by Jossey PLLC | May 24, 2021 | Crowdfunding
thecrowdfundinglawyers.com founder Paul H Jossey joined Anthony Millin and Larry Bard of the Next startup law program at Shulman Rogers for a webinar presentation about equity crowdfunding. The presentation covered the rules, elements of successful raises, industry trends, and more.
Readers can view the presentation here: https://f.hubspotusercontent20.net/hubfs/7477171/NEXT%20Equity%20Crowdfunding%20Webinar%205_19.mp4?utm_medium=email&_hsmi=128699786&utm_content=128699786&utm_source=hs_email
Readers can view the slide presentation here: https://drive.google.com/file/d/1LsTCCmpSRo6pxn9mIWm-cXZvU9It5VJa/view?_hsmi=128699786
By Jossey PLLC via www.thecrowdfundinglawyers.com
by Jossey PLLC | May 24, 2021 | Crowdfunding
thecrowdfundinglawyers.com founder Paul H Jossey has joined the Competitive Enterprise Institute as an Adjunct Fellow for Cryptocurrencies and Crowdfunding. In this role, Mr. Jossey will research and publish on crypto, equity crowdfunding, alternative and decentralized finance, and the JOBS Act of 2012. His research will cover these topics in a range of formats including blog posts, op-eds, and policy papers.
His first blog post is here: https://cei.org/blog/lbry-cryptocurrency-prosecution-shows-secs-misplaced-priorities/
About CEI
Founded in 1984, the Competitive Enterprise Institute is widely recognized as a leading and effective advocate for freedom on a wide range of critical economic and regulatory policy issues. Each year, our research and analysis are cited thousands of times in major media outlets, relied upon by scholars and advocates, and used by members of Congress, executive branch officials, and other federal and state policymakers as the basis for reform actions and proposals. Our work provides policymakers with user-friendly data and analysis, as well as concrete, actionable reform proposals.
Readers can learn more about CEI here: https://cei.org/
by Jossey PLLC | May 2, 2021 | Crowdfunding
About this webinar
This webinar will cover all aspects of Regulation Crowdfunding (Reg CF) from the rules (including November 2020 amendments), choosing a financial instrument, portal economics, how the industry has evolved since its 2016 inception, and why it’s crucial for companies to hire legal representation to guide them through the process.
In this webinar, attendees will learn the following:
- Equity crowdfunding is a new and exciting way to decentralize capital raising, meld existing (or future) customers with investors, and distinguish successful companies in the marketplace.
- The industry has grown exponentially in the past year and new rules effective March 15, 2021, provide opportunities for companies to compliment or bypass more traditional capital-raising methods.
- But the process is complicated, it involves securities transactions worth potentially millions of dollars. Companies choosing the wrong portal or financial instrument can lock themselves into bad deals that thwart company progress.
- During and after a successful raise companies can encounter pitfalls with advertising rules and post-raise SEC compliance.
- Legal representation is crucial to guide companies through the process to ensure companies stay compliant and use this capital-raising tool to its maximum potential.
And much more…
Meet the speakers:
Anthony Millin
Founder and Chair, NEXT
Anthony Millin is a trusted legal and business advisor to startup and emerging growth companies. As a startup attorney, a serial entrepreneur, a venture capital partner, and the Chair of NEXT powered by Shulman Rogers, he brings a unique legal and business perspective to advising his clients. Anthony understands firsthand what it takes to start, scale and manage a company, to successfully prepare for and run a fund raising process, and to address the legal issues faced by a startup. This background provides him with valuable insights into the legal and business needs of his clients.
Lawrence Bard
Senior Attorney, NEXT
Larry Bard is a highly regarded business attorney whose clients depend on his guidance in corporate finance and securities law matters, including public and private offerings, venture capital transactions and other financing transactions. He advises companies on issues of corporate governance, business planning, securities law compliance, executive compensation, commercial contracts and complex joint ventures. Larry has completed several initial public offerings for companies in the mid-Atlantic region and has extensive experience in mergers and acquisitions.
