, most were opposed to limiting the offering amount and eliminating the existing Rule 147 safe harbor. It is therefore highly likely that the final rules will incorporate these comments and concerns.

Stay tuned for more developments on this upcoming Commission action at

Posted in Capital Raising, Corporate Law, Crowdfunding, General | 1 Comment

On Investment Crowdfunding, Diversification & the Wisdom of the Crowd


Still Time to Fix the Fix Crowdfunding Act

One of the cardinal rules of investing is  diversification – a critical ingredient for long-term portfolio growth.  This rule applies with equal, if not greater, force when investing in “Title III Regulation CF Crowdfunding” securities – open for business since May 2016 – and an important part of the Jumpstart Our Business Startups Act of 2012 (the JOBS Act).  For the foreseeable future, companies relying upon Regulation CF will mostly comprise startups and very early stage companies, the riskiest investment class, particularly in view of the annual dollar ceiling of $1 million and the availability of other, less complex securities law exemptions – principally private placements limited to accredited investors.

broken-eggsDiversification inarguably increases the odds of a successful portfolio, as opposed to putting all of your eggs into one basket – regardless of how attractive a single investment may appear.  This is particularly true for the riskiest of investments: startups and early stage companies – where there are more things which can – and ultimately will – go wrong – and a total loss is more likely than an investment in a later stage company.

A corollary rule is to invest in things one knows best. And if this is not always possible, especially in this complex and rapidly changing world we live in, relying upon experts can often increase an investor’s odds of success.

Unfortunately, when it comes to Title III investment crowdfunding, the ability to effectively combine both diversification and external expertise is made more difficult by our securities laws, which currently provide no exemption which would allow so-called “special purpose vehicles” – i.e. diversified funds – limited to crowdfunded securities purchased by both accredited and non-accredited investors. Under current law, even a fund which has no non-accredited investors, but more than 100 accredited investors must register, thus limiting the capital pool derived from accredited investors as well.

Money Dollars Art 100Though registering the fund is, in theory, a solution, a registered investment company is a highly regulated entity. And with regulation goes costs – which would, of course, increase the cost of doing business and eat into a fund’s returns. This is likely to be especially true in the area of Regulation CF investments, where there is an annual $1 million cap for crowdfunding issuers and, at least in the short term, there will be a shortage of investment-worthy companies sufficient to justify the costs of operating as a fully registered investment company.

Fix Crowdfunding Act (HR 4855)

Congressman McHenryThe Fix Crowdfunding Act, introduced by Congressman Patrick McHenry earlier this year and passed by the House in July 2016, takes a step in the right direction. Unfortunately, due what I perceive as the absence of bi-partisan support, it is a baby step at best toward making Regulation CF a smarter and safer place for investors.

Specifically, HR 4855 affords funds investing in crowdfunded securities an exemption from registering as an investment company, but with provisos. The proviso which is the principal show stopper, in my opinion, is the requirement that the fund hold only securities of a single security – precluding diversification.  The Bill also limits eligible securities to companies with a single class of security – in my opinion another unnecessary barrier.  Broadening this Bill to allow investment by an unregistered fund in more than one issuer would foster investor diversification – and thus hopefully will be added on in the Senate, where the Bill now resides.

The Role of the Investment Advisor

The Bill also requires that in order to be exempt from registration as an investment company, the fund must be advised by an investment advisor registered under the Investment Advisers Act of 1940. I support this requirement, for a number of reasons, especially in conjunction with a diversified fund.

The Thinker Rodin ArtThough much has been said as to the “wisdom of the crowd,” there are limits on the wisdom of a crowd comprising largely investors inexperienced with early stage, illiquid investments – and the risks peculiar to this investment class.  The reality is that most non-accredited investors have no experience whatsoever – their experience being limited mostly to exchange-traded securities, managed funds and ETF’s.

As some investors will learn the hard way, simply picking a successful company in its early stages is not enough to guarantee a profit, or even to see a return of any of the invested capital. Though Regulation CF allows a company to sell a broad range of debt and equity securities, many early stage crowdfunding companies will undoubtedly offer common stock in their initial raise under Regulation CF.  The successful ones will often launch multiple, successive rounds under other exemptions as they grow and scale their businesses.

In the real world of SME finance, these subsequent rounds often have preferences over the common stock, including a preferential return over the common stock upon a future “liquidity event” – such as being sold.  In addition, initial Regulation CF investors who purchase common stock will typically not receive what is called “anti-dilution” protection – a common provision in early stage investments.  Without this protection the early “common” investor is at greater risk of being diluted in value by subsequent financing rounds, without any adjustment to the original purchase price, number of shares or the right to participate in future, often more favorable, financing rounds.

A registered investment advisor, advising a group of Regulation CF investors, will generally understand these risks more readily than the crowd. Moreover, even if a would-be Reg CF investor recognizes this risk, it is unlikely that a single investor will have any ability whatsoever to renegotiate the terms of an investment – making the investment decision in Regulation CF a “take it or leave it” proposition. However, a fund which represents a group of investors, coming with more potential capital, would have more leverage to re-negotiate the terms of a Regulation CF raise to make it more investor-friendly.

The Fix Crowdfunding Act Needs to be (and Should be) Fixed

Reg CF Title IIIThe ability to form a non-registered fund to invest in Regulation CF securities would go a long way toward protecting investors in these early stage, high-risk investments – but there is one missing ingredient in the Fix Crowdfunding Act: the ability of the fund to diversify – to invest in more than a single crowdfunded company.  Also problematic is the Bill’s current limitation on issuers issuing more than one class of security.

