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

IS THE SEC’S ACCREDITED INVESTOR DEFINITION UNCONSTITUTIONAL?

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 sguzik@guziklaw.com

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 sguzik@guziklaw.com.

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 http://corporatesecuritieslawyerblog.com/?p=707 and http://www.crowdfundinsider.com/2016/04/84175-busted-for-crowdfunding-its-rehab-time-on-capitol-hill-this-week/ 


 

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

JOBS Act Title III Crowdfunding – A Trap for the Unwary?

A few weeks ago I wrote an article discussing one of the potential pitfalls – and weaknesses – in the SEC’s new Regulation CF, which became effective May 16, 2016, which allows private companies to raise up to $1 million on an SEC registered internet portal.  Though equity crowdfunding was inspired by rewards based platforms, such as Kickstarter, the structure that emerged for equity crowdfunding, Title III of the JOBS Act of 2012, was quite different.

In particular, due to intricate SEC rules and doctrines followed for decades, most often in registered public offerings, the ability of a company (the issuer) to generate public interest in its offering before the required filings are made with the SEC is limited, if not entirely precluded. And one of the principal tenets of Title III crowdfunding was that the issuer would not be permitted to engage in any solicitation activity during the crowdfunding campaign except on an SEC and FINRA registered crowdfunding portal.  Though the SEC created a limited exception for Title III crowdfunding, allowing issuers to publicly circulate notices regarding the offering, the contents of the notice are severely restricted, essentially to a brief description of the business and the terms of the offering.

So essentially there are two problems. The first, Title III issuers will be limited in their ability to publicize their offering during the offering campaign itself, and will effectively have  no ability to call public attention to an upcoming offering outside of the particular crowdfunding portal.

And there is a second problem, issuers inadvertently engaging in prohibited solicitation activities. The consequences of this can be draconian to an issuer which inadvertently engages in prohibited advertising or solicitation: investors will have the right to get their investment back, from the issuing company and their “control persons” (management).

We are already seeing the second concern playing out – very visibly – in the national media. In particular, at least two live crowdfunding campaigns have been featured in interviews with the CEO in national news publications – while the crowdfunding campaign is live. In SEC/legal parlance, this is a big “no-no.” An excellent article in this regard, from a non-lawyer perspective, was published this week in Forbes magazine. It is a cautionary tale for would be equity crowdfunders to consider before they embark on an equity crowdfunding offering.

So once again, forewarned is forearmed.

For those of you who wish to have more information on what is permitted, and what is not, under the SEC’s crowdfunding rules, I suggest you read my article published last month in CrowdfundInsider.

And for those companies which hope to benefit from fully leveraging the crowd through the internet and social media, and do not wish to be limited to raising $1 million, they ought to weigh their options under Title II of the JOBS Act (restricted to accredited investors) and no limit on the amount of money that can be raised, or Title IV, a/k/a Regulation A+ (a “mini-IPO”) allowing raises up to $50 million.

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

House of Representatives to SEC: Time to Lift Our Entrepreneurs Off the Floor!

Originally Published on Crowdfund Insider on February 1, 2016 -

And as Tweeted by Mark Cuban to his 4.5 Million Twitter Followers on February 2

]

House Debate on HR 2187 and HR 4168

For those of you who have followed my articles on Crowdfund Insider over the past two years, you know that I have not been shy about voicing my concerns over the foot dragging that too often has often characterized the attitude of the Securities and Exchange Commission (SEC) toward the capital formation needs of small and emerging businesses.

A sampling of some of my articles have included a call back in February 2014 for an independent office at the SEC, whose sole function would be to advocate for the interests of small business – the first time that the proposal for an independent advocate for small business at the SEC was floated publicly. And in August 2014, I bemoaned the failure of the SEC to act on the recommendations made by the participants in the SEC’s Annual Government-Small Business Forum on Capital Formation, an Forum on Small Business Capital Formation Final Report 2012annual gathering of market participants considering regulatory changes needed to facilitate access to capital for small and emerging businesses. I had compared the Forum to Ground Hog Day, in view of the “same old same old” which traditionally characterized this annual, Congressionally mandated event, with the SEC routinely ignoring or delaying implementation of much needed regulatory reforms espoused by some of this country’s best and brightest entrepreneurs and securities professionals.

And I was not the only one to publicly call for an advocate at the SEC, or more responsiveness by the Commission to the perennial recommendations of the Annual Small Business Forum.  The need for these reforms was also echoed by former SEC Commissioner Daniel M. Gallagher in two public speeches – in September 2014 and November 2014.