Paul H. Jossey
Principal Attorney, Jossey PLLC
Paul H. Jossey is principal attorney at Jossey PLLC, which specializes in JOBS Act capital raises. He is also founder of thecrowdfundinglawyers.com, which provides legal commentary on cryptocurrencies, equity crowdfunding, and the Securities and Exchange Commission. He authored the law review article ‘Fixing the JOBS Act and Inviting the Tokenized Future, the Need for Congressional Action,’ published in February 2021. Finally, he recently accepted an Adjunct Fellowship with the Competitive Enterprise Institute, where he will research and publish on cryptocurrency and equity crowdfunding policy.
Register Here: https://marketing.next.law/next-equity-crowdfunding-webinar#webinar-form
by Jossey PLLC | Apr 7, 2021 | Crowdfunding
Equity crowdfunding (Reg CF) exploded in 2020 setting records for new investors and capital raised. New rules begun in March will mean even more records as companies can offer, and investors can devote, more per raise.
Source: Crowdfund Capital Advisors
But as more founders find Reg CF, many will err in portal choice. It’s understandable. Portals are the “face” of Reg CF, where companies pitch themselves to potential investors and interested backers peruse deals. They are offer value by facilitating the securities transaction and exposing companies to scores of potential investors.
But all portals are not created equal. For a variety of reasons many companies will choose the wrong one and leave money on the table. Experienced counsel can guide new companies through every step of the raise, including portal choice.
Here are eight reasons companies should retain a lawyer before choosing an equity crowdfunding portal.
- Portals secure their bottom line before founders’ top line.
- Different portals have different strengths, different fee structures, have different geographic profiles, have investor lists geared toward different industries, and place varying pre-raise scrutiny levels on companies.
- Naturally, their primary concern is attracting as many quality companies to their site as possible. Their main selling point is their investor list. Thus, the better companies they attract, the more investors those companies will provide them, the more their investor list grows.
- No portal is going tell a good company ‘You’re great but we aren’t the best portal for you because of X, Y, and Z.’ But a lawyer who understands each portal’s strengths and weaknesses will.
- Portals may have ‘Preferred Partners’ that may charge above market prices for ancillary services.
- Depending on a company’s offer limit, security type, and how much ‘crowd’ it can self-generate, it will need other professional services such as a CPA, transfer agent, or marketing.
- A portal may have side deals with these professional services that may charge above market rates. Novice companies may pay more for less.
- Experienced crowdfunding lawyers can provide warm introductions to portal representatives.
- An experienced lawyer should provide a personal introduction to portal representatives. This allows a company to bypass an impersonal website application and talk to portal staff before making a final decision.
- Good lawyers have their own networks of potential investors and signal boosts to help the raise.
- Lawyers should be as committed to the raise as the founders. That means sharing the raise to their networks, signal boosting updates, and raising awareness on social media. Equity crowdfunding is a team effort, everyone must contribute.
- Reg CF lawyers will discuss the intricacies of financial instruments with the founders and tailor it to fit the company and raise.
- Many founders choose a portal-provided template for the company’s financial instrument without understanding it. Portals sometimes prefer these premade templates because it standardizes raises.
- But what is easy for the portal is not necessarily best for the company. Many factors go into choosing which financial instrument is best and each has parts founders must separately consider or modify. One size does not fit all.
- Even on relatively straightforward instruments like Simple Agreements for Future Equity (SAFEs), calculations, valuations, and discount rates can vary widely. For instance, most founders won’t know the difference between a pre-money SAFE and a post-money SAFE, or which is more founder friendly. A portal representative is not going to explain it (if they even know themselves).
- Lawyers protect companies in the ‘Risk’ section.
- ‘Risks’ provided by portals are usually boilerplate that appear on almost all Form Cs. Portals will not spend the time and effort to get into specific risks the raise will encounter particular to the founder’s business or industry.
- Hopefully the raise and business succeed so what risk disclosures the Form C lists won’t matter. But the more specific and tailored to the raise the risk disclosures are the more protected the company is from future litigation should something go wrong.
- Experienced lawyers can draft suggested answers for investor questions during the raise and keep founders compliant both inside and outside the portal.