Allowing professionally managed funds to diversify would be expected to have the added benefit of enhancing the ability of these funds to attract greater amounts of investor capital to the crowdfunding market.  With the ability of a fund represented by a professional adviser to attract more capital this is also a potential benefit to all issuers worthy of investment seeking to hit their target offering amount.

senate-quoram-call-us-capital-congressThis is not to suggest that all Regulation CF funds ought to be outside the purview of investment company registration entirely. However, this is an issue that can be addressed by limiting the total dollars which the fund could attract before it would be required to register.

Notwithstanding the current state of this Bill, hopefully these few important tweaks can and will be made as the Bill passes through the Senate.  The result would be expected to reduce investor risk, increase the odds of a successful investment, and provide a useful vehicle to attract more capital in the aggregate to this new financial market.

[Author’s Note – Though there are many improvements to Title III of the JOBS Act which can, and should, be made, this article only addresses those provisions which remain in the current Bill, HR 4855.]

Posted in Capital Raising, Corporate Law, Crowdfunding, General | Leave a comment

NASAA and Members of Congress Come Together on the Need for the SEC to Expand Intrastate Crowdfunding Rules

It is rare that I am able to find agreement with the publicly stated positions of the North American Securities Administrators Association (NASAA). Equally rare – members of Congress who are traditionally strong advocates for “smart” regulatory reform of capital formation by SME’s to find themselves on the same page as NASAA.  However, there appears to be a growing, even overwhelming, consensus that the SEC’s proposed rules to modify current federal restrictions on the intrastate sale of securities – are on the one hand a step in the right direction.  But on the other hand, the SEC’s rule, as proposed, does not go far enough, and places unnecessary restrictions on the ability of states to decide what is in the best interests of their constituents – free of interference from the SEC.

By way of background, on October 30, 2015, the same day that the Commission announced final investment crowdfunding rules in furtherance of Title III of the JOBS Act of 2012 to implement investment crowdfunding on a national level – it also issued for comment a proposed rule, primarily intended to facilitate investment crowdfunding at the state level – Rule 147A. Significantly, the proposed rule would allow companies to advertise their offering on the Internet, something which the SEC Staff has stated is prohibited under current Rule 147 – and much to the consternation of state regulators and securities lawyers  alike.  In doing so, the SEC proposed to limit the amount that a state could authorize under its laws to $5 million. And it also proposed to eliminate the existing rule, Rule 147, in its entirety.

On October 7, 2016, a bi-partisan group of 15 members of Congress, many members of the House Financial Services Committee, signed a letter addressed to the SEC, encouraging the Commission to finalize its rulemaking, but with some important modifications. In particular, as proposed by the Commission, the existing “safe harbor” rule, Rule 147, which would allow states to regulate offerings occurring entirely within their state, would be scrapped in its entirety, and replaced by a new rule, Rule 147A, under the Commission’s general rulemaking powers.  This approach, if adopted in the final rules, has at least two untoward effects, as regards the ability of states to fashion their own rules for intrastate offering, including intrastate investment crowdfunding.

First, of the 35 or so states which have enacted their own investment crowdfunding statutes, adoption of the Rule, as proposed, would in effect, terminate these exemptions in many of the states which enacted their exemptions based entirely upon the current rule – proposed to be eliminated – bringing intrastate crowdfunding to a halt.  Comment letters to date have almost universally requested the SEC to clarify and expand the existing Rule 147, but to retain the existing rule.  Though a technicality of sorts, failure to fix this glitch would require the large majority of states authorizing intrastate investment crowdfunding to go back to their state legislatures to incorporate any new rule which replaces the current Rule 147. And until then, intrastate crowdfunding would be shut down.

Second, though the SEC’s proposed rule makes necessary improvements, it comes with some conditions which many find unpalatable – and unnecessary. In particular, the SEC rule, as proposed, would limit the ceiling under this proposed exemption to $5 million.  Opposition to this condition has been strong, simply because this is a matter which ought to be determined by each state – on a state by state basis.

The latest missive by 15 members of the House Financial Services Committee includes Congressman and Deputy Whip Patrick McHenry, a leading proponent of the JOBS Act of 2012 and subsequent legislation, and Congressman John Carney, the original sponsor of a Bill which passed the House this year which if enacted would create a new, independent office at the SEC – Office of Small Business Advocate – and would report to the full Commission and to Congress.  Undoubtedly, their letter will signal to the SEC the need to approval final rules as expeditiously as possible nearly a year after originally proposed. So look for good things to come from the Commission in this area in the coming months.

For those who want to dig a little deeper, I am providing links to my Comment Letter to the SEC as well as the Comment Letter submitted by NASAA, both back in January 2016.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, SEC Developments | Leave a comment

Yes – There Actually Is Something Obscene About SEC Regulation A+ (Sort Of)

[Caution: The following Article Contains Adult Language Which May be Deemed Offensive by Some People.  But if you like it – Tweet it] 

After a weekend of a media feeding frenzy spawned by the off color remarks of Presidential Candidate Donald Trump – never intended for public consumption – I pondered a question.  Is there any space left where one can still be politically incorrect –  off color – or even obscene – without facing huge backlash from the public?

No, I am not talking about comedian Bill Maher, who has built his brand on being politically incorrect – even at the risk of being offensive to a large segment of the population.  Well, it seems that in the course of conducting legal research on one of my favorite topics – the SEC’s new Regulation A+- the so called “Mini-IPO” – I discovered what is perhaps one of the last bastions of free speech – where you can say just about anything – at least if you frame it properly.

