Crowdfunding

SBEC Crowdfunding Trends in 2016 Breakfast Event Panel (Part 1 of 2)

The South Bay Entrepreneurial Center in Torrance, California presented “Crowdfunding Trends in 2016” on May 15, 2016 at the Toyota Auto Museum. Topics included new legislation around crowdfunding (JOBS Act), what entrepreneurs have learned from past campaigns and more about service providers in crowdfunding.

MODERATOR: Mark Hiraide
SBEC board member Mark Hiraide is a Corporate and Securities Partner with Mitchell Silberberg & Knupp. Mark represents companies listed on national stock exchanges and privately held businesses and defends individual officers and directors in corporate and securities law matters. During his 30-year career, Mark worked as an attorney with the Securities and Exchange Commission’s Division of Enforcement and Division of Corporation Finance and as a Special Assistant United States Attorney. In private practice he has handled both courtroom litigation and business transactions representing entrepreneurs, startups, publicly traded companies, directors and officers, broker-dealers, investment bankers, investment advisers, accountants and investors. He is an authority on the federal JOBS Act, having testified before a U.S. Senate subcommittee evaluating the law designed to help startups raise money. He is the author of a book on crowdfunding just published by Thomson Reuters. And he is working with the California Legislature to pass a state crowdfunding law he drafted

PANELISTS

James Lin
James is a co-founder of SBEC cohort company ZenMount. Having been struck by an idea for a tablet holder, James sought out and worked with local product designer Matther Tarnay to transform the abstract idea into a working prototype, initially using Kickstarter funding. ZenMount designs and manufactures device mounting systems for tech gadgets such as tablet, smartphone, and e-readers. Their “Origin” product is the first tablet mount with Simul-LockTM , which makes it easy to use and infinitely adjustable.

Taylor McPartland
In 2010, Taylor, a Northern California native, co-founded CrowdfundX, a leading crowdfunding agency which has leveraged crowdfunding technology, as well as the implementation of the JOBS Act, to raise funds for innovative organizations ranging from automobiles (such as Elio Motors) to non-profits. Assuming an advisory role in the company in 2015, Taylor refocused his energy on evangelizing the benefits of crowdfunding and how its strategies can be applied at local, state, and federal levels. Most recently, Taylor founded the Lincoln Federation, an organization focused on bringing together Los Angeles entrepreneurs with elected officials to collectively create positive change for a sustainable future.

Allen Jebsen
Allen is the Director of Business Development at StartEngine, the premier equity crowdfunding platform, connecting Millennials and aspiring investors with tomorrow’s progressive companies. StartEngine aims to revolutionize the startup business model by helping individuals invest in private companies on a public platform for the first time in history, thereby helping entrepreneurs achieve their dreams.

Dean Quiambao, CPA
Dean, a Partner at Armanino LLP helps numerous private companies, as well as private schools and social service, performing/fine arts and faith-based organizations address their tax, audit and outsourced accounting needs. Boards and finance and audit committees appreciate his laser focus on bringing to life the audit items that matter most, including his proven method of benchmarking data and key financial operating ratios.

SBEC Crowdfunding Trends in 2016 Breakfast Event Q&A (Part 2 of 2)

The South Bay Entrepreneurial Center in Torrance, California presented “Crowdfunding Trends in 2016” on May 15, 2016 at the Toyota Auto Museum. Topics included new legislation around crowdfunding (JOBS Act), what entrepreneurs have learned from past campaigns and more about service providers in crowdfunding. In Part 2 of 2, we feature the Q&A session after the panel.

Crowdfunding and the JOBS Act [Mark Hiraide]

Starting on May 16, 2016, entrepreneurs will be given unprecedented access to capital. For the first time in the history of federal securities regulation, companies will be allowed to take investments – i.e., sell “securities,” such as equity — to the crowd without regarding to investor sophistication. This expansion of the funding universe for cash-starved businesses is the heart and soul of the Jumpstart Our Business Startups (JOBS) Act of 2012, designed to spur job creation through development of new businesses made possible by fundamental changes in the regulation of private securities offerings. Prior to the JOBS Act, federal and state securities laws did not allow you to conduct crowdfunding offerings – offerings to the public – without registering the offering with the Securities and Exchange Commission in the same way an initial public offering (IPO) is registered with the SEC.

Because “equity crowdfunding” involves selling securities, there are many regulations that come into play, and there may be significant personal liability for violating these regulations. In this post, we cover the basic requirements of equity crowdfunding under the new rules under Title III of the JOBS Act. In another post, we’ll discuss the new methods of raising capital made possible by the JOBS Act and the differences among Titles II, III and IV.

Title III of the JOBS Act: Regulation CF – Equity Crowdfunding

The new rules under Title III are contained in Regulation CF. Under Regulation CF entrepreneurs may raise up to $1 million during any 12 month period from anyone subject to certain dollar limits on the amount an investor may invest. There is no requirement that the investor be accredited or sophisticated. If the investor’s net worth or income is below $100,000, he or she is subject to an investment cap of the greater of: $2,000 or 5% of the lesser of the investor’s annual income or net worth. If both net worth and annual income are at least $100,000, the investment cap is 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000. These caps reflect the aggregate amount an investor may invest in all offerings under Regulation CF in a 12-month period across all issuers.

An offering statement is required to be made available to prospective investors, and it must contain general information about the issuer, officer and directors and significant shareholders, the intended use of proceeds, the company’s ownership and capital structure and financial statements for the two most recently completed fiscal years. If the offering amount is greater than $100,000 but less than $500,000, the financial statements must be reviewed by an independent accountant. If the offering amount is greater than $500,000, the financial statements must be audited, unless the company is conducting its first Regulation CF offering, in which case the financial statements need only be reviewed.

