The Dangers of Influencer or Celebrity Marketing When Selling Securities Online

Looks like my AI image generator is improving. No extra hands or fingers this time. All words spelled correctly. I'm so proud of my AI for growing up!.

I published a recent article that discussed the basics of marketing securities for Reg A, Reg CF and Reg D, Rule 506(c) online. I highlighted how marketing securities online is far different from marketing most other products and services because securities laws add additional roadblocks to overcome. We are all bombarded by ads online every day, but those marketing securities for private companies under the JOBS Act have to be extremely careful to not only follow "false advertising" laws from the Federal Trade Commission and state advertising regulators, but also the very unforgiving world of securities laws that ban false and misleading statements.

This follow-up article explores one specific area that can be very problematic for those marketing private company securities: the use of celebrities or influencers to promote your securities offering.  This is an area you must approach with caution for many reasons, the least of which is that this kind of marketing can be very high profile and quickly get on the radar of securities regulators and others.

 Need some examples? Here are some where the SEC got involved in celebrities promoting crypto offerings that provide a lot of guidance as to how they would handle a similar celebrity endorsement of an online securities offering:

• In 2023, the SEC filed charges against a handful of celebrities including Lindsay Lohan, Jake Paul and Ne-Yo for violating laws for promoting certain cryptocurrencies without disclosing they were being compensated for doing so.

• The SEC fined one of the most famous individuals in the world, Kim Kardashian more than. $1 million for failing to disclose that she was being compensated to promote EMAX tokens in her Instagram posts and banned her from promoting crypto asset securities for three years.

• Also related to EMAX, former NBA star Paul Pierce paid $1.4M to settle SEC charges for touting the tokens on social media without disclosing the $244,000 payment he received for the promotion and for making false and misleading promotional statements about the crypto asset.

 No, they didn't go to prison, but it did cost them a lot of money.

 While these were all penalties against the celebrity in crypto offerings, the reality is the SEC went after these celebrities to prove a point not just in the crypto world, but also to send a message that applies to everyone who uses celebrities and influencers to promote anything that is related to the securities industry.

 So let’s talk about some specific scenarios that your company could find itself facing.

 If a Celebrity or Influencer Promotes Your Securities Offering On Their Own, You’re Probably Okay

 I emphasize the word “probably” in that last sentence.

Then again, the chances of a huge celebrity or influencer randomly deciding to promote your securities offering on their own and without being paid are about the same as the chances of Santa Claus flying around with a banner towed behind his sleigh that says, “The North Pole Loves This Stock – Buy It Now To Stay Off My Naughty List.”

AI Santa seems to have way too many reindeer and his banner is defying all laws of physics, but you get the point.

There is a huge difference between a celebrity or influencer your company pays or otherwise compensates to promote your investment offerings, and those who do so on their own without compensation. If a celebrity or influencer promotes your company’s securities offering on their own with no compensation or ties to your company, you have no control over what they say and normally if they are completely unrelated to your company you do not have a duty to intervene. There are some exceptions, but basically you are generally safe from the securities regulators if your company is completely detached from whatever a celebrity or influencer posts on their own social media channels.

Remember, securities regulators and others who might want to cause problems for your company can generally only punish you for something you have control over. That’s not to say they won’t try to do something based on a celebrity or influencer posting you didn’t pay for if it’s so blatantly false and misleading that you should have known about it and should have done something. I’m not saying they would be successful coming after you. But if you know as a company there is something so clearly false and misleading that has been seen by millions of people, it could cost you a lot of money in legal fees just to defend the allegation that you should have done something in response.

Here is a made-up extreme example. Let’s say the most famous celebrity in the United States with 200,000,000 followers on social media posts a video saying “I just bought Company X’s stock at this link. I know from someone on the inside that they are about to get a government contract worth billions and they are going to hold an IPO in 6 months. This is the greatest investment opportunity I have ever seen. I’m certain my $500 investment is going to be worth $1,000,000,000 in less than a year. Everyone should go and buy this stock right now before it all sells out. You don’t want to miss out on being a billionaire in just a few months!” 

I think it would be virtually impossible to have your company not hear from somebody, somewhere, that this post existed. Let’s also assume that what the celebrity said is completely made up. I wouldn’t say you have an absolute affirmative duty to reach out and ask the celebrity to take down the post and to establish a paper trail that you did not pay for or participate in the post in any way, but it sure seems like making that effort to reach out would come back later to help your company if someone comes knocking and asking questions. And, at the very least, you will likely have to address comments on your own social media, or if you were tagged in the post, comments on the celebrity’s social media. Setting the record straight is something that you should consider doing in those areas also.

If Your Company Pays or Otherwise Compensates A Celebrity or Influencer, There Are Many Legal Considerations

It is also a totally different story if the celebrity or influencer is being compensated (not just money – any compensation) by your company or is making the post in conjunction with your company in some manner even if not compensated. In that case, your company has a duty to be sure the celebrity or influencer does not say anything false or misleading and that they follow all of the rules of marketing securities.