This apparently “filth-friendly” X-Rated forum, mostly unknown to the general public, is a highly reputable site well known to academics and researchers in the social sciences, which includes as one of its major categories the subject of Law:  Social Science Research Network. As of the date of this article it boasts of being the repository for more than 585,000 papers, with its academic papers downloaded more than 100 million times.

Not being an academic, I stumbled across this site quite by accident, and decided it would be a good place to publish a couple of my more scholarly articles: one addressing the SEC’s Regulation A+, and the other a 30 page analysis of the SEC’s proposed regulations implementing investment crowdfunding in the U.S.

So after publishing one of my major Regulation A+ articles in the Harvard Law School Forum I decided to make it more widely available to researchers by posting it on the Social Science Research Network (SSRN).  A few weeks after its publication on SSRN, I visited their site to see how many times the article had been viewed or downloaded.  My biggest disappointment came when I used the SSRN search function, and put in the search term “Regulation A+” to see how high the article ranked in popularity – not because it was nowhere to be found in the first few pages of search results – but because of the article which was the number one search result – downloaded more than 30 thousand times.

You see, the top ranked article using this search term – Regulation A+ – actually had nothing to do with finance – or regulation – though a well researched scholarly article on the law.  The title of this article was but a single word:  The “F” Bomb – as in “Fuck.” And it was authored by a tenured professor at a prominent law school, Ohio State University.  For obvious reasons it appeared he waited until he achieved faculty tenure before venturing out into murky academic waters with his publication.

If you want a good laugh, please go to the SSRN page containing the Search function and punch in “Regulation A+.”  If you do so correctly, you will find this article as the most downloaded paper on Regulation A+ – at least until SSRN tunes up its search engine a little better.

Out of curiosity, and after a great deal of trepidation, I actually began to peruse this 74 page academic tome.  To my surprise, lurking in the early pages of the article was a golden nugget for us legal history wonks.

For those of us contract lawyers, familiar with what are called “penalty clauses” or “liquidated damages clauses,” intended both to ensure performance of the contract – and to provide a fixed measure of damages in case of breach of promise – it seems that the ancient Egyptians had it figured out thousands of years ago.

You see, according to the author of this article, the ancient Egyptians had their own “Penalty Clause” – actually a part of the standard boilerplate language of the time. As the article relates on page 8:

“During the last Egyptian dynasties, legal documents were sealed with the phrase, ‘As for him who shall disregard it, may he be fucked by a donkey.’  The hieroglyphic for the phrase—two large erect penises—makes the message clear.” 

Certainly not something that is not a part of today’s contracts, or even law school curricula, but something that today might deter frivolous contract litigation.

So perhaps one lesson to be learned is that although the Internet and algorithms have vastly accelerated the dissemination of useful information, occasionally things will go awry – very awry.  There will always be the inevitable human error in exotic algorithms and search engines – and hence the need for humans.

Posted in Capital Raising, General, Regulation A+ Resource Center, Uncategorized | Leave a comment

An Upcoming Event for Private Companies to Explore Regulation A+ Financing Options

Though I regularly speak at national alternative finance events it has not been my custom or practice to independently publicize these events.  So today being Columbus Day, an historic event marking the voyage of Christopher Columbus toward new horizons, I thought this would be as good a day as any to break with tradition and call attention to my next speaking event – open to the public.

On November 10, 2016, I will be joined by more than a dozen of some of the most prominent professionals in the new Regulation A+ financing space, representing the critical areas of a Regulation A+ financing: legal, accounting and marketing.  The event, which is open to the public, is The Regulation A+ Bootcamp.  The venue, and ringleader of this event, is none other than OTC Markets at their headquarters in New York City. And it is specifically targeted toward both early stage and privately held mature companies who are considering their financing options. Co-sponsoring this event is Crowdfund Beat, a leading crowdfunding media publication and event organizer.  Additional details regarding this Event are available here.

OTC Markets has been a leader in supporting a strong secondary market for Regulation A+ securities. It has also been an outspoken advocate for expanding all avenues of capital formation for both mature companies and SME’s.  Its most recent, visible example is its Petition for Rulemaking filed with the SEC in June 2016 requesting the SEC to expand the use of Regulation A+ to fully reporting companies. Currently, the SEC’s regulations limit the use of Regulation A+ to non-reporting companies and companies reporting under the SEC’s new, streamlined reporting requirements under Regulation A+.  This limitation is nowhere found in the statute mandating Regulation A+, Title IV of the JOBS Act of 2012.

The Petition has already garnered public support from some of the leading industry participants.  Any of you wishing to weigh in on expanding the use of Regulation A+ can do so via the SEC’s website.  You are also free to contact me directly at for more information on the Petition.

And in the interest of full disclosure, as noted in the Petition, I had the privilege of working with OTC Markets in connection with the preparation of the Petition.

Posted in Uncategorized | Leave a comment

Busted! SEC Targets Reg A+ Marijuana Company, Med-X, in Administrative Proceeding

The Regulation A+ industry was buzzing this week – not with excitement, but with a healthy dose of trepidation.  One of the first, high (no pun intended) profile Regulation A+ offerings, launched in November 2015, after a seemingly successful “Testing the Waters” campaign, was for a company called Med-X, a startup formed to participate in the newly burgeoning marijuana industry – the so called “Green Rush.”