Daniel Gallagher Dont Be Bullied 2To be sure, there are a number of statutes on the books which focus on the needs of our SME’s, most recently the Jumpstart Our Business Startups Act of 2012- which have been dutifully implemented by the SEC.  But as Congress is aware, even the very significant changes in our securities laws created by the JOBS Act, adopted with broad bi-partisan support, were not the result of innovative ideas of federal regulators. Rather, these reforms have been widely viewed as a by-product of regulatory inertia by the SEC which had gone on for all too long.  And judging by the number of recommendations made year in and year out by market participants at the SEC’s Annual Government Small Business Forum, the large majority of these Small Business Forum recommendations have routinely been ignored by the Commission. So there is plenty left to be done in Washington by way of regulatory reform in the securities markets for SME’s – if only the SEC had the political will to do so.

In the words of one noted commentator:

“.   .   . the SEC has refused to adopt reforms to ease the difficulties that small and growing companies face in obtaining financing. Many of these reforms, such as lifting constraints on entrepreneurs’ communications with potential investors, are well within the SEC’s authority. Despite studying small business capital formation for years, the SEC never seems to be able to bring itself to make meaningful changes in response to all that research.”

Hester PeirceInterestingly, these words were first published on the eve of the passage of the JOBS Act, in March 2012.  But perhaps more interesting is the author of these words: Hester Peirce, a former SEC Staffer, a member of the SEC’s Investor Advisory Committee, and the Republicannominee to fill the SEC Commissionvacancy resulting from the departure of Daniel M. Gallagher in October 2015.  Pulling no punches, Ms. Peirce bemoaned the “stubbornness” and “inaction” of the SEC in the face of “oppressive” regulatory barriers for capital formation.

Well, judging by the activity on the Floor of the House of Representatives on February 1, 2016, our Congress is sick and tired of doing all of the heavy lifting when it comes to breaking down unnecessary regulatory barriers to capital formation by our SME’s.   Specifically, two legislative bills came to a vote on the Floor of the House, both passing by an overwhelming bi-partisan majority, and each calculated to further energize the Commission to focus its resources on the needs of SME’s: H.R. 3784 (unanimously, by voice vote) and H.R. 4168 (390-1).

HR 3784 – SEC Small Business Advocate Act of 2016

According to the Republican Bill summary,

“H.R. 3784 would establish the Office for Small Business Capital Formation (Office) and the Small Business Capital Formation Advisory Committee (Committee) within the Securities and Exchange Commission (SEC) to help small businesses resolve problems with the SEC; analyze the potential impact of proposed rules and regulations that are likely to have a significant effect on small businesses; and conduct outreach to small businesses in order to solicit views on relevant capital formation issues. The bill also requires the newly established Office and Committee to submit certain reports to Congress.”

And according to the House Financial Services Committee, which reported the Bill out by a 56-0 vote in December 2015:

“Although the SEC’s budget is now almost four times the size it was in 2000, the SEC has given short shrift to the capital formation component of its statutory mandate – to the detriment of entrepreneurs and start-up ventures.   A permanent office dedicated to small business capital formation within the SEC is a logical outcome of the JOBS Act since the SEC has taken little to no action to advance the many recommendations the agency has received from its annual Government-Business Forum on Small Business Capital Formation (Forum) to help small businesses and EGCs access the capital markets.”

Mary Jo White SEC October 30 2015In other words – time is money – and without money for entrepreneurs and growing businesses, job creation and economic growth are stymied. The SEC has taken too much time, and for too long, to adequately address the capital needs of entrepreneurs – and all this is coming at the expense of this country’s biggest job creators and would be job creatures – small business.

Though the SEC currently has an Office of Small Business Policy (OSBP), its authority and power are severely limited. Unlike the OSBP, which reports to the Director of the SEC Division of Corporation Finance, the Chief of the Office of Small Business Advocate would report directly to all five SEC Commissioners.  And the Bill provides a statutory mandate for this new office to report directly to both houses of Congress on an annual basis.

The Bill would also make permanent a Small Business Capital Formation Advisory Committee, to be placed under the direction of the Office of Small Business Advocate.  Though the SEC does currently have a small business advisory committee, this committee reports only to the SEC Chair and the committee serves at the pleasure of the SEC Chair.

HR 4168 – Small Business Capital Formation Act

This Bill is calculated to change the character of the SEC’s Annual Small Business Forum on Capital Formation from an event more akin to Ground Hog Day to one that requires the SEC to be more responsive to the recommendations made by the participants in this annual gathering.  Currently, the GroundhogSEC is not obligated to respond to the Forum’s recommendations and findings. And the Commission’s track record in responding to these recommendations has been the subject of widespread criticism. H.R. 4168 requires the SEC to assess each recommendation presented at the Forum and disclose any action it plans to take with respect to such recommendations.

