Crowdcheck Blog
Insights and information for online capital formation
Anyone who knows me knows my link with the SEC’s Regulation S. While folks sometimes refer to it as an exemption from registration under the Securities Act, it’s not. Reg S provides that the registration provisions of the Securities Act simply do not apply to offers and sales made outside the United States, and then goes on to provide rules to determine whether an offer or sale is indeed outside the United States.
We often hear suggestions that a Reg S offering be added to an offering being made under one of the online offering exemptions (Reg A, Reg CF or Rule 506(c) under Reg D). This is very rarely a good idea. Reg S sits very uneasily with the online…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Disclosure, Federal Law, Regulation, Regulation A, Rule 506(c), Section 4(a)(6), Securities Law, Types of Offerings
This came up no less than three times last week, so I figured it was worth a blog post.
Subsidiaries can raise funds under Reg CF, even if they are subsidiaries of companies who cannot use Reg CF themselves, because they have a class of securities registered with the SEC, or they are not US companies. To determine eligibility, you look at the status of the potential issuer. Is it a US company? Have you confirmed it’s not an investment company? If it’s raised funds under Reg CF before, is it in compliance with ongoing reporting requirements?
We need to add another element to this determination: is the US sub genuinely the issuer under Reg CF, or is there a “co-…
This entry is filed under Crowdfunding, Crowdfunding Conditions, Federal Law, Section 4(a)(6), Securities Law, Types of Offerings
Since the increase in the maximum offering amount to $5 million a couple of years ago, we’ve seen more interest in Reg CF offerings by venture-backed companies. Sadly, it doesn’t work for a lot of them.
This is because of what we refer to as the “issuer aggregation rule”. Rule 100(c) explains that “issuer” for the purpose of calculating the $5 million limit (and also determining whether an issuer is a first-time user of Reg CF) includes all entities controlled by or under common control with the issuer and its predecessors. “Control” under securities law has a very broad definition: it includes officers and directors and 10% shareholders. (And you are never…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Due Diligence, Due Diligence Process, Financial Statements, Regulation, SEC, Section 4(a)(6), Securities Law
We keep hearing this question. To be honest, it’s not clear why a crowdfunding issuer would want to have to deal with the recordkeeping for what could be thousands of investors (and even if the issuer uses a Reg CF SPV, that itself is an issuer whose many shareholders have to be wrangled).
But are you absolutely required to have one?
Let’s look first at Rule 301 of Regulation CF. This (titled “Measures to reduce risk of fraud”) requires that the intermediary in a Reg CF offering have a reasonable basis to believe that the issuer “has established means to keep accurate records of the holders of securities” and says that the intermediary has satisfied the…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Disclosure, Due Diligence, Regulation, Section 4(a)(6)
This is a question we often get from companies as they are trying to organize their cap table, or provide information to a transfer agent. Many companies seem to be of the belief that shares are not actually issued until a certificate is prepared, or that the shares are recorded on the company’s internal ledger, or the transfer agent’s ledger. However, this is not correct.
Taking a step back, investors commit to acquire a company’s shares by signing a subscription agreement (which may also be called a purchase agreement). The subscription agreement has certain representations from the company and the investor, and may have some other clauses like for dispute…
This entry is filed under Capital Raising, Educational, Securities Law
Companies often wonder, does it make sense to do a Reg CF offering rather than a Reg A offering? Keep in mind that although selling securities using Reg CF may at first blush seem faster, cheaper and may have some advantages for marketing purposes, it is not always an easy calculation to make. There are some other factors to consider when deciding:
How quickly are you willing to be an Exchange Act reporting company?
Are you willing to keep track of an SPV and multiple reporting regimes?
Becoming a reporting company under Exchange Act Section 12(g)
For most companies (generally non-banks) under Exchange Act Section 12(g), the company would need to…
This entry is filed under Crowdfunding, Crowdfunding Conditions, Section 4(a)(6)
We are often asked by companies, “why can’t I do [fill in the blank]? I see this other company doing it.” Our response has always been that just because those other companies have not yet been subject to enforcement, doesn’t mean that there will not be an issue later on. The time and effort to build a case, and often reaching a settlement, means that public knowledge of enforcement lags.
The SEC has recently made this clear in regards to non-compliant offers and sales under Reg A. On May 16, 2023, the SEC announced 10 settlements with issuers that violated the rules of Reg A. See, https://www.sec.gov/news/press-release/2023-94. The common theme of the…
This entry is filed under Regulation, Regulation A, SEC, Securities Law
Hi everyone; a reminder that we are just over a month away from the deadline to file Form C-AR by May 1.*
We wanted to flag some issues:
If you sold any securities under your Form C, even if you didn’t sell them until this year, and even if you didn’t sell them until April 30, a Form C-AR with 2022 financials is due by May 1.
Even if your current Form C already includes 2022 financial statements, a Form C-AR is due by May 1.
If you do not have an open offering or otherwise have audited or reviewed statements available, the financial statements do not have to be audited or reviewed, but they do need to be in US GAAP format. This means balance sheet (as at…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Disclosure, Federal Law, Financial Statements, SEC, Section 4(a)(6), Securities Law
That picture probably isn’t an emoji, because emojis aren’t detailed enough for a message of that size. But they do convey some information, which is why, we assume, people use them. And since emojis are capable of conveying information, they are also capable of conveying misinformation, even misleading information that violates the securities laws.
For some time, we’ve been discouraging our clients from using emojis or other images that could be misleading. Rocketships and unicorns have long been on our “bad words list”.
But a recent court case got the attention of some of our clients. It’s not a case about emojis, rather it’s a classic “are these things…
This entry is filed under Crowdfunding, Disclosure, Disclosure, Fraud, Investing, Liability, Regulation, Securities Law
We’ve been having a lot of “why can’t we do what they are doing?” conversations recently. Potential issuers have asked:
Why can’t they structure a Reg A real estate offering where the issuer invests in minority holdings in other real estate companies?
Why can’t they file a 1-Z to exit the Reg A reporting system without bringing their ongoing reporting into compliance?
Why can’t they file a new Reg A offering without bringing their ongoing reporting into compliance?
Why can’t they increase the size of their Reg A offering by filing a Supplement to the Offering Circular?
Why can’t they advertise without including a link to the Offering Circular?
In all these…
This entry is filed under Capital Raising, Crowdfunding, Crowdfunding Conditions, Regulation, Regulation A, SEC, Securities Law