But this month’s headline for Med-X was a bit more sanguine, enough to counteract even the most potent dosage of THC:  “REGULATION A EXEMPTION OF MED-X, INC. TEMPORARILY SUSPENDED.”  The story that followed was not the kind of publicity any company is looking for – especially when it is in the throes of raising money under Reg A+. Actually, it was not a story. Rather, it was an Administrative Order issued by the SEC on September 16, 2016, temporarily suspending the exemption of Med-X under Regulation A+.  Why?

Well, it seems that this company failed to notice, or at least heed, the requirement that Reg A+ issuers file periodic informational reports as a condition of maintaining their status as Reg A+ issuers. The basic requirement calls for a company, at the least, to file a semi-annual and annual report with the SEC following the “qualification” of the offering.  Seems that Med-X failed to file its annual report, which would include audited financial statements, when due back in the Spring of 2016.

Some have speculated that the SEC was targeting a disfavored industry – marijuana. I doubt it. The SEC  has approved the registered sale of other companies in this industry long before Regulation A+ was adopted.

Others have speculated that this action reflects an uneven hand towards Regulation A+ issuers. After all, this type of swift action is rare for fully reporting companies which are delinquent in their filings. One more time: I think not.

The Staff at the SEC has been remarkably supportive of the rollout of Regulation A+, as measured anecdotally in terms of the efficiency in which it has been processing the review of Regulation A+ offerings.

Rather, I think back to one of the more notable sound bytes I coined in a Webinar back in April 2015: “Regulation A+ is not your daughter’s Kickstarter campaign.”  Raising capital from outside investors is serious, heavily regulated business.  And as indicated by some of the early Regulation A+ participants, the level of sophistication of the management of some of these issuers has hardly met the bar required to file and prosecute a Regulation A+ offering.

Yes, Regulation A+ is a little more complex than the pipedream: filling out a form, waiting for SEC approval, and then crowdfunding your way to $50 million.  Apart from detailed disclosure rules, including audited financial statements, and the always difficult task of raising capital – especially for early stage companies – there is an ongoing SEC reporting requirement. Yes, the requirement is lighter than a fully reporting public company, to be sure, but enough to quickly overload an early stage company, with limited financial and human resources.

So if nothing else, this is one SEC enforcement action can be expected to inject a dose of reality into the Regulation A+ capital raising process.  As our President might say, “A Teachable Moment.”

Posted in Capital Raising, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments | Leave a comment


Many have railed against what can be argued is the irrationality of protecting non-accredited investors from themselves, i.e. the accredited investor definition.   The definition was crafted by the SEC back in the early 1980’s as the centerpiece of what has been the most utilized method for companies to raise capital in an offering not registered with the SEC, Regulation D.

In simple terms, if a company wishes to raise capital without registering its offering with the SEC, it can utilize the Regulation D “safe harbor” created by the SEC to sell securities to both accredited and unaccredited investors alike. In practice, however, most issuers have excluded non-accredited investors from their Regulation D offerings. Why? Once an issuer includes even a single non-accredited investor in the offering, stringent (as in onerous) disclosure requirements kick in.

In 2011, courtesy of a 2,000 page bill known as the Dodd-Frank Act, Congress threw more gasoline on the fire of the oft perceived inequality of treating non-accredited investors differently. It altered the definition of accredited investor – raising the bar even higher. Previously, an individual with an income of $200,000 ($300,000 with spouse) or a net worth of more than $1 million would qualify.  Then along came Dodd-Frank: now mandating that the SEC must exclude the equity in an individual’s principal residence in calculating net worth eligibility.  Simple math tells us that this can only shrink the pool of accredited investors even further, adding to the legions of non-accredited investors.

Then Title II of the JOBS Act came along in 2012, allowing issuers to publicly solicit their “private placements” under Rule 506 of Regulation D, but with a catch: no non-accredited investors could participate – disclosure or no disclosure – and investors would need to prove up their accredited investor credentials before they could invest.

And finally, Dodd-Frank also requires the SEC to periodically review the “accredited investor” definition, a process currently in progress and subject to comment by the public.

The result has been an ongoing and increasingly raging controversy over both the definition of “accredited investor” itself, as well as the wisdom of even having such a concept. I, for the most part, have stayed outside the fray, given both the voluminous number of opinions, and advocates, on both sides of the issue and the somewhat “lose-lose” nature of the issue. In fact it’s been more than two years since I weighed in on this issue publicly – in Crowdfund Insider.

Why “lose-lose”? You see, from my perspective, as both an American and a securities lawyer, it makes great sense to expand the pool of accredited investors. This will both increase the available pool of capital to small and emerging businesses, and allow the average American, regardless of income or net worth, to carry a more diversified investment portfolio.

In my view, this leaves but two regulatory choices. One, expand the accredited investor definition. But each time you draw new lines, those who do not fall within the new line will undoubtedly feel aggrieved – many of them rightly so. Two, throw out the definition entirely.  Some have argued for this. But now, one brave soul, a newly minted lawyer no less, has taken his case to Federal court, filing a lawsuit against the SEC and its Chair, Mary Jo White in June 2016.