While this Bill is certainly no guarantee that the Forum recommendations will be acted upon, the obligation of the Commission to respond publicly to each of the recommendations will create a visible benchmark for further Congressional action if the SEC fails to act appropriately on meritorious proposals.

Some Closing Thoughts

Washington DC Capitol BuildingWhile both of these Bills still have a way to go before they become the law of the land, both are widely expected to have broad bi-partisan support in the Senate, especially in an election year – where job creation and the economy are major vote influencers.  According to reliable sources, a companion bill to H.R. 3784 is already being drafted in the Senate, with its sister bill, H.R. 4168, also expected to find a clone on the Senate side of Capitol Hill.

Of course, though the implementation of these bills provide no guarantees, they are certainly important steps in the right direction:  A dedicated advocacy voice for small business at the SEC, and some measure of accountability in addressing the concerns of SME capital market participants.

But one thing is certain. February 2, 2016, is Ground Hog Day, and you can be sure that when that infamous critter, Punxsutawney Phil, surfaces from his burrow he will be grinning ear to ear, knowing that soon there will only be one Ground Hog Day – in Punxsutawney, Pennsylvania.


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 Business Formation, Capital Raising, Corporate Governance, Corporate Law, Crowdfunding, General, SEC Developments | Leave a comment

Forbes.com Regulation A+ Interview of Sam Guzik Ranks in YouTube 2015 Top Five Interviews

2015 was a busy year for me, with SEC final rulemaking completed for Regulation A+ and JOBS Act Title III crowdfunding. In addition to more than a dozen speaking engagements around the country I had the opportunity to participate in a number of Webinars and interviews, including two interviews on Forbes.com, one with Chance Barnett on Forbes.com on the SEC’s final JOBS Act Title III final crowdfunding rules, receiving more than 38,000 views, and another with journalist Devin Thorpe, addressing Regulation A+.

I was pleased to learn yesterday that my interview with Devin Thorpe, in addition to receiving more than 5,000 views on Forbes.com, ranked number 3 in his top 5 YouTube interviews of 2015, out of 149 of his “Changemaker” interviews, edging out best selling New York Times author Tony Robbins in the number four slot.

Some of the other web-based interviews I have participated in during 2015 include a CBS Podcast on Regulation A+ with Jay Abraham, and a Regulation A+ Webinar with Congressman David Schweikert, the legislative sponsor of Regulation A+.  All of these Internet resources are available to the public free of charge.

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

Small Business in Washington, DC: Could Santa be Coming to Town this Year?

 

Merry Christmas to the SEC

December 2, 2015, seemed no different than any other day in Washington, D.C. With a light rain falling, it was a rather dismal day for sightseeing in our Nation’s Capitol – yet the sun seemed to be shining for our small and emerging businesses in the Halls of Congress.

You see, after months of bi-partisan jockeying and wrangling in Congress, and the aroma of 2016 elections not too far off in the distant future, it was finally time for both political parties to get down to business – small business, that is – the job creators and the engine of our economy. It was time for the Capital Markets Subcommittee of the House Financial Services Committee to hold hearings on five bills, grouped under the heading: “Legislative Proposals to Improve the U.S. Capital Markets.”

Carolyn Maloney 2Two of the bills in particular caught my eye, simply because I had written extensively as to the need for action in these areas, either by the SEC or byCongress.  The first bill, entitled “SEC Small Business Advocate Act, HR 3784, would create a new independent office of small business advocate at the SEC, intended to protect the interests of small and emerging businesses and their investors, reporting both to the Commission and to Congress. Originally introduced in October 2015 with the bi-partisan sponsorship of four Representatives, by the time these December 2 hearings had commenced it had picked up at least one additional co-sponsor, Representative Carolyn Maloney, the ranking Democrat on this Committee. In her words, HR 3784 was nothing more than “common sense.” It had the support at these hearings in the form of testimony from the U.S. Chamber of Commerce, the Biotech Industry Organization (BIO), and the Small Business Investor Alliance.  To me, this was the plain vanilla ice cream that went so well with Mom and Apple Pie.

So Who Might Oppose HR 3784 You Ask?