If using paid or otherwise compensated celebrities or influencers, one of the biggest issues is full disclosure of the connection to your company and of any compensation. If your company is compensating the celebrity or influencer for their posts and endorsements in any way (not just money – any compensation) then extra care must be taken to (a) disclose that they are being compensated and the amount of the compensation in the post and (b) not do so in a misleading way.

For example, an influencer who is not an investor should not talk about “why I invested” and a celebrity who was paid to post on their social media or appear in marketing should not be made to look like they are doing this just because they love your company. Full and fair disclosure of the compensation arrangement is the best way to avoid problems here. Keep in mind – these types of posts and endorsements are very high profile and can catch the eyes of federal or state regulators very easily – so always err on the side of caution and avoid even the appearance of being misleading.

The primary federal securities law that applies here is Section 17(b) of the Securities Act of 1933. Even though this law was written 90 years ago to help consumers not be swayed by “tip sheets” from paid stock promoters well before television and the internet existed, it is still applicable and enforced by the SEC for all forms of “modern” marketing and advertising of securities. This law says:

It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.  (emphasis added)

Section 17(b) is not a very forgiving law. There isn’t any wiggle room. Look at the words above that I italicized. “Unlawful” means a crime and also can lead to civil liability. “Any means of communication” means literally everything from a spoken conversation to an email, from a highway billboard to a social media post, and from a text message to a Super Bowl commercial.  “Or circulate” means to pass along the message – meaning even if you repost something or use a quote in an ad – putting you and the company on the hook if you repurpose someone else’s post or comment without disclosing the compensation. “For a consideration received or to be received, directly or indirectly” leaves no space to pay a third party who then pays someone else for the post (you can’t hire a social media company who then pays an influencer and then claim you did not compensate the influencer). “Without fully disclosing ... such consideration and the amount thereof” means you not only need to make it clear that the post is for compensation, but you also must disclose the amount you paid.

I have seen people try to find ways around these disclosures and I emphasize strongly that no company should take that risk. You can’t just have an influencer add #Paid to their post and get away with it, for example. You can’t just post generic language like “Celebrity X may have been compensated for this post” or anything so vague. This is a place where working with your legal counsel to craft the disclosures in a compliant manner is very important. Technically, something like this is a bare minimum starting point for what a post must contain to disclose the compensation – and you can imagine the buzzkill such legalese will do for a promotional post: “Celebrity X is compensated by ABC Corp. for publicizing its securities offering. The compensation is (explain amount and payment terms) and Celebrity X has been paid $_____ to date for the services provided.”

 You Also Have To Worry About The FTC and State Regulators

 This also gets us into another area. You not only have to be careful about the SEC and all the state securities regulators, but you also need to worry about the FTC (Federal Trade Commission) and state regulators who control deceptive advertising. The FTC has quite a few publications and videos available about deceptive advertising and social media influencer marketing. Two in particular that provide some helpful guidance are Disclosures 101 For Social Media Influencers and the “Advice for Influencers” short videos published by the FTC available on YouTube, and linked directly on the FTC website at this page.

Err On The Side Of Full Disclosure At All Times

It’s not just money and compensation that require disclosure. You can’t have your first cousin Brad Pitt promote your stock offering for free because of your close family relationship without disclosing that family relationship. If any financial, employment, personal or family relationship exists with your company, an influencer or celebrity must clearly and conspicuously disclose the relationship.

Always err on the side of full disclosure. Here are a few other examples of what the FTC and SEC and others may look at to determine compliance in this area that you may not have thought would be something you need to consider:

• Each disclosure should appear close to the claim it modifies (the influencer’s content), and should be in a location where people are likely to see it.

• The font color and font size of the disclosure should make it easy to read.

• When disclosure is required, it should be clear and conspicuous on all devices and platforms on which consumers will view the content. If disclosure cannot be made clearly and conspicuously on a device or platform, that device or platform should not be used.

• All opinions or claims made in the advertisements (the posts, videos, or other content shared by the influencer) must have a reasonable basis to support each claim. Anything stated as a “fact” must be 100% true and verifiable.

• This applies not only to what the influencer says or writes, but also to what is implied – what a reasonable consumer may infer from the content, even if the influencer and your company did not intend to convey such claims.

It makes sense to have your company’s marketing and legal team review all public communications from paid influencers and celebrities and establish a review system before any posts or marketing occurs.  I know from experience that influencers and celebrities may or may not pay attention to the guidance your company provides to them, and it is your company’s ultimate responsibility to be sure no false or misleading advertising occurs when paying people to market your securities. If using influencers or celebrities, your company must monitor influencer content for clear and conspicuous disclosures and for compliance with legal requirements.

Beware Of One More Thing...

If your company or any of its principals comment on or “Likes” online postings, or reposts the celebrity or influencer posting on your company’s own social media channels, or in any way reuses the celebrity or influencer post to market your securities, then your company “owns” whatever the celebrity or influencer has said and your company can be held responsible for those statements if they are false or misleading or otherwise in violation of securities laws.

