Revenue Based Financing

Lighter CapitalWhy It Works For Growing Technology Companies

There are multiple options to funding to fuel your growing technology business, but what if you need to:

A) get funded fast,
B) keep you in control of your company and,
C) not risk your personal assets

Webinar: BJ Lackland, CEO of Lighter Capital, explains what revenue-based financing is, and why it is a more entrepreneur-friendly path to growth capital. Most startups need capital at some point to revitalize or fuel growth and it is always best to know your options. This webinar will explain:

  1. Who it’s designed for, and how to decide if it’s a good fit for your business.
  2. How it compares to other funding options such as banks, angels & VC’s.

Register

This webinar is free.

When: Tuesday, September 16th @ 10am PT

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Startup Public Policy with Congressman Adam Smith

Public PolicyCongressman Adam Smith (D-WA) will be joining us to discuss some of the very exciting state and federal public policy issues being bandied about both in Olympia and on Capital Hill in Washington D.C.

A skilled lawyer and a longtime public servant–starting as a WA State Senator at the young age of 25–Congressman Smith has taken an active role in the advocacy of small business in his district and across the U.S.

Currently there are many policies in the works that could benefit the startup community. His insights into how policy is written, some of the obstacles the new policies face and proposed changes in current rules may help those who are planning on crowdfunding, wondering about changes in compliance or just engaged in the future of the community as a whole.

Don’t miss this unique opportunity!

Register

When:
Friday, September 26, 2014
9:00 AM to 10:00 AM

Where:
Davis Wright Tremaine LLP
1201 Third Avenue, Suite 2200
Seattle, WA 98101

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Crowdlending for Businesses

Crowdlending

By Tabitha Creighton

Finding capital for a startup can be as tough as any other part business and sometimes emotionally draining, since everyone seems to have an opinion on your concept. Borrowing money from a bank can be just as harrowing, however, borrowing money from “the crowd” via the Internet is one of the fascinating new ways for businesses to raise capital.

Who is the Lender in Crowdlending?

It is way of raising capital that permits high net worth individuals (corporations, trusts, other institutions, etc) to invest in businesses through debt.

Lenders discover opportunities to invest through general solicitation over the Internet or some form of public forum (social media, investor wikis, and so-on).

Why is Crowdlending a Good Thing?

Crowdlending has numerous benefits. A few are:

  1. It is a new source of capital for businesses. Bank lending levels are still in absolute terms lower than they were in 2008.  This is particularly important for start-ups (of all kinds, not just tech companies), because start-ups create the most jobs out of any segment of business maturity.
  2. Crowdlending may create a source of capital for communities that have been underserved by traditional lending institutions.
  3. This form of raising capital can reduce the costs of borrowing.  Interest rates can be lower and so can fees.  Businesses can then use these savings to increase wages, improving sustainability and energy efficiency programs, provide better healthcare.

Okay…and the Risks?

Just like all other investment activities, crowdlending is risky for lenders. However, other forms of investment activity can be considered riskier due to the community aspect of the practice. Crowdlending typically means investing in a business in your community

Numerous researchers have published studies focusing on the relationship between community lending and default rates compared non-community bank lending.  Recently, a study by the Federal Reserve concluded that the risk of default appears lower in community-based lending institutions.

To determine credit-worthiness, Crowdlender utilize the same due diligence tools banks use such as Experian and Dun and Bradstreet.  Additionally, individual consumer lenders use the same servicing models as institutions; things like UCC Filings, collection activities, distressed asset sales are also all available now to.

As you can see, certainly there is risk, but one might argue that–compared to the stock markets–the ability to at least use a collection agency to partially recover an investment is better than what happened with the last financial meltdown.

Crowdlending vs. Crowdfunding

Crowdlending gives a community the opportunity to come together to lend money to a business to get it started, or to help bridge it through tough times in a more controlled and uniform manner.  People have been doing this for years, but this way there is a bridge between the relationship and the investment.

The Internet and the JOBS Act has just made this traditional way of raising community capital much more efficient.

What is the Potential for Crowdlending?

The industry is only months old, and additional regulations at the state and federal level may make it easier or harder for the industry to grow, depending on how things shake out.  So let your representatives know you want Crowdlending!

About the author: Tabitha Creighton is CEO and Co-founder of InvestNextDoor, a new Crowdlending marketplace that enables Main Street businesses to issue promissory notes to community-based investors, and provides back-office services to support businesses and investors throughout the borrowing and repayment lifecycle.  You can find her on Twitter @tabcreighton, on LinkedIn at www.linkedin.com/in/tabithacreighton, on email at [email protected], or at her marketplace at www.investnextdoor.com. 