The offering statement must be filed with the SEC, but it is not reviewed by them. Once the offering statement is filed with the SEC, a process likely to be provided as a service by the internet portal, the offering may immediately commence and the company may accept investor subscriptions.

A significant limitation under Regulation CF is that all offerings must be conducted through a single internet portal, which must either be registered with the SEC as a broker-dealer or as a new form of regulated entity, a “financing portal.” Another significant limitation under Regulation CF is that “general solicitation” is prohibited outside of the portal. All communications and other forms of solicitation must be limited to the registered users of the portal through communication channels provided by the portal. The only exception to the prohibition on general solicitation is a notice of the securities offering that may direct interested persons to the portal, where potential investors may register as a member of the portal to gain access to the Company’s soliciting materials and communications.

A final limitation of any securities offering relates to compensation of persons involved in the solicitation of securities. After all, the old adage, “securities are sold, not purchased,” is as true (if not more true) today than it was in 1933 when Congress first regulated the sale of securities. Companies must be careful when they engage individuals, even employees, to assist in the company’s securities solicitation efforts, those persons may be required to register as broker-dealers with the SEC or state securities administrators.

According to the SEC, “finders,” “business brokers,” and other individuals or entities that engage in finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries. In order to determine whether any of these individuals (or any other person or business) is a broker, the SEC looks at the activities that the person or business actually performs.

May 26: Crowdfunding and the JOBS Act

The JOBS Act legalized equity crowdfunding and private peer-to-peer lending, created a new regime for regulating “mini-IPOs,” and paved the way for the SEC to create new sources of liquidity for early-stage investors through secondary “venture markets.” The law already has spawned new and innovative financial companies dispensing capital to startup and growing businesses. Since its enactment, the JOBS Act has been described as “democratizing” access to capital by “disintermediating” Wall Street from the process of raising capital. Once the SEC’s newly issued rules for equity crowdfunding become final on May 26, everyday people will be able to join crowds of other small investors to directly fund startup businesses that pique their interest.

 

About the Author

Mark Hiraide: SBEC MentorMark Hiraide is the SBEC board secretary. Mark is a corporate and securities partner with Mitchell Silberberg & Knupp (MSK) in Los Angeles. Mark previously partnered with the late Lee Petillon (co-founder of SBEC) for 20 years at the securities-law boutique Petillon Hiraide LLP. He is an authority on the federal JOBS Act, having testified before a U.S. Senate subcommittee evaluating the law designed to help startups raise money. He is the author of a book on crowdfunding just published by Thomson Reuters. And he is working with the California Legislature to pass a state crowdfunding law he drafted.

 

 

Mark Hiraide: California To Tackle Equity Crowdfunding

This month, the Assembly Committee on Banking and Finance will hear AB 722 (Perea), a bill I drafted for Small Business California that will legalize equity crowdfunding in California.

AB 722 allows entrepreneurs to raise capital by selling equity stakes in their companies to the public. The process will feel similar to the crowdfunding going on now that you may have heard about where companies raise capital through large numbers of small donations on Internet sites like Kickstarter and Indiegogo in exchange for T-shirts, first-dibs on products, and movie production credits.

But AB 722 crowdfunding will be different because investors will own a piece of the company, which automatically introduces securities law into the equation.

Crowdfunding of equity will enable entrepreneurs to use modern communication technology to solicit directly large numbers of prospective investors on social networks and, more broadly, on the Internet, thereby “democratizing” access to capital. For most on Main Street, it will be their first opportunity to invest in and potentially realize returns from an asset-class historically accessible only by professional venture capital investors.

Yes, without the promotional efforts of intermediaries such as Wall Street investment bankers and underwriters, entrepreneurs may only be able to raise a few hundred thousand dollars. But today, with technological advances in computer programming, a few hundred thousand dollars is sufficient to prove-out concepts, produce prototypes and get the attention of Angel-investors and other capital sources that are capable of making much larger investments.

Equity crowdfunding was supposed to be legalized at the federal level with enactment in 2012 of the Jumpstart Our Business Startups (JOBS) Act. Prior to the JOBS Act, Depression-era laws restricted a businesses’ ability to solicit the public to raise capital without registering the offering with the then-newly created federal agency, the Securities and Exchange Commission. For 90 years, without registration, companies could only solicit investment from people with whom they had pre-existing relationships.

The JOBS Act was meant to change those rules. Unfortunately, balancing capital access with investor protection is not easy. The SEC has yet to issue final rules for crowdfunding under the JOBS Act (its present rules limit crowdfunding to high net worth (over $1 million) investors). In response to this delay, and in an effort to stimulate job creation, 18 states have rushed to enact their own intrastate crowdfunding laws. While well-intentioned, these laws do not adequately protect investors. With the exception of Maine, these states allow companies to raise capital directly from large numbers of unsophisticated investors without any review by the state securities regulators or by the SEC.

Given the relatively small sums of capital at stake in a crowdfunded offering, most entrepreneurs will treat equity crowdfunding as they do non-equity crowdfunding…they will not likely seek legal counsel or other professional advice about the detailed and transparent disclosures that are required to be made to investors in securities offerings.

Assemblymember Perea’s AB 722 contains several important investor protections, such as prohibiting unsolicited telephone calls to potential investors. But perhaps most importantly, AB 722 offers entrepreneurs the benefit of a review of their offering by state Department of Business Oversight attorneys who are experienced in securities law disclosures and the securities raising process.

This is an area where DBO involvement in the regulatory regime makes good sense. We are confident AB 722 represents a smart approach to capital access that will benefit entrepreneurs, the investing public and California’s economy.