#regulationA #RegA #RegCF #regulationcrowdfunding #equitycrowdfunding  #crowdfunding #RegAPlus #funding #capitalraise #fintech #JOBSAct #capitalraise #smallbusiness #smallbusinesstips #securities #securitieslaw #equity #StartupLife #startups #marketing #securitiesfraud #marketingsecurities #generalsolicitation #506(c) #regD #regulationD

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Marketing Securities Online Is Different From Marketing Everything Else: Three Basic Rules To Follow To Avoid Trouble

I’m not sure that my AI image generator could possibly make a creepier person than this guy

Since the advent of the intertubes, we live in a world of constantly being marketed to. Back in the “good old days” it used to just be TV and radio commercials, junk mail in the mailbox and ads in newspapers and magazines. You could easily avoid or ignore them. You could change the station on the radio when commercials ran. You could fast forward past taped TV ads in shows, or switch channels while watching live. Newspapers had ads, but your eyes knew to ignore them. But today, wherever you are online, it’s impossible to not be bombarded by ads. They are everywhere, and they are so well done that sometimes you do not even know you are seeing or hearing an ad. 

This is truly the golden age of marketing. So much data is available that you can literally drop an ad in front of a group of people online in your exact customer demographic  and have that ad tailor made for your product or services, then have that ad follow them everywhere they go online. Nearly everyone buys things online now, and we never have to look far to find what we want because the wonderful people at Google and Meta and Microsoft mine so much data that they can have an ad in front of you in seconds after you showed even the most remote indication that you are interested in buying something. 

With the passing of the JOBS Act in 2012, we suddenly had the ability to sell something else online – investments in private companies and startups. Small businesses had a new tool to raise capital and the restrictions against advertising that existed for more than 80 years were gone. The prohibition against the general public investing in startups and small businesses that were not publicly traded were gone.

So why has this golden age of marketing not allowed free-wheeling, Katy-bar-the-door marketing of these securities online? Sure, we see ads for companies raising capital, but why are these ads so limited in what they say, or how they look?

This article will explore some of the reasons why marketing securities online is not as easy as marketing almost anything else online. It will also delve into some tips on how to stay out of trouble when your private company decides to sell securities using marketing and advertising online and in traditional media.

For the most part, this article will discuss three methods of raising capital online: Reg A, Reg CF, and reg D, Rule 506(c) which are all parts of the 2012 JOBS Act. Some of what I write may apply to all securities in general, but I’m mostly focused on how small businesses raise money online under these three JOBS Act laws to raise capital to try to become big businesses.

The First Step: Avoiding “Securities Fraud” in Marketing

I know what you’re thinking. “I’m not committing fraud, I’m just running an ad to try to sell stock in my company!” The reason rules for marketing securities are different from the rules about selling almost anything else online is that if you screw up in your online securities ads, you may be guilty of what federal law refers to as “securities fraud.” You could face civil penalties. You could face lawsuits. You could go to jail. This is serious stuff. Imagine running a relatively innocuous ad about how your company’s new T-shirts are the best and most comfortable T-shirts in the world, and having someone knock on your door and arrest you. That never happens. But say that the stock you are selling in your company is the best investment in the world, and you can expect a knock on your door, or more likely a nasty letter from a state or federal securities regulator before a knock.

Securities fraud under federal law is the misrepresentation or omission of information to induce investors into purchasing securities. The primary applicable federal law is Rule 10b-5 of the Exchange Act of 1934. Rule 10b-5 states that criminal and/or civil liability may occur if (a) there was a misrepresentation of a material fact (2) done knowingly (3) that a securities purchaser relied on and (4) the reliance on the material misrepresentation caused a loss.

In addition, state governments may also impose civil and criminal liability on those engaged in securities fraud based on state laws. But for the most part, if you follow the federal law as it applies, you will almost always be in good shape with state laws.

The key here that makes securities marketing different is the absolute prohibition on misrepresentation in your ads. We have all seen ads for cereal, shoes, cars and almost every consumer good that say things we all know are simply not true. Companies selling products and services have, for decades, been given some leeway for “puffery” or certain exaggerations of marketing claims. The courts tend to use this test, or something similar, to walk the fine line between puffery and false advertising: Is the claim “blustering and boasting that no reasonable consumer would rely on?” If so, it is puffery and not false advertising. One court said “a general claim of superiority over comparable products that is so vague that it can be understood as nothing more than a mere expression of opinion” is puffery, and not false advertising.

Unlike the rest of the marketing world, there is no place for “puffery” when marketing securities. Don’t expect the general rules of puffery above will be used when the SEC, a state securities regulator or a competitor makes a complaint or starts an investigation into a potentially false or misleading statement.

Under securities laws, you must be clear to not be false or misleading in any manner. When you plan to make any statement, or use any language or graphics in any marketing material, review it in the most critical fashion you can – not in the most favorable manner. Assume the regulator or court will construe it in the worst manner possible, not in a manner favorable to you. If it could be considered misleading, don’t take any chances. Do not use it.

