Equity Crowdfunding, Securities Tokens
Equity Crowdfunding Lawyers
What Is Equity Crowdfunding?
Equity crowdfunding generally refers to three types of securities offerings in the U.S., all of which were born out of, or were enhanced by, the JOBS Act of 2012. These three types of equity crowdfunding are offerings of securities under Regulation CF (Title III of the JOBS Act), Rule 506(c) (Title II of the JOBS Act) and Regulation A (Title IV of the JOBS Act).
Regulation CF
Under Regulation CF, companies can raise up to $1,070,000 from both accredited and non-accredited investors. The Regulation CF offering process is relatively simple and inexpensive. A Form C offering statement is filed with the SEC and posted on a funding portal that is a FINRA member and registered with the SEC. The funding portal hosts the company’s offering page containing the Form C information, investment documents, company video, and company summary. The company may advertise and generally solicit investors to drive traffic to its offering page. Investors can make investments by ACH in amounts as little as $100 and acquire equity or debt securities. The entire process can take less than a month to launch and, typically, offerings remain open for about 60 days after launch.
Regulation D
Regulation D, Rule 506(c) offerings are only made to accredited investors, but unlike traditional private placements under Rule 506(b), companies may generally solicit and advertise their offerings. If advertising and general solicitation are used, the company must take steps to verify that each investor is accredited. This includes obtaining a “pro letter,” from the investor’s lawyer, accountant, advisor or broker indicating that the requisite due diligence was performed. Alternatively, a company may perform its own due diligence by obtaining the investor’s W-2, K-1, or tax return to verify income or an investor’s financial statements to verify net worth. No specific type of private placement memorandum is required for a Rule 506(c) offering and no offering circular is required to be filed with the SEC. Issuers can opt to engage a registered broker dealer who may act as placement agent or they may sell securities on their own. Many issuers create offering pages on their own website to facilitate sales of securities under Rule 506(c).
Regulation A
Regulation A (commonly referred to as Reg A+) is the third type of equity crowdfunding. Companies may sell securities to either accredited or non-accredited investors in a Regulation A offering. The company must file an offering statement on Form 1-A with the SEC before selling securities. This offering statement is reviewed by the SEC staff and the company must respond to any comments from the staff. The review process typically takes around 90 days. One benefit of Regulation A over a typical initial public offering is that there is no “quiet period.” Instead, companies may “test-the-waters” under Regulation A. This means that even before a company files its offering statement with the SEC it may let the public know that it plans to undertake a Regulation A offering and obtain non-binding indications of interest from potential investors to determine whether its proposed offering is likely to be a success. Another benefit of Tier 2 Regulation A offerings is that state securities laws are preempt. This means that there is no review at the state level although simple notice filings with state securities law administrators may be required.
Once a company completes a Regulation A offering, the securities are free-trading and the company may choose to have its securities quoted on the over-the-counter markets or, if it meets exchange requirements, on a national securities exchange like NASDAQ or NYSE. Companies that sell securities in a Regulation A offering are subject to ongoing reporting requirements, which is less burdensome than what is required when a company undertakes a traditional IPO.
Why You Need a Crowdfunding Attorney
If you want to start or grow your business through equity crowdfunding, you should work closely with an expert crowdfunding attorney. You must comply with SEC and Financial Industry Regulatory Authority (FINRA) regulations, as well as state and possibly foreign laws. We can help you with the following:
- Deal structuring and document preparation
- Drafting and review of offering materials, including advertisements and press releases
- Identification of the right crowdfunding platform (such as First Democracy VC (MicroVentures), SeedInvest, FlashFunders, EquityBender, Wefunder, NetCapital and others)
- Identifying potential investor groups, angel investors and market influencers
- Identifying placement agents and underwriters
- Advice regarding the Regulation CF, Rule 506(c) and Regulation A offering process and market conditions surrounding these types of offerings
- Referrals to marketing firms who assist with general solicitation and advertising
SEC regulations for businesses seeking crowdfunding can be complex. You must determine where your startup fits and how to comply with regulations. Instead of stumbling through compliance on your own, our attorneys can guide you down a familiar path to success. Because we have significant experience with businesses seeking alternative funding opportunities, we can quickly help you achieve your goals while you focus on moving your business operations forward.
Alan Gelband
President, Gelband & Company
I have known and have been a client of Lou Bevilacqua for 20 years. He is not only technically a great lawyer, but he is extremely client centered. He has always been a great sounding board for ideas and always willing to make an introduction or help in any way to serve our interests.
Startup Crowdfunding for Small Businesses
Globally, more than $2.5 billion has been raised through equity crowdfunding. The process of raising money to start a project has helped many small businesses avoid complex banking requirements for traditional loans as well as cut down funding time.
Equity financing comes in several different flavors and can be obtained from several different types of investors. For example, your emerging growth company can raise capital from the sale of common stock, series seed preferred stock, series A preferred stock, SAFE (simplified agreement for future equity) securities, or KISS (keep it simple securities). These securities may be sold to friends and family, angel investors, venture capital investors, institutions, high net worth individual investors or to the retail crowd in an equity crowdfunded offering or public offering. When offering equity in your company, you must clearly define investor rights and avoid common risks and pitfalls by crafting documents that accurately reflect the agreement among the parties.
Small businesses that utilize equity crowdfunding to obtain startup funds raise funds from an engaged community of investors. Entrepreneurs are able to maintain control of their companies while working with people who are excited to invest in promising businesses.
Crowdfunding for Business Expansion
Although many startups are using equity crowdfunding for initial fundraising, it can also be used for business expansion. Traditional methods of obtaining funds for expansion, like working with banks and venture capital firms, can be restrictive and result in the loss of control. Equity crowdfunding, on the other hand, provides new alternative funding opportunities.
Even as an established organization, you may want to open your business to investors through equity crowdfunding. If you have a project that would benefit from additional capital, you should consider equity crowdfunding.
A Crowdfunding Lawyer Can Help You
The equity crowdfunding arena can be complex, and it can be difficult to wade through a regulatory environment that is constantly evolving. Before offering equity in your business through Regulation CF, Rule 506(c) or Regulation A, you should consult with an experienced crowdfunding lawyer who can help you understand your legal options and guide you through the entire process. Our general counsel services expand far beyond initial funding. We can help you through expansion and growth as well.
Bevilacqua PLLC has worked with large and small businesses that seek funds through crowdfunding. Our equity crowdfunding attorneys are familiar with both traditional and innovative methods of raising capital. Call us today at (202) 869-0888 or contact us online to begin achieving success through crowdfunding.