Horse in New York CityWell, as one who is a lawyer by training, there are at least three sides to be argued to every coin. The proposed SEC Office of Small Business Advocate was to be no exception. So along cameJoseph V. Carcello to step up to bat at the hearing in opposition to HR 3784.  By some measures his credentials were impressive, indeed with enough acronyms in the titles following his name to choke a horse (Ph.D., CPA, CGMA, CMA – well you get the picture). In Dr. Carcello’s words:

“I have served as a professor at the University of Tennessee for over 20 years, where I teach accounting, auditing, and corporate governance. In addition to my teaching and research, my remarks are informed by my service on the Securities and Exchange Commission’s Investor Advisory Committee, an outside advisory group to the Commission which was statutorily created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the DoddFrank Act), and the PCAOB’s Investor Advisory Group, which is an outside advisory group to the PCAOB.”

Joseph CarcelloLacking from his resume, it seems, was any experience whatsoever outside of academia – outside, of course, the SEC’s Investor Advisory Committee and the PCAOB’s Investor Advisory Group. Perhaps it was  this missing business experience which best explained the testimony he was about to present.

Dr. Carcello had two noteworthy observations. First, he informed the Committee, a need for this new SEC office needs to first be documented:

“The Congressional record needs to clearly document the inability of small businesses to seek effective redress of problems through Congress and the SEC, and further indicate why the existing institutional mechanisms – the SEC’s Office of Small Business Policy, the SEC Government-Business Forum on Small Business Capital Formation, and the SEC’s Advisory Committee on Small and Emerging Companies — are not adequate to address any problems that might exist.”

Yet as an academic he himself had nothing to add to the Congressional record, good, bad or indifferent. OK, so far, no harm -no foul?

Dr. Carcello’s second noteworthy observation on the bill: it would create what he called a “quasi-lobbying” organization. In his words:

“Creating a quasi-lobbying group to seek a more favorable regulatory climate for small businesses may succeed in reducing the cost of regulation, but at the potential cost of greater information risk to investors – less transparent disclosures, a higher incidence of non-GAAP reporting as evidenced through restatements and, in the extreme, a higher incidence of financial fraud.”

Representative Carney very elegantly disposed of this witness, pointing out to Dr. Carcello that “pejorative” labels, as in his referring to an Office of Small Business Advocate as a “quasi-lobbying” organization, were counterproductive to formulating a bi-partisan (as in non-partisan) dialogue to formulate constructive solutions for what may ail our capital markets. There was no further testimony from that witness on the bill.  By my estimation Dr. Carcello turned out to be the best witness in support of HR 3784.

The Small Business Capital Formation Enhancement Act

Representative Bruce PoliquinThe other bill on the Hearing Agenda on December 2 which caught my eye was a bill introduced by Representative Poliquin (D-ME), in draft form.  This draft bill encapsulated the simplest of requirements in the simplest of terms. Back in 1980 Congress passed a law requiring the SEC to hold an annual forum bringing together both government and small business constituents to discuss and propose initiatives to enhance capital formation for small businesses.  However, as many, including myself have observed, the annual Forum has proven in large part to be a ritual devoid of meaning. History has shown that the recommendations of the Forum participants have been ignored by the Commission. The only saving grace of the Forum, it seems, has been that ultimately, years later some of these recommendations have been taken up by Congress in spite of the inaction of the SEC.  The JOBS Act of 2012 is perhaps one of the best examples of the quality of some of the Forum recommendations that laid dormant with the Commission – only to be acted upon years later by Congress.

HR 4168 Small Business ActHence, the proposed “Small Business Capital Formation Enhancement Act,” which would simply require the Commission, following the conclusion of each Annual Forum, to assess the findings and recommendations of the Forum and disclose the action, if any, the Commission intends to take with respect to such findings or recommendations.

Once again, Dr. Carcello, the only hearing witness who was called to testify in opposition to this draft bill, instead seemed to make the case for the need for this proposed legislation. In Dr. Carcello’s view:

“.   .   .  any individual participant at the Small Business Forum on Capital Investment [sic] can make a recommendation, resulting in the SEC receiving an excessive number of recommendations, some of which may be ill-formed and possibly not within the SEC’s purview. Requiring the SEC to respond to every recommendation is inefficient and a poor use of taxpayer resources, particularly given the chronic underfunding of the agency.”

Ground Hog Small Business Forum SECFor starters, it seems that Dr. Carcello didn’t even bother to read the bill he was testifying about. It requires the Commission to respond to findings and recommendations of the Forum – not to every Tom, Dick or Harry that attends the Forum and opens his or her mouth.  And as to wasting taxpayer money, an annual gathering of hundreds of the best and the brightest at this Annual Forum, whose recommendations are ignored, is in and of itself a waste of taxpayer dollars – and much more.

