All posts tagged SEC

Crowdfunding : Key Decisions and Strategies

Crowdfunding  Key Decisions and Strategies.jpgCrowdfunding has become a reality in Washington State. This is a great opportunity for startups and entrepreneurs to finally get the funding they need to move forward with the support of many small contributors. But there are still strict SEC and State rules that must be abided by. That’s where a solid strategy comes in.

Join us to hear first hand from the experts regarding the key decisions you need to make and strategies you need to adopt to Crowdfund your next venture. The evening will start with 1 hour of networking for entrepreneurs, investors, advisors and the startup community, followed by 90 minutes of discussion and Q and A.

Panelists

  • Representative Cyrus Habib, 48th Legislative District
  • Burt Hamner, Founder and CEO Hydrobee
  • Casey Dilloway, Co-Founder Community Sourced Capital
  • Michael Luni Libes, Serial Entrepreneur and Founder Fledge Accelerator
  • Stephen McDonald, Attorney, Ryan, Swanson and Cleveland PLLC
  • Joe Wallin, Partner, Davis Wright Tremaine

Register Here

Date:      Wednesday, April 16th, 2014

Time:      5:30pm – 8pm

Where:      WeWork South Lake Union, 500 Yale Avenue North, Seattle, 98109

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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: http://www.dfi.wa.gov/sd/scor.htm), 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: http://www.dfi.wa.gov/sd/scor.htm
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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Beware, Forms D Are Public

Forms DBy Christina Chan & Joe Wallin

If you haven’t been through the process of raising money for a startup before, you may not be aware of this, but when you raise money from angels or VCs you are generally required to file a Form D with the SEC and state securities regulators.

You can find the Form D at the following link:  http://www.sec.gov/about/forms/formd.pdf

Now, in general, filing a Form D might not sound too bad.  After all, it is only 4 pages long before the instructions and continuation pages (and 11 pages with all of those included), and the disclosure required is not that onerous (e.g., names of officers and directors, amount to be raised, amount raised so far).  But there are a few rubs.

Forms dFirst, the fact of disclosure itself.  What if you and your co-founders are working this startup as your “side hustle”?  What if you all have day jobs at big companies around town and you don’t necessarily want your name on a public document filed with the SEC saying you are the executive officer of a startup?  Unfortunately, the form requires all directors and executive officers to be disclosed.

forms dSecond, there are deadlines for filing the Form D.  Under the current rules, the Form D is supposed to be filed with the SEC no later than 15 days after the date of the first sale of securities (even the IRS gives you 30 days to file an 83(b)).  The rules define “date of first sale” as follows:  “the date on which the first investor is irrevocably contractually committed to invest.  If the due date falls on a Saturday, Sunday or holiday, it is moved to the next business day.”  So, you have a relatively short timeline in which to file your Form D timely.  It is actually pretty easy for a company to miss this deadline.  The deadline is especially short because you can’t just file the form.  First, you have to get Edgar filing codes and that form must be notarized.  Obtaining the filing codes typically takes a couple of days in and of itself.

forms dThird, the form you file, the Form D, is a public filing.  Forms D used to be paper filed only.  But they are now required to be filed electronically and various media outlets monitor these filings to report on them.

The Press

You may be alarmed when, after filing your Form D, the press reports about your fundraising efforts, or an article is written about your fundraising efforts.  You may be even more alarmed when a reporter calls out of the blue and wants you to talk about your financing raising efforts for an article.

Be careful if your offering is ongoing because if you are conducting a non-generally solicited Rule 506(b) offering, you cannot comment on your offering to the press.  Even if the press reports about your Form D filing incorrectly, you do not want to call and correct them.

To protect your 506(b) status, the safest thing to do if contracted by a reporter who is asking questions about your offering is tell the reporter, “Due to SEC rules, I am unable to provide details at this time.” That refers them to the SEC regulation rather than delving further into your offering and may help clarify the reporter’s understanding of the regulations.

Christina Chan – Associate – DWT – Christina focuses on representing startups and emerging companies and mature public and private companies.

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