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Common missteps when structuring a private offering

Posted on January 16, 2019 at 1:40 AM Comments comments (0)

Using phrases like “the first” or “the only” can be problematic. Issuers should avoid any statements that can be construed as guarantees. When outlining the investment opportunity, cut to the chase. Less is more. Back up claims with references to reputable sources. Impress with thorough research and summaries of recent information from reputable sources. Use concise language. Avoid revisions that cause delay.

Offerings of operating companies rise and fall on their valuations. A valuation that is too low can lead to future dilution of owner’s equity while lowering the maximum that can be raised. A valuation that is too high can make it difficult to raise any capital at all. Try to have a well-reasoned rationale for the valuation.

Even a well crafted and sharply focused business plan will receive little interest with questionable investor returns or obviously excessive management fees. If management does not participate in profits until after investors' capital is returned, investors will be more willing to assume more risk. Inexplicable differences from industry average returns and fee structures are difficult to explain to investors. Some investors will not even try to figure out what the potential net return is, so make it easy for them. Multiple line items for consulting and advisory fees are red flags.

Use of proceeds that recaps the founders’ investment capital, if the capital was originally characterized as a loan, is understandably problematic. Real estate offerings using more than 70% leverage to acquire property will be perceived as risky, although high leverage can be appropriate in stabilized, low vacancy properties with creditworthy master tenants and a stable lease profile. Equity stack positions are appropriate for offerings of buy-and-hold-and-pray undeveloped land deals.

Commissions offered in Regulation D exempt offerings vary substantially by industry, but placement fees and broker compensation should not be so high as to be contrary to an investors’ interest. Try to use a flexible commission structure using language such as “up to X%” rather than a stated percentage. This will allow you to refer the deal to other brokers with a conventional syndicated commission structure if you need to go that way.

If the minimum offering amount is not received before the offering termination date, you face the time-consuming and irksome chore of notifying subscribers that the offering needs to be extended. And this notification can trigger a right of rescission giving an investor the right to reverse his or her decision to subscribe! Be sure to include a right to extend the offering period at the issuer's discretion. Allowing ample time for the offering avoids the need for “bridge” financing and permits the possibility of alternative financing sources.

A first impression is important when asking people for money. In this case, the first impression will likely be based on your offering documents including private placement memorandum (PPM), pitch deck, executive summary, and other documents. This is especially true for online offerings using a Regulation D, Rule 506(c exemption. Common pitfalls include hyperbolic pro-formas or financial models. Remember to be reasonable about forecasts and be sure to employ sensible operating metrics. Remember to identify the larger market relative to the revenue opportunity.

Contact [email protected] with any questions.

 

 

 

 

 

 

 

 


 

Crypto Fund using Regulation S

Posted on September 22, 2018 at 6:45 PM Comments comments (0)

A self-described “crypto-blockchain and ICO-focused investment research fund and media portal” has announced that its Regulation S securities token offering (STO) will begin shortly. The startup, XResearch, claims it is building a “community commons for crypto investors” offering institutional-quality research services and content. 

Token holders will be entitled to “institutional-quality research” and share in 5% of the equity of the company (all token holders in aggregate).

Using Regulation S, issuers can raise large amounts of capital with without the cost and delay of a Regulation D exemption, while purchasers benefit from the ability to resell in a secondary market.

Using either Rule 144 and Regulation S, issuers can use two separate exemptions for the same time period offering the same assets. Also, since a Regulation S issuer may make an offering within the U.S. to a “Qualified Institutional Buyer” (QIB) or to anyone outside the U.S., U.S. broker-dealers can purchase the securities and market them, whether or not any non-U.S. investors purchasing under them would qualify as QIBs, to large institutional buyers both inside and outside of the U.S.

Issuers using Regulation S can take advantage of the fact that the SEC and FINRA deem sales outside of the U.S to be regulated, whether or not those sales are in fact regulated. 

XResearch is led by Charles Wyman, who is working with Steven Wasserman, Barry Cohen, and Neil Benedict, among others.