The case is styled Morello v. White (2:cv-04440), launched in the Central District of California. The Plaintiff, Chase Morello, according to public records, is a second year associate at a reputable corporate law firm in Southern California. Mr. Morello has launched this on his own, as both the Plaintiff and his own lawyer.   His firm’s name nowhere appears on the pleading. That’s probably a good thing, if nothing else given the unfortunate misspelling of the lead defendant’s name, SEC Chair White (misspelled Mary Joe White), not exactly a good start out of the gate.   The lawsuit seeks to have the accredited investor definition declared unconstitutional, on a number of independent grounds, and seeks to have the lawsuit certified as a class action.  The SEC’s response is due in early October – undoubtedly a lengthy motion seeking to dismiss the Complaint at the pleading stage.

My educated guess is that this lawsuit will go nowhere – fast.  But this is now in the hands of a Federal judge in Los Angeles.

So get the popcorn out, but don’t invest in a big supply. In my view, better to work this issue through the SEC rulemaking process and – where appropriate – through the legislative process.  Yes, it is slow going, to be sure, but after all, it took over 80 years of legislation and rulemaking to get us here.

More often than not, slow and steady wins the race.

P.S. – For those of you who sympathize with Mr. Morello, but wish to participate in a more subdued manner, you may want to sign the Petition he filed with the White House last week to declare the accredited investor definition unconstitutional.

And for those who wish to receive a copy of the filed Complaint, shoot me a line at

Posted in Capital Raising, Corporate Law, General, SEC Developments | 1 Comment

SEC Quietly Injects Life Into Title III Crowdfunding Solicitation!

[As published on June 27, 2016 in Crowdfund Insider]

Reg CF Securities for Sale

When it comes to capital formation for SME’s through federal legislation, one can usually count on the North American Securities Administrators Association (NASAA) to do their best to block or narrow any new paths which Congress or the SEC may seek to create.  The JOBS Act and its implementation have been no exception to this rule.

Denied Red StampWe were reminded of this very recently, when the District of Columbia Court of Appeals denied NASAA’s challenge to the SEC’s Regulation A+ rules, which broadly preempted the authority of the states to regulate SEC reviewed Regulation A+ offerings, even where unaccredited and unsophisticated investors are involved.

So too with JOBS Act Title III crowdfunding. No sooner had the ink dried on Congressman Patrick McHenry’s “Fix Crowdfunding Act” introduced into the House of Representatives in March 2016, former NASAA President and current Chair of the NASAA’s Committee on Small Business Capital Formation, testified before the House Financial Services Committee, urging lawmakers to do nothing to fix Title III crowdfunding – at least not Patrick McHenry Work is not doneuntil there was more data to show how Title III was broken – and how it should be fixed. Even seemingly benign proposed fixes allowing an issuer to “test the waters” before formally conducting a Regulation CF offering were singled out by NASAA for deferral to some future, unspecified date. (My rebuttal to Mr. Beattyappears in an article published in Crowdfund Insider earlier this month).

Not surprisingly, this was the same Bill Beatty, who urged this same Committee, back in September 2012, to condone disregard by the SEC of rulemaking deadlines dictated by the then five months old JOBS Act and defer consideration of all post-JOBS Act legislative reforms, urging the that the SEC conduct no JOBS Act rulemaking activities until the SEC had promulgated more than 100 rules under the Dodd-Frank Act of 2011 – a multi-year task.

William BeattyIn Mr. Beatty’s words:

“Moreover, we note that many of the rulemakings required by the Dodd-Frank Act are long overdue. We have encouraged the SEC to prioritize its investor-protection rules ahead of the exemptions in the JOBS Act, and we urge Congress not to pressure the SEC to act hastily, especially where ill-considered changes could have a devastating impact on the delicate balance between investors and industry.”

And to give new meaning to the word “hubris”, Mr. Beatty’s formal 2012 remarks to this Congressional Committee were entitled:  “THE JOBS ACT: IMPORTANCE OF PROMPT IMPLEMENTATION FOR ENTREPRENEURS, CAPITAL FORMATION, AND JOB CREATION”. Well, I guess the word “prompt” is susceptible to varying interpretations? You, the crowd, can be the arbiter of this one.

So much for NASAA being a worthy advocate for entrepreneurs, capital formation or job creation, at least where federal legislation and rulemaking removes power from state securities administrators.

Well, despite the continuing protestations of NASAA, history may be repeating itself – albeit in unexpected ways. It seems that once again, as the Commission has done with Regulation A+, the SEC has found an elegant workaround for at least one of the problems that most people, until recently, have viewed as plaguing effective implementation of Title III crowdfunding – the perceived limited ability of a Title III issuer to conduct “off portal” solicitation and advertising during the course of its Regulation CF raise.

You see, with Title III investments being the riskiest class – and being peddled to the most unsophisticated and vulnerable class of investors – Congress provided robust investor protections, including, mandatory disclosures, “bad actor” checks, limitations on investment amounts, and limitations on off-portal advertising. And central to this protective scheme was the tenet that all Title III transactions were to be conducted on and through a statutory “gatekeeper”: an SEC and FINRA registered “intermediary,” either a broker-dealer or a registered “funding portal.”

kool aid 2Most of us, including yours truly, had drank the Kool-Aid, assuming that during a Regulation CF offering an issuer could conduct no off portal solicitation or advertising of its offering – with one very narrow exception – courtesy of SEC rulemaking: Rule 204, which though generally prohibiting an issuer from advertising the “terms of the offering,” allows an issuer to advertise the “terms of the offering” pursuant to a brief notice,” (dubbed by many a “tombstone ad”) containing no more than specified, very limited factual information about an issuer, including a “brief” description of the business and the “terms of the offering” (as defined in the Rule), coupled with a link to the intermediary hosting the raise.  So long as you follow this rule, to the letter, you may circulate this very limited information about your offering off portal – but no more. If you violate this rule – by mentioning a term of the offering, and including with it information outside the scope of Rule 204, you may have blown your exemption from registration under applicable securities laws.

