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Seed Rounds and Crowdfunding

Posted on March 6, 2019 at 3:30 PM Comments comments (0)

Startups and fast-growing businesses are increasingly turning to Crowdfunding exemptions to raise capital in Seed Rounds and Pre-Seed Rounds. They are relying on JOBS Act exemptions from SEC registration, primarily Regulation D, to make equity and debt offerings to accredited investors and non-accredited investors. And they are quickly learning how to use other exemptions created by the JOBS Act, especially Regulation S and Registration A.

➢ Q: What is a Pre-seed Round?

A: This is when the issuer and other founders if any are getting the company’s operations off the ground. This is time for a Friends-and-Family Round. No debt. Almost all the investors in early stage companies demand and receive part ownership. It is too early for promissory notes, except for some well-secured real estate deals, unless the investor insists on preferred convertible notes. Valuation is the rub. Valuation is seldom transparent. It is subjective, based on management, track record, market size, competition, risk and any number of things.

➢ Q: What is a Seed Round? A: Sometimes called the Early-Stage Round, this is when issuers hire a founding team to do market research, ancillary product development and market testing. This is also when the issuer decides what the final product or service is going to be and what the ideal demographic is going to be.

➢ Q: Who are Seed Round investors?

A: Seed Round capital sources include angel investors, private equity investors, and alternative class investors. Some issuers return to friends, family and associates at this stage.

➢ Q: What are the Crowdfunding exemptions?

A: Regulation D, using either or both Rule 506(c and Rule 506(b], is the most popular exemption. 

Regulation S, for offerings to non-U.S. citizens, is becoming more popular as issuers discover some advantages over Regulation D, such as little regulatory oversight (especially in Malta and other favored offshore jurisdictions), no maximum raise, and no PPM (private placement memorandum) required.

Regulation A has two versions, one with a $20 million max, and the other a $50 million max. Regulation A is the exemption most similar to full registration with the SEC; therefore, compared to the other exemptions, particularly Regulation S, it is prohibitively expensive and time-intensive.

Practice Tip: Well-advised issuers are increasingly using separate Regulation D and Regulation S websites, one for domestic marketing and one for foreign marketing, offering the same assets.

➢ Q: What is the difference between 506(c and 506(b?

A: Rule 506(c allows an issuer to market to the public; Rule 506(b does not. Rule 506(b allows up to 35 non-accredited investors; Rule 506(c does not. The usual drill is to use 506(b to raise money from friends, family and associates. After all capital requirements have not been met, the issuer converts the 506(b offering into a 506(c offering.

History Factoid: To market securities to strangers, as now allowed under Rule 506(c, was illegal for over 8 decades. Today, issuers using Rule 506(c can do practically anything to go after both accredited or non-accredited investors; for instance last year a REIT used 506(c to raise capital from early-stage investors on Craigslist.

➢ Q: So why do any issuers use 506(b?

A: Issuers continue to use Rule 506(b because it allows up to 35 non-accredited investors. If you need family money and some members of the family are not accredited, you must use 506(b.

Practice Tip: An issuer can go from 506(b to 506(c but not from 506(c to 506(b.

➢ Q: What are Series A, B and C Rounds?

A: These rounds are for issuers with track records who have established a user base, have consistent revenue figures or enjoy other proofs of process. Most Series A Rounds raise between $15 million to $50 million. Series B and Series C Rounds usually raise more capital than that, sometimes much more. These rounds are when series 7 and other securities licensees take interest and when VCs and PE (private equity) funds do much of their investing.

Sometimes a single large investor will serve as the “anchor” (think COSTCO as the first tenant in a shopping center), drawing in other, more risk-adverse investors, in exchange for re-negotiated terms.

Most issuers never need Series A funding, let alone Series B or C funding. Their Pre-Seed and Seed Rounds have raised enough capital to enable them to avoid giving more equity.

