Crowdfunding and Fund Raising

Chambliss Startup Group Sponsors “Will This Float” Pitch Event

Posted by on Dec 9, 2015 in Crowdfunding and Fund Raising

The Company Lab (CO.LAB), based in Chattanoooga, TN, will host “Will This Float?” at the Revelry Room on Thursday, December 10, 2015 from 6:00pm to 10:00 pm. “Will This Float?” is an annual business competition where startups and entrepreneurs have the chance to pitch their ideas to judges and the Chattanooga community for the chance to win cash prizes. The overall winner will take $1,000 home and a $500 voucher from Forum Sherpas. Two other finalists will receive $250 each. Our Chambliss Startup Group is pleased to offer 10 hours of free business services to the three winners. For more information about the event, please check out the Times Free Press and Nooga.com articles or visit the “Will This Float?” event page. Also, you can read about the overall winner Undaground here. *Purchase event tickets...

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FINALLY… SEC Finalizes Crowdfunding Rules

Posted by on Nov 23, 2015 in Crowdfunding and Fund Raising

FINALLY… SEC Finalizes Crowdfunding Rules On October 30, 2015, the U.S. Securities Exchange Commission (“SEC”) adopted final rules which will allow companies to offer and sell equity and securities through a crowdfunding exemption in the Jumpstart Our Businesses Act (“JOBS Act”). These rules will likely become effective in May 2016. The crowdfunding exemption allows eligible companies to raise capital online by selling equity and other securities. Until these rules go into effect, investors need to have an annual income exceeding $200,000 or a net worth of least $1 million to invest in the equity or securities of companies. The Following Rules Apply to an Offering Company o May raise up to $1 million through the crowdfunding exemption in any 12-month period. o Companies engaging in crowdfunding offerings will be required to file certain information and disclosures with the SEC and provide such information and disclosures to investors. o Required information and disclosures include:         information about officers, directors and certain owners of the company;          a description of the company’s business and the intended use of proceeds to be realized from the offering;         information about the company’s financial condition;          the price of the offering, the target offering amount, and the deadline to reach the target offering amount;          o information about certain related-party transactions;          o audited or reviewed financial statements of the company; and          o the company’s recent tax returns. The Following Rules Apply to Crowdfunding Investors o If annual income and net worth is less than $100,000: may invest the greater of (i) $2,000, or (ii) 5% of the investor’s annual income or net worth in a single offering. o If annual income or net worth is equal to or greater than $100,000: may invest the greater of 10% of the investor’s annual income or net worth in a single offering. o The maximum amount of investment for any investor in any 12-month period is $100,000. Disqualified Companies o Certain companies are not eligible to participate under the crowdfunding exemption, including foreign companies, public companies that already report to the SEC, and companies with no specific business plan. Companies Must Use Registered Portals o Crowdfunding must take place exclusively online through an SEC-registered intermediary, either a broker-dealer or a funding portal. Transfer Restrictions Apply to Securities Purchased Via Crowdfunding o As a general matter, any security purchased through crowdfunding may not be resold for one year. o There are exceptions to this rule, however, including transfers (i) to family members, (ii) to accredited investors or (iii) at a SEC-registered public...

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Crowdfunding Alternatives–Part 3(C): Broker-Dealer Model