To sum up some of the remarks at the Hearing by the bill’s Sponsor, Representative Poliquin, we assemble all of this talent to focus on how to better foster the growth of small business and our economy, so we ought to listen. After all, he pointed out, some of the recommendations have ultimately wound up as important, bi-partisan legislation, such as the JOBS Act. So it seemed to this Congressman that if a Forum proposal were to be rejected by the Commission, one ought to know why.

Sounded a lot like a letter I sent to the SEC on July 28, 2014, republished onCrowdfund Insider a few days later, stating in part:

“Given both the importance of capital formation for small business, the role of the SEC in facilitating capital formation, and the time, energy and resources expended by the Forum participants, perhaps it is time for the Commission to consider some element of “follow-up”, and accountability, by the Commission .   .   .”

Christmas in Washington DC Capitol

A Bi-Partisan Holiday Gift for SME’s – Courtesy of Congress?

Well, I never did receive a response from the SEC to my July 28, 2014 letter.  I expect Congressman Poliquin will have better luck, as will the sponsors of HR 3784, establishing an office of small business advocate at the SEC, judging by the progress of these bills. You see, according to the calendar of the Capital Markets Subcommittee, both of these bills have been scheduled for “markup” in this Committee on December 9, a fast pace for a bill by Capitol Hill standards. Moreover, the word on the street in DC is that these bills are quickly gathering broad bi-partisan support.

So write or call your Congressional representative, and tell them to please wish our small and emerging (and underrepresented) businesses a Happy and Prosperous 2016!


 

 

Sam Guzik National Press Club BSamuel 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 the 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.

 

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Editor’s Note – The following article appeared in Crowdfund Insider on December 8, 2015. On December 9, 2015, the House Financial Services Committee voted to approve the bill to establish an office of small business advocate at the SEC, HR 3784, by a vote of 56-0.  The House Financial Services Committee also approved a bill to require the SEC to respond to recommendations made by the participants in the SEC’s Annual Government – Small Business Forum by a vote of 55-1. These two bills will now go to the full House of Representatives for a vote. Further details on these bills are available here.

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

Crowdfunding Counselor Sam Guzik, A Voice Galvanizing & Advocating for the Crowd

 

[The following interview of Samuel S. Guzik appeared in Crowdfund Insider on December 1, 2015]

Sam Guzik National Press Club B

“I do not recycle or repackage the ideas of others.  I try to focus instead on broader JOBS Act issues and events which have thus far gone unnoticed – or barely noticed – and which require further thought, analysis and hopefully, action, by louder and more powerful voices.  A lone voice can start a revolution, but history shows that it takes a noisy crowd to get things to the finish line. If you will indulge me for a moment, I suggest that this time history will be no different.”

Sam Guzik Washington DCAfter receiving a B.S. degree in Industrial and Labor relations from Cornell University and graduating from Stanford University Law School, thought leader Sam Guzik was admitted to practice in both New York and California. With more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a partner at the LA law firm of Ervin, Cohen and Jessup and in the firm he founded in 1993, Guzik & Associates, Samuel Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private.  Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses. A recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowd finance, Guzik has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters. He has also been cited by SEC Commissioner Daniel M. Gallagher on two occasions in public statements, both for his advocacy on behalf of SMEs and his thought leadership on SEC rulemaking and post-JOBS Act reforms.

A prolific writer on JOBS Act issues affecting entrepreneurs, small and emerging companies, investors and Internet-based funding portals, Guzik is a frequent blogger on The Corporate Securities Lawyer Blog, addressing developing corporate and securities laws issues, and on Crowdfund Insider as its Crowdfunding Counselor.  In 2014 he published two major commentaries on JOBS Act rulemaking in The Harvard Law School Forum on Corporate Governance and Financial Regulation: the first article, entitled “Regulation A+ Offerings – a New Era at the SEC,” discussing the SEC’s proposed regulations implementing JOBS Act Title IV Regulation A+;  the second article entitled “SEC Crowdfunding Rulemaking under the JOBS Act – An Opportunity Lost?” addressing deficiencies in the SEC’s proposed Title III investment crowdfunding regulations.  His articles have also been cited in national business publications on issues relating to federal securities regulation, including The Economist, Forbes, Bloomberg’s BusinessWeek, Compliance Weekly and Equities.com. Guzik, a founding member of The Heritage Foundation Securities Regulation Working Group, focusing on federal regulatory issues affecting small businesses and emerging growth companies, also served as a member of the Advisory Council of the Crowdfunding Professional Association before being appointed to their Board of Directors in March 2015.