You do not want that knock on your door.

Here are the three basic rules to avoid committing securities fraud. Of course, there are just guidelines. In all instances, get legal advice from a securities lawyer.

Basic Rule 1: Be 100% truthful and use verifiable facts in all marketing communications

Ads, interviews, social media posts, emails and every other form of marketing need to be 100% truthful and all statements presented as facts must be 100% verifiable as true.

My basic rule is... if it could be read in any way as being misleading, do not say or use it at all. There is no reason to take a chance. Securities regulators do not care about “puffery” and will look at any statement that exaggerates, even if it is not believable at all, to be a false or misleading statement and a violation of securities laws.

Basic Rule 2: Use Qualifying Words and Terms When Giving An Opinion

If you have to discuss anything uncertain (I’m not talking about something false or misleading) make sure you qualify your statements.

For example, if you want to talk about your product being the best in the marketplace, understand the fine line between these two statements:

(1) We have the best product in the marketplace.

(2) We believe we have the best product in the marketplace.

The second statement is clearly an opinion, and while it is best to avoid even these types of statements when discussing a securities offering, sometimes it happens anyway, especially in a live interview. In those cases, be sure to qualify your statement with “we believe” or “we feel” or similar language. It’s not a perfect defense, and if the words after the qualifying statement are false or misleading, then qualifying it will not help. But always train yourself and your marketing team to qualify any opinion statement that cannot demonstrable be proven as fact to give your company the best chance to avoid problems.

Again, review all securities marketing statements in the most critical and negative way before using them because that is how a regulator or court will read them. They do not care if you interpret what you said differently. Your opinion as to how it could be interpreted the way you want it to be interpreted means nothing in this context. That is not how a regulator will interpret it.

Basic Rule 3: Try to avoid making statements about future projections unless there are lots of disclaimers and qualifying language

Projections of future sales, revenues, profits, etc. are rarely accurate, despite everyone’s best efforts. Once those projections are made public, they become fodder for regulators and plaintiff’s lawyers to make claims that you promised something that was false or misleading. It’s better to stay away from projections altogether. I almost always advise my clients to not use projections at all to promote the sales of their securities because of their uncertainty and the potential liability. But in circumstances where projections are used despite the great risk they bring to the table, there should be significant and thorough disclaimers surrounding the projections if they are in writing. If used in a media interview, they should be tempered by qualifying words and language – and best to do so in excess of what I discussed above given that you are talking numbers that people will rely on to make investment decisions.

But in my opinion, the best policy is to not use projections at all when marketing securities.

#regulationA #RegA #RegCF #regulationcrowdfunding #equitycrowdfunding  #crowdfunding #RegAPlus #funding #capitalraise #fintech #JOBSAct #capitalraise #smallbusiness #smallbusinesstips #securities #securitieslaw #equity #StartupLife #startups #marketing #securitiesfraud #marketingsecurities #generalsolicitation #506(c) #regD #regulationD

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

How To Make An Effective Equity Crowdfunding Video

Take an AI generated movie set background, sprinkle in some bad photoshop of my head, and Voila! I’m a film director!

Why is a securities lawyer talking about making videos? Those who know me understand, but for those who are new to the world of Kendall Almerico, let me give you a tiny bit of background.

I’m been shooting and editing film (and later video) since I was a teenager. Not to date myself, but that means I was making Super 8 movies and cutting them with a razor and using tape to hold clips together. I remember when video cameras first came out and there was no way to edit them at home, so anything you shot had to be shot in order — no mulligans — to make a cohesive movie.

Go ahead, make dinosaur jokes.

I later worked in television and radio stations and I have an undergraduate degree in broadcasting. You used to have to pretty much work in broadcast related business to have access to video editing equipment. Now, anybody and everybody can shoot and edit quality video with the tiny device we all keep in our pockets (or our hands)  — but that doesn’t mean everyone can make a great video that tells a story and sells a product or company. That takes not just technical knowhow, but a certain set of skills that involves knowing how to communicate to the masses in a persuasive manner.

I’m not a professional videographer, but I know how to tell a story. I know how to communicate with investors through video. And I’m smart enough to know that a style of video that works for one company, does not necessarily work for every company.

There are some common elements in most successful equity crowdfunding videos, and this article will talk about those elements, and give you some real world examples of videos that I have used personally with clients to successfully to raise significant capital in the equity crowdfunding space.

Get Attention Quickly

You only have a few seconds to grab a viewer’s attention and to keep it. Many experts (people who write things on the internet are always “experts” so you know they’re telling the truth!) say that if you don’t grab a viewer’s attention in the first 10 seconds of an online video, you will lose that viewer. It’s true. People have short attention spans — especially when watching video online. So you need to grab people’s attention right away. I’m not sure 10 seconds is really a make or break point, but you definitely need to do something at the beginning of the video to keep people engaged.