Posted by on Aug 13, 2013 in Crowdfunding and Fund Raising

We’re wrapping up the series discussion on crowdfunding because I’d like to move on to other business issues that I’ve been encountering lately (stay tuned later this week for how to limit liability in a contract), but before we move on, there’s another accredited crowdfunding platform that we should discuss briefly because it is a counterpart to the investment fund model that we discussed last week: The Broker-Dealer Model: The broker-dealer model is another type of accredited crowdfunding platform in which a company partners with a registered broker-dealer who can accept transaction-based compensation (*i.e. the broker-dealer partner can receive a percentage of funds raised in each offering). The typical transaction involves the sale of securities in the startup company itself, rather than an investment fund which serves as a middleman (as in the investment fund model). The securities in the startup company are sold directly to accredited investors under Rule 506 of Regulation D. One of the obvious downsides of the broker-dealer model is the need to find the right broker-dealer who can serve as a partner because the profitability of the platform depends to a large degree on making sure the broker-dealer’s transaction costs and experience level are enough to originate and close on the right amount of offerings to be profitable. Another downside of accredited crowdfunding platforms, whether using the investment fund model that we discussed last time or the broker-dealer model, is that the offerings are limited to accredited investors which significantly reduces the number of eligible investors. This is one reason why the startup world is anxiously awaiting the final rules concerning the exemption in Title III of the JOBS Act. As we wrap up our crowdfunding discussion, please note that there are many other methods for startup companies to raise funds, and they all have advantages and disadvantages. If you’d like to know more about crowdfunding or any other funding platform, please contact an attorney who can help answer your...

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Crowdfunding Part 3(B): Alternatives— Accredited Crowdfunding Platform #1

Posted by on Aug 9, 2013 in Crowdfunding and Fund Raising

We’ve been talking about crowdfunding for a while now, and we’ve started discussing alternatives to the crowdfunding exemption in Title III of the JOBS Act because that exemption is technically not final yet.  Last time we talked about rewards-based crowdfunding, which is analogous to the pre-sale of goods and services and does not require any exemption from the registration requirements of the Securities Act because it does not involve the offer or sale of securities. Another alternative is an accredited crowdfunding platform, which, unlike rewards-based crowdfunding, is a crowdfunding platform that actually does facilitate offers and sales of securities and therefore does require more regulatory compliance. Accredited crowdfunding platforms, (or “Regulation D crowdfunding platforms”) are only open to investors who qualify as “accredited investors” under Rule 501 of Regulation D of the Securities Act. There are 2 main types of accredited crowdfunding platforms: (1) the investment fund model and (2) the broker-dealer model, but we’ll only talk about one of them today: Accredited Crowdfunding Platform #1: The Investment Fund Model The investment fund model is an accredited crowdfunding platform that typically targets high-growth startup companies who would otherwise try to go the traditional venture capital (“VC”) route. Companies that adopt the investment fund model usually form and advise other investment funds which make investments in different startup companies. These other investment funds will then make offerings of their own equity interests to accredited investors in unregistered offerings that fall under the Regulation D safe harbor (Rule 506). Thus, the companies who adopt the investment fund model of crowdfunding intend to act as investment advisors, meaning that they will have to register as such under applicable law (e.g. Investment Advisors Act of 1940) or otherwise qualify for an exemption (e.g. Dodd-Frank Act exemption for VC fund advisors). Being an investment advisor means that these companies have the right to receive a profit share upon the termination of the investment funds that they advise; however they are not permitted to accept “transaction-based compensation,” which would require them to register as a broker-dealer and comply with those applicable regulations. There are a couple of companies employing this investment model that are worth noting: FundersClub and AngelList are online platforms that raise funds and advise startup companies in this manner. If this sounds confusing, maybe it is. Next time we’ll talk about the broker-dealer model, but in the meantime, please talk to an attorney if you have any questions or are interested in raising funds for your...

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Crowdfunding PART 3(A)– Alternatives: Rewards-Based Crowdfunding