- An important part of Reg CF raises are questions potential investors ask founders on the portal page. Some questions are business-centric about revenue and future plans etc. These are best answered by founders. But many involve legal questions about securities, the Form C, and other complex topics where founder won’t be versed. Legal counsel can draft answers that keep founders compliant and stop them from saying (or promising) things that can produce liability.
- Lawyers will also review founder communications and marketing outside the portal to keep companies compliant with Reg CF’s myriad communication rules.
- Lawyers represent the founders, no one else. The company’s lawyer has one focus during the raise. They are the only ones in the process who’s only job is to protect the company’s interests. Good ones will not only keep founders compliant but maximize the raise. With potentially millions of dollars at stake, it pays to have someone in your corner.
As decentralized finance and equity crowdfunding explodes in popularity, founders should engage legal counsel to guide them through the process and allow them to focus on what matters most: getting capital to grow their business.
By Jossey PLLC via www.thecrowdfundinglawyers.com
by Jossey PLLC | Mar 15, 2021 | Crowdfunding, SEC
New SEC crowdfunding rules go live today. Some questioned whether the Biden Administration would try to kill the rules approved last November. But that did not happen, and now entrepreneurs and private investors can engage more freely, although further improvements await.
Crowdfund Capital Advisors summarized the new changes below:
Regulation Crowdfunding changes before and after
New SEC crowdfunding rules leave questions unanswered
Although new SEC crowdfunding rules vastly improve the status quo, questions remain. Foremost are how special purpose vehicle (SPV) rules will work. In theory, SPVs should ease messy cap table issues and other hurdles linked to unaccredited investors. But the Commission’s rule-heavy approach may kill this innovation before it blooms. At the least, the Commission’s crowdfunding-vehicle exception will force issuers into a cost-benefit analysis.
While supporting the crowdfunding-vehicle concept, critics panned the costs and complexity. Wefunder, the largest portal by volume, will not support it. As envisioned, one raise may require multiple crowdfunding vehicles. The SPV also saddles issuers with cost burdens, substantially increasing upfront outlays for an already expensive option. Even with proxies, the need to gain permission from security holders for transactions will burden administrators. There are also additional disclosure obligations and questions about who will manage the vehicle and distribute paperwork. These issues will hamper and may foreclose crowdfunding-vehicle use altogether.
The marketplace may have solved this ‘messy-cap dilemma’ on its own. Wefunder created a ‘custodian’ model that reduces Reg CF investors to one line. Other portals followed. The SEC has not publicly commented on the new structure, which may signal tacit approval.
SEC should further improve crowdfunding rules
As I have written in ‘Fixing the JOBS Act and Inviting the Tokenized Future, the Need for Congressional Action,’ many more fixes remain. These include:
- Regulate sales not offers.
- Exempt Secondary Trading for Regulation A+ and Regulation CF.
- Preempt state filing requirements and notice fees for Regulation A+ and Regulation Crowdfunding.
- Exempt Regulation A+ and Regulation Crowdfunding from the 12(g) Rule.
- Raise the Regulation A+ Offer Limit to $100 million.
- Raise the Regulation Crowdfunding Offer Limit to $20 million.
- Simplify or eliminate individual limits for Regulation A+ and Regulation Crowdfunding.
- Limit financial and reporting requirements for Regulation A+ and Regulation CF.
SEC is unlikely to pursue new crowdfunding improvements
Unfortunately, further improvements to the SEC’s crowdfunding rules are unlikely. The election brought a leadership change at the Commission. Gary Gensler will assume the chair once confirmed. Senators did not query Mr. Gensler about the new crowdfunding rules or the JOBS Act in general. But both Democrat-appointed Commissioners voted no. Acting Chair Allison Herren Lee and Commissioner Caroline Crenshaw released statements claiming the new rules lacked investor protection and were unnecessary. For what its worth, Mr. Gensler forcefully stated his investor-protection priorities during his confirmation hearings and his MIT tenure. This likely foretells his posture toward private-capital expansion.