If they stop watching your video after 10 seconds, there is a very strong chance they are not going to invest in your company. So don’t start off your video with something boring. Things like a great visual, an exciting phrase or a famous face will hold attention. Do what works for your company, but do it right away at the beginning of your video.

And I know all of this because I’m an expert!

Here is an example from my client, international craft brewing sensation BrewDog. More about them later (and the full video this screenshot came from), but when they launched their first successful Reg A offering a few years ago, the first thing you saw on their equity crowdfunding video was this:

You may not have known that BrewDog called their equity crowdfunding offerings “Equity for Punks.” You may know anything about them. But you see a vibrant Times Square backdrop and some attention grabbing words: Propaganda Outreach. If you stopped watching after seeing this, you were never the kind of person who was going to invest in their company anyway.

Don’t Go Too Long

A lot of “experts” will tell you that your video should be under 2 minutes. Some will tell you under 90 seconds. While this would be ideal given the short attention spans of your typical TicTok viewer, it’s not really accurate when it comes to equity crowdfunding videos. The reality is, most companies will not be able to effectively introduce their company, explain an investment opportunity and convince strangers to invest in 90 seconds. The random time limitations people impose also contradict the reality that if you make a 60 minute compelling and interesting video, people will watch it for 60 minutes. Hell, every major motion picture made is 90 minutes minimum, and a great film leaves you on the edge of your seat not leaving, but instead wanting more.

This goes back to my story telling comment earlier in the article. If you can tell the complete story in 90 seconds, you should do so. But if it takes 3–5 minutes to do so, and you can do it in a very interesting and compelling way, 3–5 minutes is also okay. It all depends on what you are saying, who is saying it, how it is being said, and if you have a creative team who knows how to keep the subject matter interesting.

I’m going to use three examples of videos made by equity crowdfunding clients of mine to launch their online offerings – one of which is still ongoing as this is published. All three were very successful, and collectively these three offerings raised millions of dollars from thousands of investors. The lengths of the three videos are 2:07, 2:38 and 5:15! When you see each of these videos below, I doubt you will be looking at your watch and wondering why they are longer than 90 seconds. They are compelling, attention grabbing and interesting. But if you are going to use a 5 minute video, you better make sure it’s not boring or repetitive. Show it to a few people when it’s done but before you launch it. If you hear “That was too long” and — believe me, people will tell you if it’s too long — then edit it down and make it tighter.

Get People Excited About Your Company As Quickly As Possible

Remember, you are not making The Godfather or Citizen Kane.

You’re making a commercial for your company. You’re not trying to sell tickets to a movie theatre. You’re trying to sell investments in your company. This is not time for Quentin Tarantino film techniques with a timeline where you have to watch half a movie that seems chronologically challenged then it all ties together at the end (with lots of blood and cursing). You’re making an ad. It needs to grab people quickly. I needs to get people excited about your company quickly. It needs to get people thinking “I’ll watch the rest of this, I’m interested in investing in this company!”

So don’t wait until 30 seconds into a 2 minute video to explain what your company does. Tell the viewer right away. Let them know why your company is special — right away. Use visuals — this is video after all — do not have a talking head spending 30 seconds explaining something that one picture or 5 seconds of video can explain immediately!

Real People Get Real Results

Not every great equity crowdfunding video has someone central to the company in it. But most do. And there is a reason why.

Lots of people bet on the jockey, not on the horse.

Most companies using equity crowdfunding, whether it is Reg A or Reg CF, are at a relatively early stage. Apple is not using equity crowdfunding. Apple can do a video, use its famous logo, throw up great imagery and sounds — and sell you its products — because its Apple! You already know who they are and what they do.

Most companies using equity crowdfunding are not particularly well-known. You have to explain to people what you do, and who you are. And having a face that is integral to the company to do the explaining is usually the right call. Look, I’ll be the first to admit if the founders of a company do not look good or do not sound great on video, this concept gets thrown out the window. But most founders believe in their company, know more about the company than anyone else, and speak with passion about their company and that belief, knowledge and passion come through in a well-made video.

Here’s an example from a Reg A video for my client Armed Forces Brewing Company who sold out their first Reg A offering. They are now on their second Reg A offering which you can read about here: www.OwnArmedForcesBrewingCo.com Their entire launch video is below, but this is the first frame of the video from their initial Reg A offering:

That guy is Robert J. O’Neill, a highly decorated retired Navy SEAL who also just happens to be the guy who shot and killed Osama Bin Laden. He is one of many veterans who own this military tribute brewery. While many people recognize him, not everyone does, so the first words out of his mouth are “I’m Robert J. O’Neill, former Navy SEAL Team 6 operator, and I shot a famous guy.” Even if you didn’t hear the audio, you have seen (a) the company’s logo and branding, (b) American flags and (c) guns and ammo. If this kind of imagery is not appealing to a viewer, that viewer is not likely to invest in Armed Forces Brewing Company. But for people who are fans of the U.S. military and veterans, this opening shot and tiny bit of dialogue have sucked you in and kept you watching. This is what the beginning of an effective video needs to do.