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ISOs using Regulation S

Posted on May 31, 2018 at 8:40 PM Comments comments (0)

ISOs using Regulation S

What type of documentation is typically involved in a Regulation S offering of debt securities? What are the holding periods for the sale of Regulation S securities? How is the distribution compliance period measured for different types of securities? How are Regulation S transactions structured? What are the holding periods for the sale of Regulation S securities? What is the due diligence process for initial purchasers in a Regulation S offering? 

What type of documentation is typically involved in a Regulation S offering of debt securities?

A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include: The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales. The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement. The Operating Agreement contains representations, warranties, and covenants specific to each offering. The Subscription Agreement commits the investor to the investment. Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions. With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.” Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days. The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. • Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding. A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities. Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering. An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering. T

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country. If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration. Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering?

Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered. Practice tip: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules. 

Cryptocriminals & State Regulators

Posted on May 27, 2018 at 9:45 PM Comments comments (0)

The North American Securities Administrators Association (NASAA) last week announced a large crackdown on fraudulent Initial Coin Offerings and cryptocurrency offerings.

State regulators identified hundreds of ICOs in the final stages of preparation before being launched to the public. These pending ICOs were advertised and listed on ICO aggregation sites to attract investor interest. Many have been and are being examined; some are under active investigation, and some have already resulted in enforcement actions.

State regulators found approximately 30,000 crypto-related domain name registrations, almost all of which made in 2017 and 2018. For more information about ICOs and cryptocurrencies, watch NAASA’s video “Get in the Know About ICOs” or read NASAA’s Investor Advisories: “What to Know About ICOs” and “Be Cautious of the Crypto Investment Craze.”


ISOs using Regulation S

Posted on May 25, 2018 at 10:45 PM Comments comments (0)

What type of documentation is typically involved in a Regulation S offering of debt securities?

What are the holding periods for the sale of Regulation S securities?

How is the distribution compliance period measured for different types of securities?

How are Regulation S transactions structured?

What are the holding periods for the sale of Regulation S securities?

What is the due diligence process for initial purchasers in a Regulation S offering?

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What type of documentation is typically involved in a Regulation S offering of debt securities? A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include:

The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales.

The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement.

The Operating Agreement contains representations, warranties, and covenants specific to each offering.

The Subscription Agreement commits the investor to the investment.

Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions.

All investors must be given the same “disclosure package.”

Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days.

The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. 

Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding.

A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities.

Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering.

An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering.

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country.

If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration.

Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering? Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered.

Practice Note: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules.

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More questions? Contact [email protected]


With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.”

ICOs are so 2017

Posted on May 1, 2018 at 5:35 PM Comments comments (0)

Is there really a new term for fundraising?

STO?

Some in the industry are opting for "security token offerings," a term that the CEO of Overstock (which is under SEC investigation itself) advances. "The ICO craze of last year created a toxic waste dump of financial assets," says Patrick Byrne.

"What we're developing is a mechanism so that there will be a legal way to go forward, and not create any new toxic waste." "It's the new term," Byrne said. "The industry is distinguishing very clearly now between ICOs and STOs." Overstock has invested $2.5 million in start-up Elio Motors. The company is launching "ElioCoin” to fund production and other costs.

ElioCoin made clear this is a "security token offering" in a company statement. "It is a very clever offering, and could represent a whole new model for American entrepreneurship," Byrne said.

In an ICO, coins or tokens are put up for sale as a form of crowdfunding. There are no voting rights or dividends as with shares of a company. Instead, "utility tokens" give the bearer access to a network, platform, and services. Whoppercoin, Pandacoin, Trumpcoin, and PutinCoin have all raised money through ICOs.

In a security token offering, you also buy coins or tokens. However, these tokens must be backed by something tangible such as assets or a revenue stream. They are similar to a share of a company in that they are "programmable" to do things like conduct proxy voting, "You can program a token, but a static share certificate just sits there and collects dust," said Trevor Koverko, CEO of Polymath. The SEC has said that all ICOs constitute securities.

