All posts in Federal Law & Regulation

Crowdfunding v. SCOR

Crowdfunding v SCORThe word is now out – Title III equity crowdfunding under the JOBS Act is not going to work very well.  The problem?  It is going to be way too expensive.  Estimates to do an equity raise pursuant to Title III range between $140,000-$250,000 for a million dollar raise.

See these two posts on this topic:

Crowdsourcing a Title III Crowdfunding Cost Model

“Death by Expense” of Crowdfunding?

This is simply too steep for it to make any sense except for companies that have a business purpose other than just raising money to do such an offering (e.g., encouraging patronage by turning patrons into stockholders as well).

But here is something interesting to consider.  Years ago state and federal securities regulators constructed something called a Small Company Offering Registration, or a SCOR. If you read the description of a SCOR offering on the Washington State Department of Financial Institution’s website (see here:, you will notice something somewhat remarkable: it looks even better than a Title III equity crowdfunding.  Let me show you how they compare.

 Title III CrowdfundingSCOR (“Small Company Offering Registration”)
Fund raise limit$1M during any 12 months$1M during any 12 months
Required to use an intermediary?Yes (and look for a fee of about 8-10% of the gross proceeds to be paid to the intermediary).No.
Advertisement allowed?Yes, but subject to limitations.Yes. But there are no specific advertising limitations as there are in the draft crowdfunding regulations.
Investor limitationsYes; individual investor caps.No.  “Investors are not limited as to number or type, nor is there any restriction on the amount that may be sold to any one person.” See the following link:
Requirement of audited financials?Yes, if raising more than $500,000.No, if you only raise money from Washington residents.
Geographic availabilityNot limited to specific states in which the issuer has gone through the registration process.The geographic availability of a SCOR offering is limited to the states in which a company has gone through the registration process.

Will the SCOR come back into popularity now that Title III equity crowdfunding has not turned out as crowdfunding advocates had hoped? It is possible. It will be fun to watch and see. But let’s be honest – there are problems with SCOR offerings, which is the reason they are not very popular. What problems am I referring to? In general just the complexity of an offering that requires you to either register securities with state securities regulators (like a SCOR offering), or go through a difficult and burdensome process (like that described in Title III of the JOBS Act).

The truth is—Congress needs to revisit the crowdfunding provisions of the JOBS Act and simplify those provisions substantially. I am afraid Title III crowdfunding is going to go the way of SCOR—it will be scarcely used, and ultimately forgotten.

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“Demo Days” and General Solicitation

demo days and general solicitation1I’ve been writing an article on general solicitation, a long one, and doing a lot of research.  As part of that, I found the attached SEC No-Action letter that I wanted to share with everyone, because it directly hits on the question of whether “demo days” constitute general solicitation.

This has been a hot button issue for a lot of people.

You might recall that at the open meeting of the SEC’s Advisory Committee on Small and Emerging Companies held on Tuesday, September 17, 2013, that SEC staff refused to answer the question whether demo days constituted general solicitation.


(The key part starts at the 52:00 minute mark.)

Those who made comments to the SEC’s proposed Reg. D rules have also voiced alarm over the rules’ potentially adverse impact on demo days – a great thing in the startup ecosystem.  Mitch Kapor had this to say:

Practices that have worked well without incident for decades could suddenly become unintentional minefields for honest startups and sophisticated investors alike.  Demo days, where startups present to investors and press, will most certainly be called “general solicitation” by the law firms advising startups (and likely by SEC enforcement as well).  This means that some of the most high profile ways new startups raise money transparently may now cause those same startups to go out of business if the penalties are enforced.

Read the attached SEC No Action Letter, Michigan Growth Capital Symposium (May 4, 1995).  In the letter, the SEC concurs that presenting companies at the symposium won’t be deemed to have generally solicited. However, there are a number of key predicate facts that the SEC relies upon in reaching that conclusion, including “no specific financing details are a part of presentations made at the symposium and no private placement materials are distributed there…”

It is a helpful no-action letter, but I don’t think it will stop the debate.

