Archive for May, 2015

May 15, 2015 – On April 13, 2015 Governor Hickenlooper of Colorado signed the Colorado Crowdfunding Act. The Crowdfunding Act becomes law on August 5, 2015, and on May 7, 2015 Colorado Securities Commissioner Gerald Rome said that he anticipates the regulations will be final by that date so that Colorado businesses will be able to raise money in a crowdfunded offering beginning August 5, 2015. Under the Crowdfunding Act, offers can be made solely in Colorado, under the federal intrastate offering exemption. This means that the offers may be made only to Colorado residents, and only Colorado residents may invest. In addition, the offering must comply with the federal intrastate exemption, which means, among other things, ownership of the stock must not leave Colorado for 9-months after it is purchased.

I discussed the requirements for crowdfund offerings in Part 1 of this article; this Part 2 discusses the role and requirements for “intermediaries” who provide the Internet website for offerings.

Before the JOBS Act was passed three years ago, “crowdfunding” in the U.S. comprised only donations, or pre-sale purchase of goods or services, through websites such as gofundme, KickStarter, and indiegogo, and not the sale of securities. The JOBS Act required the SEC to establish a procedure for small securities offerings to a large number of investors, and in 2013 the SEC published proposed “crowd funding” rules, but they have not yet been approved and adopted. As a result states have begun to adopt their own laws and regulations to enable businesses to raise money by offering securities to “the crowd,” and now Colorado has followed suit.

In a private placement, the issuer may, and often does, sell its securities directly to investors. However, the issuer cannot sell its securities directly to the public in a crowdfund offering, for example, through its own website. In Colorado securities can be sold in a crowdfund offering by a registered broker-dealer, a registered sales representative (stockbroker) or an online “intermediary.”

An online intermediary is a website that is not a broker-dealer or stockbroker, and does not offer securities except for crowdfund offerings. Before offering online intermediary services, the intermediary must:

  1. File a statement or form with the Colorado Division of Securities disclosing the following:
    • identity, address, contact information, and names of the officers, directors, managers, or other persons who control the company;
    • a consent to service of process; and
    • an undertaking to provide investors the offering information required by the Crowdfunding Act.
  2. Comply with reporting and filing rules of the Securities Division. The rules have not been published yet, but the Crowdfunding Act says the Securities Commissioner may require intermediaries to file financial information, make and retain specified records for 5 years, and establish written supervisory procedures to prevent and detect violations of the Crowdfunding Act and rules. I anticipate the rules will include all of these requirements
  3. Maintain records of all its offers, which must be available to the Securities Division on request and subject to division examination at any time.
  4. Not have any ownership or financial interest in, or be affiliated with, any issuer it conducts offerings for.

Intermediaries cannot charge commissions on securities sold. Under both federal and state securities laws, only registered and regulated persons such as broker-dealers and stockbrokers can be paid commissions. Since intermediaries are not registered, they cannot be paid based on the amount of securities sold. Intermediaries have two fee options, and they can use one or a combination. They may charge (1) a fixed fee for each offering, or (2) a variable amount based on the length of time the securities are offered. As a result, intermediaries will have several fee options. For example:

• a flat fee unless the offering is not sold within a number of weeks, and then an additional fee for every week the offering remains open;
• or a fee for every week the offering remains open, but not less than a fixed amount, which will guaranty the intermediary a minimum fee even for offerings that sell out very quickly.

No Advertising?

An intermediary cannot promote a crowdfund offering – the Act says: “An on-line intermediary shall not identify, promote, or otherwise refer to any individual security offering by it in any advertising for or on behalf of the on-line intermediary.”

An issuer cannot promote its crowd fund offering either, because issuers are restricted to distributing a notice that can only state the company is conducting an offering, the name of the intermediary, and a link to the intermediary’s website.

Non-securities crowdfunding offers, like the recently extremely successful effort by Alan Tudyk and Nathan Fillion to raise funding for the series Con Man on indiegogo, can use social media to publicize the opportunity. Tudyk and Fillion used their extensive Twitter and facebook followers to gain momentum and attention for the Con Man fund raise. Companies selling securities in a crowd funded offering through an intermediary will not be able to undertake any similar advertising, promotion, or sales campaigns, and will instead have to rely on investors who follow intermediaries looking for investment opportunities.

Although the Colorado Crowdfunding Act has several advantages over the proposed SEC rules, it is still a very expensive option when compared to a traditional private placement, and only time will tell if it presents a viable funding option for companies who cannot raise the needed funds through traditional private placements.


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May 5, 2015 – On April 13, 2015 Governor Hickenlooper signed the Colorado Crowdfunding Act into law. The Crowdfunding Act becomes law 90 days after the current legislative session adjourns (around August 5, 2015). However, raising money under the Act will not be allowed until the Colorado Securities Commissioner adopts crowdfunding regulations, so there is not yet any crowdfunding in Colorado.

