provide Generally Accepted Accounting
Principles (GAAP) financial statements
for the two most recently completed fiscal
years (or shorter period since inception).
For issuers that intend to raise more
than $100,000 by crowdfunding, the
financial statements must be reviewed by
a Certified Public Accountant (CPA). In
some cases, issuers must provide audited
financial statements. This is an added cost
and administrative burden that doesn't
exist in other exempt offerings. Fourth,
issuers must file annual reports at the SEC
for a period of time following the offering.
Finally, we believe that many companies
will be hesitant to admit a large number
of unsophisticated investors as owners.
Based on these disadvantages, we believe
that Regulation CF will be unattractive to
many companies seeking capital.
available?
companies seeking equity capital in
excess of $500,000 will be best served by
utilizing the exemption provided by Rule
506 of Regulation D. Under this rule,
companies can raise an unlimited amount
of funds from an unlimited number of
accredited investors.
In 2013, Rule 506 was amended to
provide two different options for issuers.
Under Rule 506(b), which has been used
for decades, companies are prohibited
from using advertising or general
solicitation to seek investors. This means
that an unrestricted website open to the
public cannot be used to solicit investors.
Recently, however, the SEC recognized an
exception to this rule for online platforms
limit offers and sales to investors who
meet the accredited investor requirements
and other suitability requirements.
companies who desire to seek investors
online, but who don't wish to comply with
the verification requirements described
below.
Under new Rule 506(c), companies
may utilize advertising and general
solicitation including unrestricted, open
offerings online if the company is willing
to restrict all of its sales to accredited
investors and is willing to comply with
more burdensome requirements regarding
the verification of each investor's status as
an accredited investor.
of potential investors without the burdens
of the Regulation CF crowdfunding rules
described above.
online platforms utilized by
companies seeking capital?
of online platforms have sprung up
to assist companies in raising capital
online (again, as long as all investors are
accredited). General equity crowdfunding
platforms include Wealthforge, CircleUp,
Crowdfunder, AngelList and Portfolia.
In addition, a number of equity
crowdfunding platforms focused
on the real estate industry have
emerged. Examples include Fundrise,
RealtyShares, RealtyMogul, Prodigy
Network and RealCrowd. Each of these
platforms is different but each appears
to require that investors be accredited
and each appears to use a "cooling off
period" after registration before investors
of the platforms expressly state that the
platform is not designed to comply with
Regulation CF (also called Title III of
the JOBS Act). Some of these sites act
as a platform that matches issuers and
potential investors. Others focus only
on debt-like instruments such as senior
secured loans, mezzanine loans and
preferred equity. Finally, a number of the
platforms pool funds from investors into
a new LLC formed by the platform that
in turn invests into a separate LLC or
partnership that owns the property.
We expect to see the continued
development and growth of online
platforms that match investors with
companies seeking equity capital.
However, we believe that platforms
structured to comply with Rule 506
(instead of Regulation CF) will be more
useful to established companies.
came up with a tortured acronym for the Crowdfunding
portion of the JOBS Act: "Capital Raising Online While
Deterring Fraud and Unethical Non-Disclosure Act of
2012."
3 The definition of "accredited investor" can be found at
investor's total investment in all crowdfunding offerings
over a 12 month period may not exceed 10 percent of
the lesser of their annual income or net worth. For other
investors, total investment may not exceed the greater of
$2,000 or 5 percent of the lesser of their annual income
or net worth.
inc-080615-502.htm
Rule 506(c) to ensure that the content contains no
misstatements, omissions or other information that
could lead to a claim under the anti-fraud provisions of
federal and state securities laws. Companies that utilize
a broker-dealer must also comply with applicable FINRA
advertising guidelines.