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Private Placement Advisors LLC designs and executes Pre-Seed and Seed Rounds using Crowdfunding (JOBS Act) exemptions. This is all we do. Schedule a free 20-minute consultation. We will listen to the company’s narrative, we will ask questions, and we will suggest one or more JOBS Act solutions. For specific suggestions on how Private Placement Advisors LLC may be able to help your company raise Seed and Pre-Seed capital, email [email protected]

No ICOs Registered with the SEC

Posted on May 4, 2018 at 10:35 PM Comments comments (0)

The SEC says no ICOs have been “registered” -- but the SEC is not really keeping score.

The SEC says no ICOs have been “registered” but that doesn’t count the growing number of exempt offerings under Rule 506(c.

Is there a path from a pre-ICO fund raise using Reg CF to a Form D Rule 506(c offering and then to a Reg A+ offering? And then even to a full registration?

Securities and Exchange Commission Chairman Jay Clayton has repeatedly reassured the public that no initial coin offerings have been “registered” with the SEC, but plenty of them are coming onto the market through the back door. Eventually, these ICOs could get distributed beyond just accredited investors and into the hands of retail consumers.

There’s been significant growth in ICOs using Rule 506(c since the beginning of 2017.

Period Number of ICO-Related Form Ds

1Q 2017 0

2Q 2017 1

3Q 2017 11

4Q 2017 32

1Q 2018 (Through Feb. 20) 39

With tokens or coins issued to accredited investors under Rule 506(c of Regulation D, one year would be the minimum timeframe for transfers under Rule 144. Most of the ICOs filed using Form D since mid-2017 have used Simple Agreement for Future Tokens, or SAFT, as their legal framework.

Telegram used the SAFT structure to raise money from accredited investors. As for the transition form accredited investors to retail investors, “There is still significant uncertainty about how to go beyond the SAFT accredited investors to the retail investor under the current regulatory environment.” 

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Join the State Securities Regulation LinkedIn discussion group and go down the crypto rabbit hole with us to learn 1) what will constitute securities in the eyes of state regulators and the SEC, and 2) what will constitute best practices for exempt offerings of ICO offerings. 

Members of the discussion group are entitled to any of 21 audio handbooks on exempt [email protected] https://www.audible.com/search/ref=a_hp_tseft?advsearchKeywords=Douglas%20Slain&filterby=field-keywords

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Posted on April 8, 2018 at 9:45 PM Comments comments (0)

 Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2.

There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.

For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities. In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.

The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory. Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC.

With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing. Finally, the “bad actor” disqualification applies to both Rule 506 and Regulation A+ offerings. However, a company that had its registration revoked under Section 12(j) of the Exchange Act within five years before the filing of the offering statement or that has been delinquent in filing required reports under Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer is required to file such reports) is not eligible to do an offering under this Regulation.

The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

Posted on March 27, 2018 at 11:15 PM Comments comments (0)

The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

The ICO process should be designed in collaboration with regulators to comply with U.S. securities law. Existing financial institutions and regulators will not scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law.

Should we paint all ICOs with the same brush by claiming each one of them offers securities subject to SEC scrutiny? On Ripple's XRP "digital asset" door, even though there was no formal ICO to launch that token, it now trades on 18 exchanges.

Now, after raising nearly $94 million of venture capital, Ripple probably does not need an ICO.

One ICO was recently "gate-keeped" by Perkins Coie LLC. It involves the sale of a utility token that raised $35 million in less than a minute. These tokens created a digital advertising ecosystem tied to consumer attention which is why it is styled the “Basic Attention Token.” This ecosystem is an upgrade from the digital advertising scheme ecosystem of 1990s.

The plaintiff's bar has been alert when the SEC has not yet moved. See Davy v. Paragon Coin, Inc., et al., Case No. 18-cv-00671 (N.D. Cal.January 30, 2018) and Paige v. Bitconnect Intern. PLC, et al., Case No. 3:18-CV-58-JHM (W.D. Ky. January 29, 2018).