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Intrastate Crowdfunding and the 499 Shareholder Problem

Intrastate CrowdfundingIn prior posts I have lamented the problems with the federal crowdfunding law.  The SEC is still behind on finalizing rules implementing the crowdfunding provisions of the JOBS Act. In the meantime, Washington State and a handful of other states have pushed forward with crowdfunding laws of their own that are meant to offer a less expensive and more practical and usable alternative to the federal crowdfunding law.

The Basis of State Crowdfunding – The Intrastate Exemption

State-level equity crowdfunding laws allow a company to equity crowdfund without having to comply with the federal crowdfunding law.  To accomplish this, states designed their equity crowdfunding laws that rely on the intrastate exemption from registration under the Securities Act of 1933 (the “33 Act”).

Section 3(a)(11) of the 33 Act exempts from registration any security that is part of an offering sold only to persons residing within a single state if the company is also doing business in that state.   So, as long as a company complies with the federal intrastate exemption, it only needs to be concerned with the state’s crowdfunding rules when conducting a crowdfunding offering; it won’t also have to comply with the federal crowdfunding law.

The 12(g) Issue

Although state crowdfunding laws make it easier for a company to crowdfund (so long as the company complies with the intrastate exemption), companies need to watch out for other federal laws that can trigger reporting requirements.  One of the more historically notorious rules is Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”).

Section 12(g) of the Exchange Act requires a company to register its securities with the SEC if the company has (A) more than $10 million in assets and (B) a class of securities that is held by either 2,000 persons or 500 persons who are not accredited investors.

So if a crowdfunded company has equity investments from 500 persons who are not accredited investors or from over 2000 persons (whether accredited or unaccredited), the company may be required to start filing expensive periodic reports with the SEC and go through the full expense and rigmarole of being a public company.

Some Recent History on 12(g)

Section 12(g) has also been called the “Facebook Rule” because of Facebook’s widely-reported on experience with the rule.

The JOBS Act made Section 12(g) was made less onerous:  Section 12(g) used to require that if a company had more than 500 shareholders of record (whether accredited or unaccredited) and over $10 million in assets, the company would need to register with the SEC (the idea being that there was an active trading market for a company with more than 500 shareholders and investors needed to be protected ).  The JOBS Act increased this threshold so that a company needs to register only if it has either 2,000 or more shareholders of record in total or 500 or more unaccredited shareholders and over $10 million in assets.

Even with the amendments from the JOBS Act, however, because the 500 threshold for unaccredited shareholders remains, this rule remains a potential barrier to companies hoping to access state-level equity crowdfunding statutes without having to comply with significant regulatory obligations and expense.

Does Federal Crowdfunding Have the Same Problem?

No, the federal crowdfunding exemption avoids the 12(g) problem: Based on the SEC’s proposed rules, persons holding securities issued under the federal crowdfunding exemption will be exempted from the calculation of the number of shareholders of record under 12(g). See page 275 and following of the proposed Crowdfunding rules.

Practical Advice and Suggestions

Below are some tips and advice for avoiding accidentally surpassing the 12(g) cap:

  • Don’t go anywhere near bringing into your company 500 non-accredited investors.
  • Include in your company’s organizational documents stock transfer restrictions.
  • Obviously, keep careful track of your stock records and share register.
  • Obtain and keep good documentation showing the accredited investor status of investors (if they are accredited).

Conclusion and Grounds for Optimism

Intrastate crowdfunding has hope. We need the SEC to fix its overly restrictive Compliance & Disclosure Interpretations. See The SEC Needs To Fix Its Intrastate Crowdfunding Guidance. And we may need the Congress to amend Section 12(g) to accommodate larger intrastate crowdfunding offerings. But, even if the SEC doesn’t back off its C&DIs, and Congress does nothing more to Section 12(g), state-level equity crowdfunding should still be helpful to companies.

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How Does Private Equity Develop M&A Investment Strategies?

M&A STRATEGIESPlease join us for the Pacific Rim M&A Institute’s Q3 session. This session will address questions such as:

  • How does private equity develop M&A investment strategies?
  • What is the investment life cycle of various different types of investments?
  • How does private equity think about and apply M&A?

The program will feature a panel discussion on the M&A process from the perspective of financial buyers of venture capital. The panel, moderated by Professor Jarrad Harford of the Foster School of Business at University of Washington, will include:

About the Pacific Rim M&A Institute

PRMAI was founded by Davis Wright Tremaine, the University of Washington School of Law, and the University of Washington Foster School of Business. The mission of PRMAI is to create best practices and interdisciplinary knowledge sharing in the M&A community. Join the conversation at prmai.com.

Register

When:
Thursday, Sept. 18th, 2014
7:00 – 8:00 AM Registration & Continental Breakfast
8:00 – 9:00 AM Panel Discussion

Where:
Davis Wright Tremaine LLP
1201 Third Avenue, Suite 2200
Seattle, WA 98101

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