But Then The Memo Came

CrowdCheck MemoI recently received a copy of a publicly available memorandum prepared by CrowdCheck this month, entitled: “Communications and publicity by issuers prior to a Regulation CF offering.”  It seems that CrowdCheck had recently engaged with the Staff at the SEC to flesh out the contours of what exactly an issuer could and could not do prior to and during a Regulation CF offering when it came to off portal communications.  Regarding pre-filing publicity, there is nothing new there from the perspective of a seasoned securities lawyer, a subject I covered in an article back in March.  But one of the conclusions that the memorandum reaches regarding issuer publicity during its Regulation CF offering is STUNNING!

Yes, an issuer conducting a Regulation CF offering is free to not only continue normal business promotional activities off portal, but also to advertise and generate interest in its offering off portal, with one important caveat: these materials may not mention any of the “terms of the offering” – as defined in SEC Rule 204. However, these materials may directly link to the issuer’s offering page on the licensed intermediary.

So, for example, an issuer who has filed its Form C with the SEC and its intermediary, it is free to wax eloquently (but truthfully), off portal, regarding its business and prospects – via social media, webinars, live events, etcetera, so long as it does not mention or refer to the “terms of the offering” – as defined by Rule 204.  Rule 204 defines “terms of the offering” as “the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period. So if you stay away from these areas, as an issuer you have fairly free reign to promote your company and your offering off portal.

Invest Now ButtonThis would allow an issuer, for example to tack onto its promotional materials an “Invest Now” button, or similar verbiage, linking to the host intermediary, so long as the material does not mention the type of securities offered or otherwise contain a “term of the offering.” However, if your Invest Now button says “Invest Now in our Common Stock” or “Invest Now before the offering closes on July 31, 2016,” you will likely have violated Regulation CF since you have included a “term of the offering” with information going beyond the type of information permitted in a Rule 204 notice.

Compliance can be a bit tricky for the lay person, but for the well-counseled issuer, there is a great deal of utility in what one (myself included) might characterize as an unintended “loophole” in Title III – at least when it comes to generating public awareness in your company and your offering through social media and the internet outside the confines of a single intermediary.

So how, exactly, did this “loophole” come about?

It seems that the JOBS Act only requires that specified crowdfunding “transactions” take place on a licensed intermediary. But Title III is silent on the ability of an issuer to engage in general solicitation and advertising off portal, with one narrow exception. Title III, does in fact, restrict advertising by an issuer of its Title III offering. But the statutory ban on advertising only extends to advertising the “terms of the offering.” Anything else is good to go under Title III unless the SEC promulgates additional restrictions through the rulemaking process – which it certainly has the discretion to do – but seemingly has not.

A close look at the final SEC Title III rules confirms that there are no additional restrictions by an issuer on off portal advertising or offering activity. In fact, by reason of the SEC narrowly defining “terms of the offering” in Rule 204, all else is fair game off portal for an issuer’s offering and PR activity during the Regulation CF raise.

SEC Securities and Exchange CommissionFrankly, from my perspective, this was too important an issue to rely solely upon the CrowdCheck memo, or even my own “legal” analysis. Surely I must be missing something in my analysis. So last week I hopped on the Amtrak train from NYC to DC to say hi to the Staff at the SEC – coupled with a simple request: to point out the flaws in my analysis as to the permissible scope of off-portal offering activities under Regulation CF.  Well, it seems that there weren’t any holes in my simple, stupid statutory and regulatory analysis.

As I headed back to NYC, I couldn’t help but ponder how this could have happened. After all, wasn’t Title III, as “butchered” by NASAA and other lobbyists in the Senate before being passed into law, touted as an offering activity neatly compartmentalized and confined to the Title III licensed registered intermediary? And surely, this statutory “loophole” could not have gone unnoticed by the Commission and the Staff during the rulemaking process – though seemingly unnoticed by virtually all other market participants.

Yes, this in my opinion is the same type of elegant (and lawful) creativity which the Commission and the Staff exhibited in proposing and implementing Regulation A+ – in the interest of making the JOBS Act mandate work as well as possible in practice – pre-empting the authority of the states to regulate Regulation A+ offerings to accredited and unaccredited investors alike.

Lessons to be Learned

Legislative sausage making often results in legislation with unintended or unforeseen consequences. Sometimes trapped in the sausage casing are microscopic pockets of air – which go unnoticed in the legislative process – only to surface months or years later.  Well, it seems that once again the SEC found some oxygen for Title III crowdfunding in one of these “pockets” – as it did in Regulation A+ rulemaking – a pocket not clearly evident from the text of the legislation – or even from a close read of the final Regulation Crowdfunding rules themselves.

NASAA Top Investor ThreatsSo perhaps the time has come for NASAA to rethink some of its PR strategy, in particular the constant, familiar harangue by NASAA and some state securities administrators during the Regulation A+ rulemaking process – that after all, the state securities administrators know better than the SEC when it comes to reviewing offerings in their state. Perhaps, just perhaps .  .  . There might be some backlash when you repeatedly tell Congress, the public and the SEC that you know better than the SEC – and even members of Congress – especially when you are on the wrong side of an issue – and are standing in the way of the inevitable changes for the better that are taking place in our financial markets, big and small.