Remember the graphic that started the BrewDog video I showed you earlier — the one that said Equity For Punks: Propaganda Outreach? Right after that graphic, the video cuts to BrewDog’s founders. 

They are shot from a very low angle and they have NYC lights behind them. It’s visually strange, but grabs your attention. And it fits their company. Here are your founders — this is who we are! And when you see the full video a little further down in this article, you will hear the passion in their voices as they tell you how excited they are to bring their global success to America!

Problem and Solution

There is a widely held belief that every pitch deck, every video and every other thing done to attract investors must identify a problem, then explain why this company has the magical solution!

I’m not one to argue with things that work, and I agree that this makes sense in many cases — particularly when you have a new product or service that people may not understand. If you have to explain that a problem exists because people do not inherently know about it, then a “problem and solution” section of your video is probably a good idea. In fact, you may want to lead with it.

But if your company is entering a flourishing and crowded market that already exists, forcing a “problem and solution” into a video may just be a waste of time. Leave it in your deck or on your offering page. For example, my client BrewDog is a craft brewery behemoth that is a true unicorn — with an enterprise valuation of more than $1B. They have successfully run many equity crowdfunding offerings around the world, and have raised hundreds of millions of dollars from hundreds of thousands of crowdfunding investors worldwide. When they used Reg A to fund their first U.S. brewery, they were already a successful and profitable brand all over Europe, but had almost no footprint or visibility in America. They simply believed that they had a better product, a better approach and better everything than craft brewers in America.

There wasn’t a “problem” with the craft brewing industry in the U.S. they were trying to take their share of. They didn’t offer a “solution” to a problem. They just needed to educate people about who they were, what they bring to the table and their overseas success. So their crowdfunding launch video (click on the photo below to watch the video) did not have (or need) a “problem and solution” section.

This video launched one of the first Reg A offerings in the U.S. and drove thousands of people who had never heard of BrewDog to invest millions in the company to launch their U.S. operations. One of the reasons I love this video so much is that it really sends a message about what BrewDog is all about. You see the two founders and you know their personalities right away (bet on the jockey not the horse). It is high energy and you hear about their success overseas (get people excited as soon as possible). It is professional looking and has great video and sound (see below for good video and sound). It asks for an investment (see below for don’t forget the ask). You see that they like to “stick it to the man” by dropping “fat cats” all over Wall Street. While this approach may not appeal to everyone, and probably not to many traditional stock market investors at the time, it was an incredibly effective video to introduce a company to a new market for that company, and it worked.

What I like about it most is that I made an Alfred Hitchcockian cameo in the video. Yes, that’s me — the extremely handsome movie star everyone is staring at before he is unceremoniously smacked down by a parachuting fat cat. If there were credits in the video, I would have been listed as “Dude in suit on Wall Street pummeled by falling feline.”

Talk About Your Business — But Don’t Make It All About Numbers

In the world of public companies traded on NASDAQ or the NYSE, it’s all about the numbers. Revenues, profitability, PE ratios and a million other stats that analysts spew out to analyze how a company is performing. Public company management often spend more time worrying about their stock price than anything else. Numbers are important. But don’t make the mistake of thinking that most Reg A or Reg CF offerings should be treated anything like public companies when it comes to talking about business numbers in an equity crowdfunding video.

Hit a few main numbers and statistics in your video, but if you include more than 2–3, you are going to lose your audience. Watching a crowdfunding video is nothing like watching a stock market analyst talking about a publicly traded company on CNBC. If your video drones on and on about numbers and stats, I can assure you many people will stop paying attention. It’s hard to entertain and keep people engaged when you are droning on and on about one number after another.

If you are going to use numbers and stats, consider adding graphics to illustrate. There is a reason people say a picture is worth a thousand words. People will remember a graphic with a number at a far greater percentage that a number than is merely spoken. For example, take a look at this video from another client of mine that recently completed a successful Reg CF offering, Wunderground Coffee.

Look at how Wunderground’s Reg CF video illustrated a key number/stat to show their growth.

This is one of my favorite crowdfunding videos because (a) it worked (b) it told a lot of important stories about the company in a short time (c) it showed off the amaxing founder Jody Hall and her team of very successful entrepreneurs with multiple exits and a history with an industry giant (d) explained why mushroom coffee is delicious and healthy and a new growing industry and (e) had lots and lots of “food porn” shots of their amazing coffee.

Don’t Forget “The Ask”

Crowdfunding Video 101 — Ask your viewers to invest. Ask more than once if you want. Definitely ask at the very end — in the perfect world a viewer of the video watches the video then goes straight to the INVEST button on the same webpage and pulls the trigger. Reminding the viewer of this is important and a necessity for any equity crowdfunding video.