Michigan Growth Capital Symposium SEC No-Action Letter (May 4, 1995)

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Securities Law 101

Securities Law 101If you are the founder of a startup, unless you plan to self-fund and never grant stock options or other types of compensatory equity awards, you will need to familiarize yourself with both federal and state securities laws.

The reason?  Because if you don’t comply with the securities laws you may significantly harm the value of your company (not to mention exposing you and your company to potential civil and criminal liability).

If you can’t find an exemption, or you don’t have the time or money to file all the applicable forms and pay the required fees, do not issue the securities.

I know, I know, you’d prefer to spend your time on matters more directly related to the immediate success of your business, like typing out your next line of code.  But here is the key for you to remember:  Any time your company issues stock or any time your company grants stock options or compensatory equity awards of any kind (stock bonuses, for example), your company either must comply with the registration requirements of federal and applicable state securities laws (which, for the most part, are overly complex, burdensome and expensive to comply with at the startup stage of a company’s existence) or will have to identify an applicable exemption from the registration requirements.

The table below lists securities exemptions private companies commonly use.  The table does not contain a complete list, but it might be helpful to you in understanding the most likely choices applicable to the typical emerging business.  You should always consult with a legal counsel before issuing securities.

Section 4(a)(2)The Securities Act of 1933, as amended, provides an exemption for “transactions by an issuer not involving any public offering.”  This is the exemption relied upon when founders come together to form a company in which they are each going to be actively involved.  See SEC Release No. 33-4552. (  If you issue securities based on Section 4(a)(2), you will also have to find a state law securities exemption.  This can require the filing of forms with various states, and the payment of fees.  See, e.g., California Form 25102(f).
Rule 506 of Regulation D

Rule 506 allows companies to raise an unlimited amount of money from “accredited investors.”  Effective September 23, 2013, there are now two types of offerings under Rule 506.  A non-generally solicited type of offering – referred to as a 506(b) offering, and a generally solicited offering – referred to as a Rule 506 (c) offering.  (“Accredited investors” generally are investors with either (i) a $1M net worth excluding primary residence (but taking into account debt on such residence in excess of the fair market value), or (ii) $200,000 of income for the last two years with the expectation of the same in the current year, or $300,000 with spouse.)  Generally solicited 506(c) offerings involve complications not present in non-generally solicited Rule 506(b) offerings.

One great thing about Rule 506 is that a security sold under Rule 506 is considered a federal “covered security,” meaning that state securities regulators cannot condition or merit review the issuance of the security. They can require the payment of a fee incident to the filing of the Form D, but they cannot otherwise impose limitations or conditions on the issuance. See

Rule 701Rule 701 is a federal securities law exemption for compensatory equity issuances.  For example, if you want to grant an employee or an independent contractor a stock option, you would typically rely on Rule 701 as your exemption.  Rule 701 has a number of qualifications, conditions and limitations.  See this blog post, What is Rule 701 and Do I Need to Worry About It?
Washington Equity Compensation ExemptionRCW 21.20.310(10) provides a Washington securities law exemption for, among other things, compensatory equity awards (i) issued pursuant to a plan that provides for the issuance of ISOs and NQOs and (ii) similar plans if the director of the DFI is notified in writing with a copy of the plan 30 days before offering the plan to employees.
California Equity Compensation ExemptionSee California Corporation Code 25102(o). See also this blog post: California Compensatory Equity Issuances.
Equity Crowdfunding Under Title III of the JOBS Act (Section 4(a)(6) offerings)Equity crowdfunding under the JOBS Act is not yet available.  The SEC has issued the proposed rules, but those rules won’t be final for some time.

I am sometimes told by a company that they issued securities under the “friends and family” offering. There is no such thing as a “friends and family” exemption.

If you are looking for a more comprehensive exemption table, albeit one with many exemptions inapplicable to startups, see the Exemption Table.

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