On February 6, SEC chairman Jay Clayton acknowledged that the potential derived from blockchain was "very significant." Still, Chairman Clayton said the SEC would continue to "crack down hard" on fraud and manipulation involving ICOs offering an unregistered security. Chairman Clayton said the SEC was "working the beat hard" to crack down on ICOs, but chose not to answer a question, namely whether the SEC will "go back" and scrutinize earlier ICOs. I

n other words, there may be some ICOs that the SEC will not attack, Notwithstanding Clayton's comment that "every ICO I've seen is a security, some 2017 ICOs raising hundreds of millions of dollars will not be addressed by the SEC! This provides a clear "nudge wink" that not all ICOs come under SEC regulatory control. As with XRP and BAT, there will likely be many more tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities.

The fact that the SEC has not done anything, despite moving against Munchee, Inc., signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value. In other words, utility tokens may be a good idea after all.



Why a business plan is not enough

Posted on March 21, 2018 at 1:10 AM Comments comments (0)

Many companies rely on a business plan or executive summary to serve as the basis for their investment. This does not provide the basis for compliance with state and Federal rules and any capital raised may be in violation of state or Federal rules.

Regulation D is an exemption that allows companies to raise capital though the sale of equity or debt securities without registering with the SEC. Start-ups typically choose the Rule 506(c program because it allows general advertising and solicitation. Companies can now execute a “public offering” of their private placements with straightforward compliance benefits of a traditional Regulation D offering.

The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.

The 506(c exemption allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. It is important to note that the current 506(b program is still available for issuers that do not need the capability to engage in general solicitation. The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.

CRYTOCURRENCY COMPANIES LOOK FORWARD TO A 50% INCREASE IN REG A+ CAP

Posted on March 19, 2018 at 3:50 PM Comments comments (0)

The U.S. House of Representatives just passed the “Regulation A+ Improvement Act” which will permit a 50% increase in the cap. Reg A+ is more streamlined than traditional IPOs and it allows non-accredited investors to invest , and it allows for retail investor participation, a hallmark of cryptocurrencies. StartEngine advertises ability to “Launch an ICO” and its founder says that Reg A+ is “the future of ICOs.” Reg A+ has been used for raising over $600 million since October 2017, and the pace of Reg A+ securities offerings will increase with the 50% increase in cap.

ICOs that have already used Reg A+ for their offerings include: • Gab ICO: Social network for those who believe in free speech and the free flow of information online • RideCoin ICO: Decentralized ride-sharing marketplace built on the blockchain. • WeDemand ICO: Allows bids on concerts with smart contracts and tools SEC-approved exchanges must be used and there must be anti-money laundering checks, increasing overhead. Also increasing the overhead is the requirement that Reg A+ requires “Offering Circulars,” which are more detailed than the traditional PPM.

There are also two types of Reg A+ offerings, Tier 1 and Tier 2. In a Tier 2 offering companies must undergo an audit upfront and annually and post financial performance information bi-annually. The alternative is a Tier 1 Reg A+, which is limited to $20 million but dramatically reduces regulation.

Here is a summary of Tier 1 and Tier 2

Tier 1 • Raise up to $20M in a 12 month period • No more than $6M can be offered for sale from affiliate security holders • Affiliates are also precluded from selling more than 30% of internal shares in the Reg A+ offering • Requires Form 1-A registration statement with the SEC • Non-affiliates can sell their shares after one year under SEC Rule 144 • Company must engage in the services of an SEC registered Transfer Agent • Available to C-corps, S-corps and Limited Liability Companies (including REITs) with organized businesses in the United States and Canada • Requires PCAOB or GAAP audited financial statements for the previous two years • Requires adherence to state Blue Sky laws • Allows solicitation to and investment from both accredited and non-accredited investors