By using the term "security token offering" or STO, issuers are being more upfront with regulators, Byrne said. "I think the SEC should essentially shut down the utility token world," Byrne said. "Eventually the STO security offerings will be done in lieu of the IPO."

Join the LinkedIn discussion group, State Securities Regulation, and go down the rabbit hole with us to learn what is and what will be a security in crypto world (the metaphysics of it) and how do we know that (the epistemology of it).

Enjoy securities law history in the making.

Douglas Slain

Members of the State Securities Regulation LinkedIn discussion group are entitled to any of 21 audio law handbooks @ https://www.audible.com/search/ref=a_hp_tseft?advsearchKeywords=Douglas%20Slain&filterby=field-keywords

What is the difference between Rule 147 and Rule 147A?

Posted on April 8, 2018 at 9:35 PM Comments comments (0)

 Rule 147A lifts the ban on general solicitation found in Rule 147. Issuers can use social media and other internet-based opportunities even if the actual sales of the issuer's securities can only be made in one state. Otherwise, Rule 147A is substantially identical to Rule 147 except that it allows issuers to be incorporated out-of-state.

This change means that a Delaware corporation that is headquartered in Texas can take advantage of Rule 147's exemption when raising funds from Texas residents What is the new Rule 504? The SEC's new Rule 504 increases the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million, allowing more flexibility in smaller, private securities offerings. However, a consequence of the SEC's rule changes may be that many states legislatures will have to revisit their intrastate crowdfunding statutes to take advantage of these changes.

There are exceptions for offers and sales made in accordance with specified types of state registration provisions and exemptions. In some states an offering can now be made to unaccredited investors. Note that all sales (not offerings) made under Rule 506(c must be made to only accredited investors. (The SEC also repealed the widely ignored Rule 505, which permitted offerings of up to $5 million annually sold solely to accredited investors or no more than 35 non-accredited investors).

The 34 states that enacted their own, intrastate statutes ahead of the SEC's rules can continue to rely on those statues.

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.



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

Peer-to-Peer lending in 2018

Posted on January 1, 2018 at 5:15 PM Comments comments (0)

f you need to borrow money to make home improvements or consolidate credit card debt, where do you turn? In 2018, the answer may be peer-to-peer lending platforms. These are websites that match borrowers with investors. The ease and speed of the loan application and approval process is helpful. And P2P platforms tend to be more forgiving than banks when it comes to credit histories. While the latter often deny loan applications from consumers who haven’t borrowed in the past,

P2P lenders often use more than just credit histories to determine a borrower’s eligibility and creditworthiness. P2P loans may offer rates that are lower than those charged by credit cards companies. Interest rates vary depending on the creditworthiness of the borrower as assessed by the P2P platforms. And while P2P platforms use some unconventional methods for assessing creditworthiness, borrowers with high scores often get lower interest rate offers on the platforms.

APRs for P2P consumer loans from some of the largest platforms range widely from 7.99 percent to 36 percent, according to a report by the U.S. Treasury. Borrowing minimums and maximums for consumers can vary from platform to platform and range from as little as $1500 to as much as $50,000. Unlike bank loans, loans from P2P platforms can be done entirely online. Filling out an application often takes 20 minutes and applicants are informed of funding decisions within 48 to 72 hours.

Funding for a single loan typically comes from a variety of sources, as P2P investors want to diversify their loan holdings and invest in multiple loans. Though the name “peer-to-peer” may imply disintermediation, large institutional investors often participate in P2P platforms. P2P platforms charge fees to both borrowers and lenders. These include origination fees, late payments fees, and fees for unsuccessful electronic payments. Lenders are charged fees as well, such as servicing fees and collection fees if necessary. Loans to consumers are generally unsecured loans. You do not need to put up collateral and you do not have to worry about someone seizing your property for nonpayment.

There are other consequences. The P2P platform could ban you from taking out new loans or turn your account over to a collections agency. In any event, your credit score will suffer and make it harder for you to take out a loan or to secure credit in the future.

For more information, contact Douglas Slain at [email protected]