Sara Hanks 2016To be clear, these are my views, and my views alone. They do not necessarily reflect the view of anyone else, including CrowdCheck or the SEC. And they should not be construed as legal advice. Nonetheless, we all owe a debt of gratitude to the folks at the SEC for their hard work on Title III – and to Sara Hanks/CrowdCheck for ferreting out one of the best-kept secrets thus far in Title III crowdfunding.

Having said that, it seems that Title III issuers now have a new tool in their arsenal to draw attention to both their company and their offering off portal, in a meaningful way, during their Regulation CF offering without running afoul of securities laws.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, SEC Developments | Leave a comment

An A+ Day for SEC Regulation A+ – A Victory in Court for Small Business!

Today was an important day for small and emerging companies. On this day the US Court of Appeals for the DC Circuit dismissed the challenge by NASAA and others to set aside the SEC’s rulemaking under Title IV of the Jumpstart Our Business Startups Act (the JOBS Act).

Regulation A, as modified by Title IV of the JOBS Act, was a critical step by both Congress and the SEC in making the public markets available to small and emerging businesses – at an affordable cost and without the burden and uncertainty of a state by state review of the offering.

No longer does a company have to spend millions of dollars for its IPO. Nor does a company face the prospect of having its offering banned in states who view the offering as too risky. Such was the fate of Apple Computer’s IPO back in 1980, both in Massachusetts and elsewhere. In the view of the state regulators, Apple’s stock was overvalued. State regulators are still blushing today over that now infamous call.

Regulation A+ (as it is informally known as) provides a useful, cost-effective path for companies to both become public, and remain public, with a simple offering qualification process at the SEC and much lighter ongoing reporting costs, when compared to fully reporting companies.

And after one year in operation, Regulation A+ has fulfilled expectations. The SEC qualification process has worked well in operation, with offerings clearing the review process in less than 60 days, and with a lighter touch review from the SEC than is typical in a full Form S-1 registration. My own personal experience with these new filings bears this out – an initial comment letter from the SEC barely over two pages – something unheard of in a full SEC registration.

So Regulation A+ is an important and valuable option for small and emerging companies to consider if they are looking to provide liquidity for their shareholders and the heightened profile that goes with being a publicly reporting, and trading, company.

For any of you who would like to learn more about Regulation A+, and other new capital raising options now available since the passage of the JOBS Act, feel free to contact me directly via email at

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments | Leave a comment

JOBS Act Crowdfunding Begins on May 16, 2016: Don’t Get Busted for Solicitation!


Solicitation from Wikipedia by Kay Chernush for the U.S. State Department


It’s been five months or so since the SEC published its long awaited investment crowdfunding rules.  Though Congress dictated that this task be completed by the end of 2012, the SEC missed the mark by nearly three years.  Now, with rules in hand, and an anticipated launch date of May 16, 2016, the time is ripe to assess where are we are headed in the brave new world of equity crowdfunding.

Some Preliminary Observations

Mary Jo WhiteGiven the magnitude of the task handed to the SEC, balancing the need to protect the most vulnerable group of investors in the riskiest area of investment, and the confines presented by Title III of the JOBS Act, the SEC did a pretty good job of listening to commenters and critics alike.  Though the proposed rules were in many respects “sinful”, in most areas the Commission seemed to have struck the proper balance between investor protection, critical to establishing and maintaining the integrity of this new marketplace, and the need for the smallest, albeit riskiest, ventures to raise relatively small amounts of capital in a right-sized environment, in terms of both financial cost and complexity.

Audited Financial StatementsThough Congress left it to the SEC to decide if and when audited financial statements would not be required for raises over $500,000, something it was unwilling to do in its proposed rules, the SEC abandoned the requirement for audited financial statements in the final rules for first time crowdfunding companies.  Except for the American Institute of Certified Public Accountants, this was a no brainer for most commenters – requiring audited financial startups added little incremental protection to investors and was a cost that most startups could simply not tolerate.

Non-Financial Disclosure The SEC had very little leeway in dictating the type of non-financial disclosure required by a crowdfunding company – as the JOBS Act had explicit disclosure requirements.  However, the SEC in the final rules heeded the call of two lonely commenters (yours truly and the SBA Office of Advocacy), who pleaded with the SEC to provide an alternate, more simplified Question and Answer disclosure format.  This was not a novel idea. Indeed, this was one of the top recommendations of participants in the SEC’s 2012 Annual Government-Small Business Forum.  Only this time, this “recommendation” was couched in terms of the obligation of the Commission to consider some type of simplified “form” disclosure under a federal statute intended to reduce burdensome requirements on small businesses in the federal rulemaking process – The Regulatory Flexibility Act of 1980.  No wonder that this change in the final rules was one of two changes mentioned by Chair White in her opening remarks when the Commission considered and adopted the Title III Final Rules on October 30, 2015.

Compensation of Intermediaries – In the final rules the SEC backed off somewhat from its position in the proposed rules that no intermediary (portal), not even a licensed broker-dealer, could accept equity compensation. Under the final rules an intermediary can accept equity compensation, with two provisos: it must be the same type of equity as is received by the crowd, and the equity can only be given as compensation for the intermediary’s services.  This was not a trivial issue. Absent equity compensation, in most instances broker-dealers would look to another form of financing which allowed equity compensation.  For a funding portal, whose activities are limited to Title III crowdfunding raises, the inability to receivechampagneequity compensation could be the difference between the portal turning a profit in the long term – or not. And for the crowdfunding company, the ability to pay some of the crowdfunding costs with equity instead of cash would be a useful option.  Having said that, by limiting equity compensation to the same type of equity offered to investors, not required by the JOBS Act, this limited the economic value of equity compensation to an intermediary.  And for a broker-dealer, this limitation makes Title III crowdfunding less attractive to it than other types of financings which do not contain these limitations – the most prominent being unregistered offerings limited to accredited investors allowed under Title II of the JOBS Act since 2013.

