Crowdcheck Blog
Insights and information for online capital formation
The Theranos jury’s fraud convictions of Elizabeth Holmes, former CEO and founder of the now defunct Theranos, Inc., should give pause to startups seeking to build their reputation by touting their relationships with other companies. In the press to find financing, it can be tempting to use the logos of other companies, especially those that command market attention, to persuade investors to come on board. In the case of Theranos, Ms. Holmes placed the logos of Pfizer and Schering-Plough on Theranos reports without receiving permission from those companies. In her testimony, Ms. Holmes stated that she did not mean to deceive investors or business partners. …
This entry is filed under Fraud, Securities Law
Well, I thought I’d better blog something before people think we’ve vanished. We’ve just been too busy. But recently something happened that tied together two previous blog posts.
Trolls have become an increasing problem in the online space. The whole point of the crowdfunding regs is to give voice to the crowd, to enable retail investors to make informed investment decisions by learning from each other’s comments and questions and the issuers’ responses. They can’t do that when trolls interfere with the communication channels, posting the same content and saying the same things again and again, especially when they do so under several different identities. “…
This entry is filed under Fraud, SEC, Section 4(a)(6), Securities Law
The SEC today decided to make a statement against companies considering using Regulation CF for fraudulent offerings, and funding portals that facilitate the fraud. A copy of the complaint can be found here, https://www.sec.gov/news/press-release/2021-182.
On September 20, 2021, the SEC filed in federal court a complaint against sponsors of a marijuana real estate venture, and the TruCrowd funding portal, and its owner. The complaint alleges the sponsors of the issuer hid the existence of a person who acted in the role of an officer throughout the offering process because that person had a criminal record. The complaint also alleges that funds were used in a…
This entry is filed under Bad Actor, Crowdfunding Conditions, Federal Law, Fraud, SEC
Startup investors all hope for a great “exit.” Most startups, of course, will never get to that point, but for the successful ones, the principal ways that investors get repaid for their faith in a high-growth early stage company is an eventual IPO, hopefully at a price much higher than the price they paid, or through the acquisition of the startup by another company.
It can take a very, very long time for a startup to get to the point of an IPO. We aren’t aware of a company crowdfunded under Regulation CF having done an IPO yet. Mergers and acquisitions are a much more likely option for an exit for a company that raised funds in a Regulation CF offering.
We’ve…
This entry is filed under Capital Raising, Crowdfunding, Investing, Regulation, Regulation A, Section 4(a)(6), Securities Law
Reg A and Reg CF have been around for a few years now and we are finding that some of our clients, especially those that have made multiple offerings, are getting to the point where they need to consider the implications of Section 12(g) of the Securities Exchange Act, which requires companies to become registered with the SEC when they meet certain asset and investor number thresholds.
Let’s start with the requirements of Section 12(g). It says that if, on the last day of its fiscal year, an issuer has assets of $10 million and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited investors, it has to…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Disclosure, Regulation A, Section 4(a)(6)
A while back, one of our favorite start-up clients called me and asked me to speak to a potential investor. Paul Efron, a resident of Arizona, wanted to invest in the company's Regulation A offering. However, when he went onto the company’s website to invest, his subscription was rejected. The company was accepting subscriptions from investors in every state but Arizona and Nebraska.
Why Arizona and Nebraska, asked Paul?
The reason was that while federal law and most states’ laws say that a company selling its own securities is exempt from broker-dealer registration, that’s not the case in a handful of states. These states say that if a company isn’t using a…
This entry is filed under Capital Raising, Crowdfunding, Regulation, Regulation A, Securities Law, State Law
The amendments to Reg CF, Reg A, and other rules relating to capital formation utilizing exempt offerings have finally been published in the Federal Register, with an effective date of March 15, 2021. See, https://www.federalregister.gov/documents/2021/01/14/2020-24749/facilit….
This entry is filed under Crowdfunding, Regulation A, SEC, Securities Law
An increasing number of issuers have been using Regulation A to make continuous offerings of units, consisting of a combination of equity, often common stock, and warrants to purchase the same equity at a future date. Under the Securities Act, the units, the shares of stock, the warrants and the shares of stock issuable upon exercise of the warrants are separate securities whose offer and sale must be registered on a registration statement or covered by an exemption from registration such as Regulation A. That is why offering statements under Regulation A list each of these individually and why the SEC requires the validity opinion filed as an exhibit to the…
This entry is filed under Regulation A, SEC, Securities Law
For some reason, this issue has been coming up a lot lately. Our usual response to the question “Can non-US issuers make a Reg A or Reg CF offering?” is to point to the rules:
Rule 251(b)(1) says Reg A can only be used by “an entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada.”
Reg CF Rule 100(b) says Reg CF may not be used by any issuer that “is not organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia.”
Slightly different formulations…
This entry is filed under Capital Raising, Crowdfunding Conditions, Financial Statements, Regulation A, Section 4(a)(6), Securities Law, Types of Offerings
I have long (oh so long) been one of those urging the SEC to give some clarity with respect to the status of “finders.” See here for the latest piece.
Early-stage companies raising funds very often reach out to a guy who knows some guys who have money and have invested in startups in the past. If the first guy wants to be compensated by reference to the amount of money his contacts are able to invest, he may well have violated the broker registration requirements of the Securities Exchange Act of 1934. And it’s not only him who needs to be worried; if a startup raises funds through someone who should have been registered as a broker and wasn’t, their sales of…
This entry is filed under Capital Raising, Federal Law, Regulation, Regulation A, Rule 506(b), Rule 506(c), Securities Law