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Archive for for November, 2015

Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules (Part 3)

November 24, 2015

Intermediaries.

All crowdfunding must be done through an intermediary. No issuer can do crowdfunding directly without hiring one. The Act imposes various requirements on crowdfunding intermediaries.[1] For starters, intermediaries have to register with the SEC as a broker or as a funding portal and become a member of a national securities association.[2] Under the final rules, intermediaries would also have to provide risk disclosures or other investor education materials and ensure that each investor reviews such information and understands the risks.… Read the rest

An Example of How Securities Laws Can Be Broader than Most People Think: SEC Warns Investors of Fantasy Stock Trading Websites (Part 2)

November 21, 2015

In re Sand Hill Exchange.

In re Sand Hill Exchange involved two Silicon Valley entrepreneurs, Gerrit Hall and Elaine Ou, who operated a website called Sand Hill Exchange (“Sand Hill”).[1] The SEC said that the two wanted to create a business that would involve valuing private startup companies, especially companies operating in Silicon Valley, and initially experimented with several business models, including a variation of a “fantasy sports” league, a valuation contest, a valuation game, and so forth.[2] The SEC alleged that, starting around February 2015, Sand Hill started offering its new products that allowed users to fund their Sand Hill accounts with either dollars or bitcoins and then buy and sell contracts that referenced a private company, such as Uber, Pinterest, Snapchat, and Coinbase.… Read the rest

Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules (Part 2)

November 19, 2015

Disclosure Requirements.

Under the final rules, an issuer must file with the SEC and provide to the relevant intermediary and investors a Form C: Offering Statement, prior to the commencement of the offering of securities and amend the same to disclose any material changes, additions or updates.[1] The final rules set forth information that needs to be included in Form C, at times in great detail, as follows:

  • the name, legal status, physical address, and website of the issuer;
  • certain information about directors and officers;
  • information about beneficial owners;
  • description of the business and the anticipated business plan;
  • current number of employees;
  • discussion of the material factors that make the investment speculative or risky;
  • target offering amount and the deadline to reach the target, including a statement that if the sum of the investment commitments does not reach the target, no securities will be sold in the offering, investment commitment will be cancelled, and committed funds will be returned;
  • whether the issuer will accept investments in excess of the target offering amount and, if so, the maximum amount that the issuer will accept and how oversubscriptions will be allocated, such as on a pro-rata, first come-first served, or other basis;
  • a description of the purpose and intended use of the proceeds;
  • a description of the process to complete the transaction or cancel an investment commitment;
  • a statement that if an investor does not reconfirm his or her investment commitment after a material change is made to the offering, the investor’s commitment will be canceled and the committed funds will be returned;
  • the price to the public or the method for determining the price;
  • a description of the ownership and capital structure of the issuer (in some specified detail);
  • certain information about the intermediary;
  • a description of the intermediary’s financial interests in the transaction and in the issuer;
  • a description of any indebtedness of the issuer;
  • a description of exempt offerings conducted within the past three years;
  • a description of certain transactions involving the issuer;
  • a discussion of the issuer’s financial condition;
  • financial disclosure, in the form of either: (1) federal income tax returns and financial statements certified by the principal executive officer (for issuers offering $100,000 or less); (2) financial statements reviewed by an independent public accountant (for issuers offering $100,000 – $500,000); or (3) audited financial statements (for issuers offering over 500K);
  • any disqualifying event that occurred before the effective date of the rules;
  • updates regarding the progress of the issuer in meeting the target amount;
  • where on the issuer’s website investors will be able to find the issuer’s annual report and the date by which such report will be available on the website;
  • whether the issuer or any of its predecessors previously failed to comply with the ongoing reporting requirements; and
  • any other material information.
Read the rest

Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules

November 17, 2015

On October 30, 2015, the Securities and Exchange Commission (“SEC”) finally voted to adopt the final rules to implement Title III of the JOBS Act, popularly known as the “CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012)” (In this blog, we will just call it the Act.). See our previous blogs titled “SEC Votes To Adopt Federal Crowdfunding Rules” and “Crowdfunding: Is It Right for My Business?”.  The final rules and forms will be effective May 16, 2016, and the forms enabling funding portals to register with the SEC will be effective January 29, 2016. … Read the rest

LLC Owners, If You Owe Someone Money, Your Ownership of an LLC Might Not Be Protected: When It Comes to Single-Member LLCs, Charging Order May Not Be the Exclusive Remedy (Part 5)

November 14, 2015

Real Life Stories (Cases) on the Issue: Olmstead v. FTC (Florida).

Olmstead v. FTC, a non-bankruptcy case, dealt with the question as to whether a court may order judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment (not unlike the question of whether a debtor-member in bankruptcy transfers all of his or her interests in the LLC to the bankruptcy trustee).[1] In that case, the Federal Trade Commission (“FTC”) sued the defendants for unfair or deceptive trade practices involving an advance-fee credit card scam and obtained judgment for more than $10 million in restitution.… Read the rest

More Clarification on How To Raise Money Without Registration: SEC Issues Compliance and Disclosure Interpretations on Exempt Offerings (Part 4)

November 12, 2015

Intrastate Exemption.

We briefly touched on the concept of intrastate exemption in our previous blog series on crowdfunding (available here). As the name suggests, intrastate offerings are transactions that do not involve interstate commerce (hence the exemption, as being outside of the scope of the Securities Act of 1933). This is important because, to qualify for the intrastate offering exemption under Rule 147, the transaction must be “genuinely local in character,” i.e., local financing by local industries carried out through local investment.… Read the rest

An Example of How Securities Laws Can Be Broader than Most People Think: SEC Warns Investors of Fantasy Stock Trading Websites (Part 1)

November 10, 2015

On June 17, 2015, the Securities and Exchange Commission (“SEC”) issued an investor alert to warn investors about fantasy stock trading and other similar websites. For a full text of the alert, click here.

Although most people think that terms like “swap,” “security-based swap,” and “derivative” include only complicated financial instruments used by sophisticated financial institutions, the SEC explains that these terms are defined broadly and include any agreement, contract, or transaction whose value is based upon – or “derivative” of – the value or performance of some other financial product, event, or characteristic.… Read the rest

LLC Owners, If You Owe Someone Money, Your Ownership of an LLC Might Not Be Protected: When It Comes to Single-Member LLCs, Charging Order May Not Be the Exclusive Remedy (Part 4)

November 7, 2015

Real Life Stories (Cases) on the Issue: In re Modanlo (Delaware).

In Modanlo, Modanlo was the debtor and held a 100% ownership interest in NYSI, a Delaware single-member LLC.[1] Subsequently, the trustee filed a bankruptcy petition for NYSI and sought the court’s authorization to permit him to act as the manager of NYSI, among other things.[2] Modanlo objected, arguing that neither he nor the trustee as his successor had any authority to cause NYSI to do anything, including placing the LLC into a bankruptcy, once he filed his bankruptcy petition (causing him to cease being a member of NYSI and causing dissolution of NYSI).… Read the rest

All postings are intended to be planning tools to familiarize readers with some of the high-level issues discussed therein. No posting is intended to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.