However, in my view it is too soon to be popping the champagne corks on the May 16 launch date. Many of the legislative proscriptions in the JOBS Act will make Title III crowdfunding a non-starter for most startups thirsty for capital.  Apart from the relative cost and complexity of raising money through JOBS Act crowdfunding, Congress, in its wisdom, essentially took the crowd out of crowdfunding. How?

Title III crowdfunding is simply not your daughter’s Kickstarter campaign. 

You see, under the JOBS Act crowdfunding companies are prohibited from engaging in advertising their offering, except under limited circumstances. Let’s take a closer look.

Entrance No SolicitingOf course, an issuer can promote their offering on an SEC and FINRA licensed portal. But not so fast. You cannot even begin your campaign on a licensed portal unless and until you file your offering materials with the SEC and make them available on the portal.  So is this a big deal? If tried and true principles of rewards based crowdfunding carry over to equity crowdfunding, which I expect they will, a key metric to a successful Kickstarter campaign is how much traction your campaign generates on the opening days of a campaign.  If you cannot generate interest in the offering among friends, family and fans before your campaign officially begin, the odds of a successful campaign plummet.  And if you go out and spread the word before your campaign officially commences you will likely find yourself engaged in “general solicitation” of the offering, something that in most cases will invalidate the Title III crowdfunding exemption – a serious matter if the issuer and its principals are not prepared to refund backers’ money down the road (what the SEC calls an investor’s right of rescission).

Well, at least you can widely promote your company and its products, without mentioning its securities, before the commencement of the equity crowdfunding campaign. Right? Not necessarily. You see, according to the SEC (and buried in the SEC’s 685 page final rules release) is a cautionary statement. If you go out and start promoting your company and its products right before you start your Title III campaign, you may have already blown the Regulation Crowdfunding exemption before you even start – by engaging in general solicitation (advertising).  If this sounds complicated – well, it is.

So How About Equity Crowdfunding under my State’s Law?

If you want to advertise your state crowdfunding raise under a crowdfunding exemption in your home state – now a possibility in a majority of states – think again. Most states which have enacted local crowdfunding legislation did so under a federal exemption, the intrastate offering exemption.  A key requirement of the federal exemption, which states must follow, is the requirement that no offers or sales of securities be made to residents outside the state. And according to the Staff at the SEC, in two published rulings back in 2014 (and much to my chagrin), an issuer cannot use the Internet or other means of general solicitation or advertising in an intrastate offering. Period. Full Stop.

See No Evil Have No FunThe bottom line? Most equity crowdfunding raises cannot effectively use the Internet or social media to promote their equity crowdfunding raise. Imagine: crowdfunding, Si –  But Internet solicitation – well .   .   .

So unless you wanted to get busted by a regulator for “solicitation”, or be at risk of having to refund your investors’ money, you may want to carefully review your other fundraising options before diving into a Title III campaign, or even a local equity campaign. And yes, there are many good options, courtesy of the JOBS Act.

Title II crowdfunding is one option which has no restrictions on solicitation, but all of your investors must be “accredited” – as in rich.  And then there is Title IV of the JOBS Act, dubbed Regulation A+.  Again, you can solicit to your heart’s content, even before you make any expensive filings with the SEC.  But Regulation A+ will not be a good fit for most startups, simply because in most cases it requires a company to provide a detailed disclosure document with audited financials, all of which must be reviewed and approved by the SEC before a company can begin accepting investor money – not to mention the ongoing public reports which a Regulation A+ must file with the SEC at least twice each year.

QuestionAnd if all else fails, there is the tried, true and relatively unregulated rewards based crowdfunding world. But, unfortunately, no profits can be left on the table for your loyal backers – something that the Oculus backers learned the hard way not too long ago – sold for a cool $2 Billion after running a successful rewards based campaign.

So What is the Solution to this Conundrum for Startups Who Need (and Deserve) Better Options?

Solutions are in the works in our Nation’s Capitol, both at the SEC and in Congress – much of which is behind closed doors. For a peak at what is hopefully around the corner for equity crowdfunders looking to raise money from the great unwashed masses – with a piece of the company thrown in – stay tuned for my next article; Part II – coming to you, of course, on Crowdfund Insider.

Author’s Note: For two other articles I wrote on this subject, addressing the risks of engaging in “off portal” publicity activities, and legislative solutions in the works, see and 


Samuel S. GuzikSamuel S. Guzik, a Senior Contributor to Crowdfund Insider,  is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice.  Guzik is also former President and Board Chair of the Crowdfunding Professional Association (CFPA). A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium sized business he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. In 2014, some of his speaking engagements have included leading a Crowdfunding Roundtable in Washington, DC sponsored by the U.S. Small Business Administration Office of Advocacy, a panelist at the MIT Sloan School of Business 2014 Crowdfunding Roundtable, and a panelist at a national bar association event which included private practitioners, investor advocates and officials of NASAA. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.

Posted in Capital Raising, Corporate Law, Crowdfunding, General, Regulation A+ Resource Center, SEC Developments, Uncategorized | Leave a comment