Posted by on Aug 5, 2013 in Crowdfunding and Fund Raising

The prior 2 crowdfunding discussions focused on what crowdfunding is under Title III of the JOBS Act and its potential disadvantages should the SEC and FINRA ever get around to promulgating the applicable final rules… Today the discussion will focus on what, if any, alternative crowdfunding opportunities are out there, given you can’t yet rely on the exemption in Title III of the JOBS Act to raise capital from the general public. Alternative Crowdfunding Opportunities– REWARDS-BASED CROWDFUNDING Rewards-based crowdfunding is perhaps the most familiar form of crowdfunding and does not require an exemption from the SEC’s registration requirements of typical offerings because there is no “offer” or “sale” of securities as those concepts are defined in applicable Securities laws. Under the rewards-based crowdfunding method, a company or an individual can raise funding for a project by promising individual donors that they will receive some specific reward from the project when the project is complete. The classic example of a rewards-based crowdfunding method is an author or a filmmaker trying to raise money for a book or a documentary by promising those who donate that they will receive a free copy.  Thus, the rewards-based crowdfunding method is analogous to the pre-sale of goods and services. There are many companies who have used rewards-based crowdfunding platforms to raise or help companies raise capital, including Kickstarter, Inc. and Indiegogo, Inc., and the popularity of this fundraising platform continues to grow.  Kickstarter, for example, has helped raised over $732 million and successfully funded more than 46,000 different creative projects since its inception in 2009 .  (Check it out: www.kickstarter.com) For more information on other crowdfunding alternatives to the delayed Title III exemption in the JOBS Act stay tuned for Crowdfunding PART 3(B). Also, if you’re interested in learning more about how to raise capital for your company or project, please get with an attorney who can help bring some of this to...

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Crowdfunding 101— PART 2: Potential Disadvantages

Posted by on Jul 30, 2013 in Crowdfunding and Fund Raising

Ok, so last time in Part 1 we went over what crowdfunding is as contemplated by Title III of the JOBS Act and how crowdfunding can be useful.  We also discussed how true JOBS Act crowdfunding is not really an option right now until the SEC and FINRA adopt final rules clarfying the scope of crowdfunding potential. Before getting into the potential disadvantages of crowdfunding should the final rules be adopted any time during our lifetime, we would like to emphasize how late the SEC and FINRA are in their rulemaking efforts regarding crowdfunding possibilities: Given that it is already almost August 2013, the government is woefully behind in its end-of-2012 deadline for promulgation of crowdfunding rules– and, despite the potential disadvantages of the JOBS Act crowdfunding methods, much of the startup and entrepreneurial world is frustrated with the (not-so-atypical) regulatory clog. Now that the regulatory rant is over, we can go over the potential disadvantages of crowdfunding (despite the many potential advantages, there are many concerns): Potential Disadvantages of Title III Crowdfunding We can boil the potential disadvantagse of Title III crowdfunding down to: Cost and Effort–  Many practitioners fear that offerings relying on the Title III crowdfunding exemption will be too costly and time-consuming for the very companies and investors the exemption purports to target.   EXAMPLE: 1) Disclosures:  Title III of the JOBS Act requires issuers to make an inordinate amount of disclosures.  Issuers will have to provide detailed descriptions of their officers and directors, ownership and capital structure, business and financial condition (including financial statements–some of which may need to be audited). 2) Liability:  Issuers may be held liable for material misstatements or omissions in their oral and/or written statements in a manner that is not too different from the potential liability arising out of a traditional SEC registered offering. 3) Attorneys’ and Professionals’ Fees:  In order to comply with the requisite level of disclosures, many practitioners believe that a substantial amount of legal and accounting help will be required and that a large portion of the funds raised will end up going to pay the fees associated with such services. 4) All or Nothing:  The issuer in a Title III crowdfunding offering must set a fundraising goal and, unless the company raises that specific amount (or more) from investor commitments, no securities can be sold.  This raises the potential risk that an issuing company can incur a significant amount of up front costs for absolutely no reason. Given the uncertainty surrounding the regulatory requirements of Title III crowdfunding, as well as the potential costs and burdens of compliance once applicable final rules are promulgated, alternative crowdfunding platforms have developed and will likely continue to do so in the future. For more information on alternatives to Title III crowdfunding, stay tuned for PART 3 of the Crowdfunding 101 series, and, as always, if you have any questions concerning raising capital, crowdfunding or otherwise, please seek the advice of an attorney who can take you beyond the 101 series into the practical world of...

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