Don’t be subtle. Ask for an investment. Ask for money. I’ve had clients try to be clever and not want to mention their video is about getting people to invest. This misguided desire to be subtle and not ask directly for an investment reminds me of how some people run ads for an equity crowdfunding offering. They run an ad about something sexy, something interesting, something to drive a click on the ad — but never mention the ad is driving the person who click to an investment opportunity. This is almost always a mistake, and gets a click from someone who then finds out they are being asked to invest. People do not like being deceived. It’s a waste of ad money driving clicks from people who then get surprised, and not in a good way, that you are asking them for money to grow your company. If you are running ads and not telling people you are seeking an investment, you’re wasting your money and their time. Same thing with your video. If you suck them in, keep them excited and never tell them you are asking them to invest, you just wasted an opportunity.

Last, But Not Least — Good Sound and Video Quality Matter

Don’t get me wrong — you do not have to get Martin Scorsese to direct your equity crowdfunding video or use a Hollywood crew of 50 people to shoot a 2 minute video. I’ve seen great equity crowdfunding video that were shot on an iPhone and edited in iMovie. But even those paid attention to two important details: great video and good sound quality.

Great video means having good lighting and keeping everything in focus. Good sound quality usually means having an external microphone especially if you are using an iPhone. Nothing is` more unprofessional than a poorly lit video where the person talking isn’t using a mic, and it sounds like they are in a tin can or the Lincoln Tunnel.

The point is you are asking people to invest in your company. People want to invest in a company that will be successful. If you can’t invest a few bucks to make a great video when it is often the first and only impression a potential investor will have of your company, then you’re not projecting success to the audience that matters. If people think you can’t even make a decent video that looks and sounds good, why should they trust you with a much more difficult task of building and growing an entire company?

A few final words…

There is no cookie cutter, one-size-fits-all approach to an equity crowdfunding video. In fact, one video used to launch a Reg A offering that sold out and was oversubscribed, pretty much broke most of the rules above. Watch this equity crowdfunding launch video for Armed Forces Brewing Company  —  a military tribute brewery that pledges to employ 70% if their national workforce from veterans and their family members. The video is funny, silly, goofy and a parody of a lot of things. Some people loved it and shared it and it was seen by a huge number of people, Some people didn’t like it at all because it was too campy, but they remembered it. It features a famous person — retired Navy SEAL Robert J. O’Neill who shot and killed Osama Bin Laden, playing an over-the-top cartoon version of himself shooting and blowing things up.

Humor in an equity crowdfunding video is a big risk, and although this one paid off, it’s not always easy to do the right way. Armed Forces Brewing Company had a strategy from the beginning that they were going to market their company using humor and it worked for them at the beginning, and still works today as they are in a second Reg A offering as I publish this. Watch another of their promotional videos used during their Reg A offering.

Again, they break all the video rules, but it worked for Armed Forces Brewing Company. They oversubscribed their first Reg A offering and are on their way to doing the same in their second Reg A offering.

The point here is that every company is different and your equity crowdfunding video should reflect your company’s ethos, mission and character. Compare the BrewDog video above to the Wunderground video above. Two very effective videos, but completely different style, tone, and direction.

One thing I cannot overemphasize — get help from professionals when you create your equity crowdfunding video. The professionals may be your marketing team, your social media team, outside videographers or others. But this is an area where guidance, both technical (video, audio, music, graphics) and in the overall writing and presentation is invaluable.

Your equity crowdfunding video can make or break your Reg A or Reg CF offering. Don’t make the mistake of glossing over this incredibly important part of a successful online capital raise.

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Top 10 Tips and Tricks For A Successful Reg A or Reg CF Equity Crowdfunding Offering

This AI generated image that is supposed to illustrate the title of this article is really creepy. These two bizarre, plastic-skinned, dead-eyed Tom Cruises with a Flock of Seagulls wigs are going to haunt me in my dreams forever.

Part Six of a Six Part Series Comparing Regulation A and Regulation Crowdfunding

So you’ve decided to use equity crowdfunding to raise capital for your company. You’ve made the decision to use either Regulation A (a/k/a Reg A or Reg A+) or Regulation Crowdfunding (a/k/a Reg CF). Now comes the fun part... what do you have to do to actually raise capital?

If it’s not clear already, equity crowdfunding is not like the movie Field of Dreams. Just because you build an offering page online, does not mean that investors will come. Reg A and Reg CF are all about your company driving potential investors to your online offering page. The key to every successful equity crowdfunding offering is marketing to drive investors.

 This article is all about marketing.

 By marketing, I mean doing all of the things to drive traffic to your equity crowdfunding offering page, then to convert that traffic into investors. Suffice to say, there are a lot of moving parts to make this work. This article will explore the Top Ten things you must do, in my opinion, to have a successful offering and raise millions of dollars online selling securities in your company through either Reg A or Reg CF.

 1. Plan your marketing well before you launch

Depending on how much you are trying to raise and how large your “low hanging fruit” group of potential investors may be, you may have a fairly simple and inexpensive marketing plan, or you may need a very complex and costly one.

 By “low hanging fruit” I mean people who already love your company, your fans and customers, your email or newsletter lists and your social media followers. If this group numbers in the hundreds of thousands, and you are only trying to raise $1M, your entire marketing plan might be a series of emails and social media posts to that crowd.