 

Be sure to participate in the 2015 Americas Alternative Finance Benchmarking Survey by Friday, 18 December. The Survey, a joint venture of The Centre for Alternative Finance at University of Cambridge Judge Business School and the Polsky Center for Entrepreneurship and Innovation team at Chicago Booth School of Business, is the first comprehensive and empirical assessment of crowdfunding, P2P lending and other forms of alternative finance across North, Central and South America.

Douglas Monieson“The Alternative Finance team has been contacting hundreds of alternative finance platforms in the US, Canada and Latin America,” according to Douglas Monieson, Associate Director at the University of Chicago Alternative Finance Institute. “The support from our research partners – universities; organizations including Inter-American Development Bank and the Development Bank of Canada; corporate sponsors like the CME Group and KPMG; associations including Crowdnetics, Lend Academy, and Crowdfund Insider; and the platform themselves – has been outstanding.  All recognize the importance of independent, systematic and reliable benchmark research to facilitate a better understanding of Alternative Financing in economics, finance and public policy.”

I recently caught up with Guzik between NextGen’s Equity Crowdfunding Conference, Thanksgiving preparations and CfPA’s Third Annual Crowdfunding Summit.  He discussed the importance of the 2015 Americas Alternative Finance Benchmarking Survey, as well as the hot topics  of post-JOBS Act reform, Title III, Regulation A+, CfPA’s strategic plans and the 2 December House Financial Services Committee’s hearing on bill HR 3784. Our interview follows.

Erin: How will the University of Cambridge / UChicago 2015 Americas Alternative Finance Benchmarking Survey be impactful to the Crowdfunding Professional Association (CfPA)? Do you believe the data will aid policy makers in making good policy decisions? 

Cambridge Chicago Supporting OrganizationsSam: The CCAAFB Survey will be impactful not only to the CfPA, but to the industry, industry participants as well as policy makers.  Raw data, and the conclusions which can be derived from it will be immensely helpful, especially when compiled and analyzed by these leading academic institutions. We are at the very beginnings of a new, Internet-based, financing system. Absent reliable data, we are at the mercy of conjecture and anecdotal events, which is inherently unreliable. Equally as important, academicians can review and analyze this data through a number of disciplines: macro-economic and micro-economic, social and cultural behavior and finance.  The studies which this data will produce will be of immense guidance, both in term of understanding what is working, and why, but also to help the industry, crowdfunders and regulators evaluate important next steps.

Erin: Why is the advent of equity crowdfunding so important? How can crowdfunding help bridge the gap between the “vast capital deserts which lay between the shores of New York City and the San Francisco Bay”?  Which platforms are most effectively bringing people, ideas and capital together? What sets them apart?

New_York_City_Midtown_from_Rockefeller_Center_NIHSam: Equity crowdfunding is immensely important as an efficient allocator of resources, allowing capital to be directed to companies outside the traditional capital networks, and also providing investors with an abundance of real time data and investor feedback through the wisdom of the crowd. Statistically, capital for early stage businesses has concentrated geographically in certain major metropolitan areas, specifically, New York, Massachusetts and California – leaving the “flyover states” underserved. Equity crowdfunding also provides a broader reach for populations traditionally underserved by traditional capital sources, such as women and minorities. We are also seeing data from accredited investor crowdfunding in the U.S. which shows the influx of capital in the U.S. from long distances, including outside the U.S.

Finfair Sam GuzikThere are an unlimited number of platforms which will flourish in this new environment: community based platforms, industry verticals such as real estate, technology and media; and platforms appealing to targeted affinity groups, such as socially conscious companies. It would be unfair to single out any one platform.  Companies looking for the right platform must do their homework, taking into consideration such factors as the area of concentration of the platform, its track record, the strength of its investor base, and site traffic generally.

Erin: Since graduating from Stanford Law, you have honed specialties in corporate, securities, finance, private offerings, public offerings, reverse mergers, contracts, business, mergers, acquisitions and real estate law. You also hold a BS in Industrial and Labor Relations from Cornell and a law degree from Stanford.  How does your background provide a foundation for a nimble career trajectory shift into the realm of crowdfunding and alternative finance? 

standford law schoolSam: As far as my academic background, what has stayed with me most is the conclusion I drew in law school in my first securities law class: our regulatory system, now more than 80 years old, has long lived with too many ambiguities and uncertainties.  Though this has been narrowed somewhat by the SEC providing “safe harbors” for companies to raise money short of a full SEC registration, more is needed to open up avenues of capital formation for startups and SMEs.  The widespread adoption and availability of Internet technology and communications channels now makes it possible to close some of the gaps in our regulatory structure, and provide more cost-effective means for startups and emerging companies to raise capital.  All that is required is the political will of regulators and Congress, and recalculating the appropriate balance as between investor protection, efficiency of capital markets and “right sized” regulation for the smallest of companies who can least afford burdensome, complex regulations.