Tier 2 • Raise up to $50M in a 12 month period • No more than $12M can be offered for sale from affiliate security holders • Affiliates are also precluded from selling more than 30% of internal shares in the Reg A+ offering • Requires Form 1-A registration statement with the SEC • Non-affiliates can sell their shares after one year under SEC Rule 144 • Company must engage in the services of an SEC registered Transfer Agent • Available to C-corps, S-corps and Limited Liability Companies (including REITs) with organized businesses in the United States and Canada • Subject to Tier 2 on-going annual and semi-annual reporting requirements • Requires PCAOB or GAAP audited financial statements for the previous two years • Preempts necessity of adhering to state Blue Sky laws • Allows solicitation to both accredited and non-accredited investors

Who is excluded from participating? • Any companies subject to the order of the SEC within the last five years (under Section 12(j) of the Exchange Act) • No asset backed securities or undivided interests in oil, gas and/or mineral rights •Certain “bad actors” • Certain types of reporting companies • Investment firms and funds • Companies with no business plan or whose sole purpose is to engage in M&A activity • Companies that have failed to file according to the Regulation A+ rules over the past two years • Companies with annual revenue greater than $50 million or a public float greater than $75 million

Exempt Offerings Questions

Posted on May 19, 2017 at 2:35 PM Comments comments (0)

Questions we hear

Can I do multiple offerings on the same raise at the same time?

How do Blue Sky laws work?

What does “testing the waters” mean for a Reg A+ offering and why are some Reg A+ issuers declining to test the waters?

Do I have to be a broker dealer?

Do I have to use a broker dealer?

Do I need FINRA’s approval for a Regulation D offering?

Is there a limit on how many investors I can have?

What documentation is required for my type of offering?

What is a Reg CF offering?

For answers, see  

LinkedInhttp://linkedin.com/in/douglasslain

Facebook: http://facebook.com/douglas.slain

Twitter: https://twitter.com/exemptofferings

Blog: http://www.privateplacementadvisors.com/apps/blog

Web site: http://privateplacementadvisors.com

Reg A+ versus Reg D

Posted on April 22, 2017 at 12:45 AM Comments comments (0)

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2.

There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.”

Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506. For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.

Reg A versus Reg D

Posted on February 25, 2017 at 7:05 PM Comments comments (0)

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2. The new Regulation A, commonly referred to as Regulation A+, is a significant improvement over the old Regulation A, which was rarely used in any event.

The old Regulation A permitted exempt offerings up to $5 million in any 12-month period, including up to $1.5 million of securities offered by security holders of the company, while the thresholds of Regulation A+ are much higher. There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.

For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.

In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.

The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory.

Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC. With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing.

Private Placement Advisors LLC

http://www.audible.com/search/ref=a_search_c4_1_1_1_srAuth?searchAuthor=Douglas+Slain&qid=1487524144&sr=1-1

Trump v. Dodd-Frank, new news

Posted on February 7, 2017 at 5:25 PM Comments comments (0)

State Regulators and Trump State attorneys general and state securities commissioners have responded to President Trump’s threats to reduce federal regulation and enforcement efforts in the financial services industry. Both New York Attorney General Schneiderman and Maria Vullo, the superintendent of New York's Department of Financial Services ("DFS"), have made it clear that they will exercise broad authority to stand in the way of any Federal effort to dismantle the Dodd-Frank Act, as Trump has promised to do.

Schneiderman said, "Any attempt to gut these consumer and investor protections would . . . embolden those who seek to defraud and exploit everyday Americans. The States are the back stop, the states are the next line of defense after the federal government," and, "[i]t is embedded in our system of jurisprudence that state laws must be respected.” Each of the 50 states has some form of "Blue Sky" law that regulates the offer and sale of securities. In addition, multiple federal statutes grant state attorneys parallel enforcement authority, and this includes the Truth in Lending Act, the Fair Credit Reporting Act, and the Dodd-Frank Act.

Under Dodd-Frank, a state attorney general or state securities regulator is authorized to bring a civil action to enforce provisions of the Act. State attorneys general and state securities regulators will challenge the Trump administration with an expansion of state-level activity to monitor industries benefiting from a decrease in federal regulation. As Schneiderman put it, "The states are the next line of defense."