Finally, the Commission has already declared priority shifts. On March 4 it announced an Enforcement Task Force Focused on Climate and ESG Issues. This followed a March 3 release of 2021 Examination Priorities, a February 5 announcement of a new Acting Deputy Director of Division of Enforcement, and a February 1 new Senior Policy Advisor for Climate and ESG.
Commissioners Hester Peirce and Elad Roisman have objected. The Republican-appointed duo questioned what the flurry of climate-and-ESG-focused moves may mean. They averred new standards in this highly charged space may only arise via Commission vote. Regardless, the PR blast assuredly ends momentum for further private-capital changes.
New SEC Crowdfunding Rules will improve entrepreneurship
The new SEC crowdfunding rules will open opportunities for investors and startups alike. The rules will help the already booming alternative-capital industry grow. While further boosts are now unlikely, the industry can blossom before future revisits.
By Jossey PLLC via www.thecrowdfundinglawyers.com
by Jossey PLLC | Feb 1, 2021 | Crowdfunding
Crowdfunded revenue share loans hold promise for certain businesses raising capital during the pandemic. The SEC considered banning these Reg CF instruments along with other nontraditional instruments like SAFEs during its recent review and Final Rules vote. The Commissioners, however, kept them in Reg CF raises. (The Biden Administration’s plenary freeze on regulatory actions means the Final Rules are not yet live.)
Once the Final Rules go live, these instruments could play a bigger role in Reg CF funding. They offer the benefits of simplicity, flexibility, and brand loyalty.
Rev shares emerged in the early 20th century to finance oil and gas exploration. Eventually they spread to entertainment and startups. But they were not part of public financing provided by capital markets, thus few investors could access them. This changed with the JOBS Act of 2012 and Reg CF which went live in 2016. Now everyone, not just wealthy financiers, can participate in such projects and see immediate returns.
Brick-and-mortar businesses could benefit from crowdfunded revenue share loans
Crowdfunded revenue share loans are acutely suited for brick-and-mortar stores like restaurants, breweries, and bars. They also hold promise for other retail-based industries and subscription-based services.
How crowdfunded revenue share loans work
Like the name states, crowdfunded revenue share loans are crowdfunded loans (notes). Loyal customers and brand ambassadors will purchase these instruments first and hopefully spread the word. The company (issuer) pays a percentage of its top-line revenue to noteholders until it repays the debt. Payments vary with revenue—when revenue rises the issuer pays more and vice versa. If the issuer has not repaid the loan by the maturity date it becomes fully due and payable. Here are some standard loan terms:
Source: Localstake.com
Crowdfunded revenue share loans benefit both issuers and investors
Many advantages exist for issuers and noteholders using rev shares. First, they are easy to understand. Retail investors and loyal customers will buy these loans. This cohort will likely be unfamiliar with equity investments, for instance the terms, rights, and responsibilities of SAFEs or preferred stock. Issuers choosing these instruments are likely to have loyal and local followings and aren’t aiming for mass adoption where equity works better. Retail investors will see a return almost immediately and have the satisfaction of helping local entrepreneurs and boosting a local economy. Issuers avoid the complication of messy capitalization tables.
According to a 2018 study, issuers have more success with crowdfunded revenue share loans than other types of loans like bank or SBA loans. Bank loans will have higher interest rates and a greater chance bankruptcy. SBA loans are very selective, and processing takes many months.
Issuers can couple these rev shares with perquisites like with Kickstarter campaigns. Companies can provide T-shirts or other swag, exclusive deals, private receptions, or anything thematic to the business and raise. This will further strengthen their relationship and brand loyalty with customers.
Issuers and investors should consult professionals before investing
Of course, this blog post is not investment advice. As with any investment risks abound. The business could fail and default on the loans. Investors get no say in how the business operations. Issuers must accommodate potentially dozens (even hundreds) of note holders that may complicate accounting and tax structures.
Crowdfunded revenue share loans will not work for all companies, but it can be great for some. Congress designed Reg CF to help the millions of businesses ignored by venture capital. These instruments could further help them whilst strengthening brand loyalty. Provided the Biden Administration doesn’t unnecessarily delay the Final Rules, these rev shares could emerge as a Reg CF force.
By Jossey PLLC via www.thecrowdfundinglawyers.com