Erin: How does the CfPA plan to “organize, energize and channel the forces that are necessary to move the post-JOBS Act forward”?

Sam: The first step is to have the industry leaders share my belief that what this post-JOBS Act industry needs is a collective voice, especially in D.C. where there remains a great deal of work ahead, in terms of fine-tuning regulations, adopting new regulations, and effecting further legislation to build on the JOBS Act of 2012.  This will require a combination of the CfPA demonstrating leadership in these areas and involving key industry participants and thought leaders.

Erin: In terms of advocacy, outreach, establishing best practices and calling out less-than-best-practices, how does the CfPA intend to “nurture” the nascent crowdfunding industry?

Sam: There are many opportunities. Indeed, there are too many opportunities relative to the resources of any single organization, including the CfPA. All of these efforts start with strong, diverse leadership, with recognized industry leaders, something the CfPA has succeeded in accomplishing in 2015. It truly takes multitudes of disciplines, including academic, legal, accounting, and financial, not to mention having expertise in industries which have proven to be a good fit for crowdfunding.  This leadership core must be able to engage with as many industry partners and affiliates as possible, as the industry’s strength, and the strength of the CfPA, will require “crowdsourcing” in the broadest sense. Within this framework, an expanded crowdsourced network with the right partners, anything and everything is possible.  The CfPA is in the process of implementing plans for 2016 in terms of outreach and best practices, fueled by the recent completion of JOBS Act rule making for unaccredited investment crowdfunding and Regulation A+. The CfPA is fortunate to have a wealth of talent on its Board, to energize and implement effective initiatives in the areas most in need of attention as we begin a new era, advocacy, outreach and best practices.

CfPA Board of Directors 2015

Erin: Please take a moment to talk about the dynamic CfPA team, including such notables as Brian Korn, Scott McIntyre, Thell Woods, Joe Bartlett, Jordan Fishfeld, Alon Hillel-Tuch, John Mueller, Rodney Sampson, Richard Swart, Ph.D., Rose Spinelli, Xiaochen Zhang and Crowdfund Insider Senior Contributor Anthony Zeoli.

Sam: We have a wealth of talent who have shown the ability to be industry leaders. We are fortunate to have the leaders in academia, finance, entrepreneurship, marketing, advocacy and other important disciplines. Many of them have international reach. And as a collective group, we have seen great traction in attracting international interest.

Erin: What challenges have you faced as President of CfPA?

Sam: Initially, the biggest challenge for me was how to define the focus of the CfPA. Crowdfunding has become a broad, unwieldy space in a short number of years. And up until now our resources have been limited, both financial resources and the bandwidth of CfPA leaders and membership.  Take our Board, for example. Most of us are already fully committed to activities outside the CfPA.  There is a need for some level of part-time staff to effectively conduct outreach with our membership and prospective membership alone. However, as we approach year end, with an expanded Board, we are beginning to attract industry support, both financially and in terms of actively participating in core CfPA activities. With the JOBS Act now in full swing, I expect this trend to accelerate.  There is now the semblance of a post-JOBS Act industry. If we show leadership, with tangible results, I expect to see growing industry support at the CfPA.

Erin: You recently stated, “I ultimately learned that a single voice can make a difference. But a collective voice – the power of a noisy crowd – is essential to sustained progress.”  What experiences led to learning these lessons?

Patrick McHenry Delivers StatementSam: A collective voice is important, especially when under the umbrella of an industry trade organization such as the CfPA. Let’s face it, there are strong countervailing forces in Washington, D.C., whose priorities are often at odds with necessary legislative and regulatory change.  These forces are well- organized, well-financed and well-staffed, replete with full time executive directors, staff attorneys and paid lobbyists. Proponents of the JOBS Act and post-JOBS Act reform are no match for these forces. It takes not only the continued actions of individuals, but also a permanent, established industry voice.  The time was not right for this back in 2012, but with the JOBS Act now in full swing, the time truly is now.

How did I come to these conclusions? From reviewing the low priority given to our engines of job creation and small business over the past 35 years, and listening to D.C veterans who share the goals of enhancing channels of capital formation for startups and emerging businesses. Some of my biggest influencers in this area have been Congressman Patrick McHenry, the recently retired SEC Commissioner Dan Gallagher, and David Burton, Senior Fellow at The Heritage Foundation.