When the regulations are adopted, Colorado businesses will be able to raise money in a crowdfunded offering solely in Colorado, under the federal intrastate offering exemption. That means the offers may be made only to Colorado residents, and only Colorado residents may invest.

As of the date of this article, there is no U.S. federally allowed crowdfunding equity investment regime. On October 23, 2013 the SEC published proposed “crowd funding” rules, as required by the JOBs Act, and they have not yet been approved and adopted. “Crowdfunding” in the U.S. currently applies only to (1) donations, or pre-sale purchase of goods or services, through websites such as gofundme, KickStarter, indiegogo, etc., and does not involve sale of equity, or (2) state crowdfunding registration exemptions.

The crowdfunding rules proposed by the SEC are functionally limited and if adopted as proposed would have little utility. The SEC proposal has low fundraising limits, and very high costs, such as audited financial statements, meaning that the cost of crowdfunding would use up most of the funds raised, and would not be financially prudent in light of other, less expensive fund raising methods such as traditional private placements. To counter the vacuum on crowdfunding left by the SEC, several states have begun passing their own crowdfunding exemptions. Most of those rely on the intrastate offering exemption from federal registration requirements, allowing offers and sales only to residents of that state, though Maine’s recent rules allow investment from non-Maine residents. Texas, Indiana, Wisconsin, Washington, and Michigan are some of the states that have pending proposed, or adopted, intrastate crowdfunding rules. Click here for a rundown of state exemptions.

The Colorado Crowdfunding Act joins that list. Under the Colorado Act there is a firm $1 million limit on how much money an issuer may raise through crowdfunding in any 12-month period, unless the issuer has audited financial statements on file with the Colorado securities commissioner, and then the amount increases to $2 million.

There is no limit on how much accredited investors can buy in crowdfunding offers, but non-accredited investors cannot invest more than $5,000 in crowdfunding offers in any 12-month period. Individual accredited investors are people who have more than $1 million in assets (excluding the equity value in their home), or who make more than $200,000 a year, or $300,000 a year with their spouse.

Each crowdfunding offer must comply with relatively strict rules, when compared with the flexibility issuers have when conducting a private placement. The issuer must provide a disclosure document with certain required language (legends) to each potential investor. A disclosure document (commonly called an offering circular, offering memorandum, or prospectus), although highly recommended in almost all offerings, is not required by law for some private placements.

The offering must be a “minimum – maximum” offering; that is, all investor funds must be held in a bank escrow account until the minimum amount of investment is raised, and all sales in the offering must cease once the maximum is raised. Oversubscriptions are not allowed. The minimum cannot be less than 50% of the maximum. For example, an issuer who does not have audited financial statements will probably structure the offering for $1 million maximum, $500,000 minimum. This means the issuer will not have access to any of the money it is raising in the crowdfunding until it has raised $500,000, at which point the issuer may start withdrawing money from the escrow account.

At least 10 days before the offering starts, the issuer must:

1. file a form with the Colorado Securities Commissioner giving notice of the offering;
2. pay a fee (which has not yet been established);
3. file a copy of the issuer’s disclosure document (discussed below); and
4. file a copy of the issuer’s bank escrow agreement.

After the offering the issuer must provide quarterly reports to its owners, either directly or by posting on the intermediary’s website. The quarterly report must include executive compensation and management’s analysis of operations and financial condition, and must be filed with the Colorado Securities Commission.

In spite of these many requirements, which are similar to but less onerous than a registered public offering, the company also cannot advertise its crowdfund offering, except through a public statement saying only that it is conducting an offering and directing interested persons to the intermediary’s website.

Unlike in a private placement, the company cannot sell its shares directly to investors in a crowdfunding offer. Instead, the offering is done via (1) a licensed broker-dealer, (2) a licensed sales representative, or (3) on the Internet by a website authorized to make crowdfund offers, called an “intermediary.” Intermediaries are discussed in detail in Part 2 of this article.

Finally, the Colorado Crowdfunding Act specifies that a crowdfund offering “shall not be used in conjunction with any other [private placement] exemption…during the immediately preceding twelve-month period.” I can only speculate what that sentence means. It may mean that an issuer cannot conduct a crowdfund offering if they have conducted an exempt private placement in the preceding 12-months, or that an issuer cannot convert their private placement into a crowdfund offering. Hopefully it will be clarified in the rules to be issued by the Colorado Securities Commission.

In passing the Colorado Crowdfunding Act the legislature included this statement:

“Creating a Colorado crowdfunding option, with limitations to protect investors, will enable Colorado businesses to obtain capital, democratize venture capital formation, and facilitate investment by Colorado residents in Colorado start-ups, thereby promoting the formation and growth of local companies and the accompanying job creation.”

While the Colorado Crowdfunding Act increases the amount that can be raised in crowdfunding offers from that initially proposed by the SEC, it retains many of the filing and continuous reporting requirements that make the SEC crowdfunding proposal so unworkable. It remains to be seen whether crowdfunded equity offerings will be a useful or viable alternative to traditional private placements.

Part 2 of this article will discuss the requirements for “intermediaries.”

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