Daniel Gallagher Title IVAs a veteran securities attorney, one of the conclusions I came to was that small and emerging businesses lacked a strong, effective advocate at the SEC. This led me to publish an article in Crowdfund Insider in February 2014 advocating for a Small Business Advocate at the SEC who reported not only to the Commission but to Congress. Though the need for this new office seemed obvious, I could find nothing in the public record discussing the need for a small business advocate at the SEC prior to my article. This led to a meeting with then SEC Commissioner Dan Gallagher in June 2014 to discuss the efficacy of this idea.

SME Small Medium EnterprisesIn September 2014 Commissioner Gallagher adopted this proposal, appropriately titled “Whatever Happened to Promoting Small Business Capital Formation?” citing me as a proponent. This started a chain of events which ultimately led to an introduced bill in Congress in October 2015, HR 3784, with bi-partisan sponsorship and backed by major industry trade associations, including the U.S. Chamber of Commerce, the National Venture Capital Association, Small Business Investor Alliance, Biotechnology Industry Organization (BIO), Small Business & Entrepreneurship Council (SBEC), and the Crowdfunding Professional Association, of which I am President. The bill is scheduled to be the subject of hearings on December 2 in the House Financial Services Committee and reportedly has yet to face any opposition. I expect that ultimately this bill will become law, helping entrepreneurs in pursuit of capital for many years to come.

What I learned from this experience is that a single voice can be effective, but it takes collective action in Washington to get the ball over the finish line. It took the involvement of not only the public outcry of an SEC Commissioner, but a DC-based small business trade association who heard this call to action, the Small Business Investor Alliance, to help bridge the gap between an idea whose time had come and an introduced bill, by actively pursuing legislation on the Hill.

Erin: Do you believe Title III will fulfill its mission of facilitating access to capital for SMEs?

Washington DC Capitol BuildingSam: Yes, Title III will fulfill its mission. The first step is to take back the ground that Congressman McHenry’s bill lost in the Senate, a victim of special interest groups and partisan politics. I expect that the task will be easier in 2016, with various forms of crowdfinance having a track record, both in the U.S. and abroad.  The ghosts which some saw in Congress in 2012 simply have not appeared. But a stagnant, jobless economic recovery is still with us. Imagine – a legislative fix that does not require increased government expenditures or new taxes. It is as simple as striking a better, wiser balance between protecting investors and the integrity of our capital markets, on the one hand, and allowing efficient access to capital for the smallest of businesses.

Erin: Which dots still need to be connected to make Title III more workable? Many see some challenges regarding the final rules on Title III, i.e. no SPVs and a low limit for a raise and low investor limits. How will Congress act to address these issues?

Cost of RegulationsSam: I am confident that we will see legislation in 2016 to make Title III more efficient and effective. We now have a fixed target, final SEC rules, and a track record for equity crowdfunding. A number of areas which need to be addressed: increasing the offering limit from $1 million to $5 million; limiting portal liability, letting it act more as an independent intermediary, rather than a quality filter; revising issuer liability to remove the strict liability type standard in Title III, replacing it instead with the tried and true “anti-fraud” liability standard applicable to issuers conducting private placements; allowing full use of social media outside the confines of the crowdfunding portal, and allowing Title III companies to “test the waters” similar to what is now allowed under Regulation A+; allowing investors to form special purpose vehicles to group together large groups of investors under a single entity, allowing intermediaries and their affiliates to have a greater economic stake in their issuers; and removing investment limits for accredited investors. Yes, a tall list, but one which will ultimately see fruition, though some of these issues may take some time to resolve.

Erin: Do you think Regulation A+ is living up to its potential?

A +Sam: The correct answer is that it is too early to tell, as this is a new vehicle for capital formation. The informed answer is that it is showing early signs of promise. We are seeing quality underwriters begin to enter this space with filed offerings. And we are also seeing some companies getting strong traction in testing the waters campaigns. I expect this market to show strong incremental growth, simply because there has been a vacuum in the small IPO market for the past two decades, and Regulation A+ seems perfectly poised to fill the gap.

Erin: What are your thoughts about Title II accredited crowdfunding?

Sam: Title II has gotten off to a slow start, as it is new. But it has also shown incremental sustained growth over the past two years. It has proven to be a tremendous fit for the real estate industry, and those seeking financing in the $1.5 -$2.0 million range. I expect that this area will grow as intermediaries develop broader investor bases and the investing public has an opportunity to view the track record of some of the early Title II investments.

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