 But if you don’t have a huge group of built in potential investors, then you need to be ready to market to find investors because, believe me, they are not going to find your offering otherwise. At the very minimum, you will need email and social media marketing assets ready to go at launch and people in place to respond to online comments and responses to your emails. You may need to contact a PR firm. You may need to engage influencers to help spread the word. You will likely need to run digital ads, and if so, will need someone who understands that world to help you do it effectively.

 At a bare minimum, you should set up a social media calendar, prepare emails in advance, and get your ducks in a row with every marketing asset you plan to use well before you go live and start accepting investments. Once the offering hits the internet, you should already have everything ready to go and have your marketing machine cranking. If you wait to do any of this until you have launched, you are way behind the eight ball and will be playing catch up.

 Create a plan. Write it out and disseminate it. Make sure everyone knows their role and the expectations you have of them. Have them ready to rock and roll the day you launch. Then stay on your team and be sure they do what they are supposed to do.  

 And remember, if you do any marketing prior to the formal launch of your Reg A or Reg CF offering, you must follow “Testing The Waters” rules including having the testing the waters disclaimer on all marketing you do prior to your official launch. Failing to do so will get your company into regulatory trouble.

 2. Have a great video

 I cannot emphasize strongly enough how important a crowdfunding video is to the success of most equity crowdfunding offerings. Many people who are driven to your offering page online will watch your video first. If they are impressed, some will invest right then without even reading much more on the page. I have seen this happen over and over again. Others will be intrigued enough to learn more on your page and read further. But if your video is bad, unprofessional, has poor audio or video quality, or otherwise doesn’t get people excited about your company, you have lost that potential investor forever.

 Your chances of success are greatly enhanced by the video you use. I could, and will one day soon, write an article on crowdfunding videos alone, but for now let’s leave it at the video needs to tell your company’s story and get people excited about investing.

 3. Build a compelling offering page

 On most equity crowdfunding sites, investors see the video and some basic information about the offering and your company first. This area one sees when they first visit your offering page is called “above the fold” – a reference to the old newspaper saying about the news that was on the paper’s front page at the top – or above where the paper was folded. This part of the offering page is by far the most important, for the same reasons the video is important. There is a strong chance that the section “above the fold” containing your video is going to be the determining factor as to whether you get someone excited to be an investor, or lose them before they ever scroll down and see everything else you have to offer.

 I always say to my clients “If you want to become a billion dollar company, start acting like one now whenever you can.” The above-the-fold top of your offering page needs to make your company look like you are, or someday will become, a billion dollar company. Show off your logo. Include something visual about your company to grab attention. Write a killer headline and if there is any text above the fold, use it to your advantage. Don’t make people scroll down the page to learn what your company is all about, or to highlight the one or two biggest selling points of your offering.

 Below the fold, be sure to use a good mix of short paragraphs and photos or graphics. Highlight the things every investor wants to know: What am I investing in? Who are the people running the company I’m investing in? How will your company take on the competition in your industry? What are you using my money for? How will I get a potential return on my investment?

 Don’t overdo it. I’ve seen companies spend inordinate amounts of time designing offering pages that go on and on into a seemingly bottomless pit of unimportant minutiae that a huge percentage of site visitors are never going to read. Remember, the tedious disclosures, financials and legalities are in your SEC filing and anyone can read that document on the offering page if they want to get all the details. The offering page is, bringing it down to basics, just a big ad for your securities offering. Treat it like the ad that it is. Don’t turn it into War and Peace because very few people will ever scroll down to read the entire thing. Keep paragraphs short, use interesting and eye grabbing photos and graphics, and use highlights – not details – to convey the opportunity.

 4. Kickstart your offering with friends and family

 On your equity crowdfunding offering, the very top of your offering page will display an important number – the total amount of money you have raised to date. The day you launch, this number is going to read $0.00. That’s not a good thing for people to see.

 When people from the general public start to see your offering page, you need to have already raised money, so that big fat zero doesn’t chase them away. Remember, nobody likes to be the first one on the dance floor.

 The solution to this - and by far one of the most important but also most ignored rules to a successful crowdfunding offering – is to go to friends and family to invest in your offering before you show it to anyone else.

 If your friends and family are not interested in investing in your company, why would you think anyone in the general public would be interested?

 Here is another important tip: when you reach out to friends and family, this means the friends and family of everyone on your management team, your board, your advisory board, and any employees willing to help. The more people involved, the more friends and family you will reach and the more capital you will raise.

 Also, if you’re not the kind of person who likes to ask people for money, you should not be using equity crowdfunding. If you’re a not big enough believer in your company to want to ask your friends and family to be a part of its growth, then you should not be using equity crowdfunding.

 I had one client raise more than $350,000 from his friends and family on the first day of his offering. He had reached out a few days before to give them all a heads-up, and on launch day all he had to do was give them the URL and remind them how important it was to get the investment done that day. It was like a well-oiled machine. When he then started driving investor traffic to the page, people saw that in one day he had raised 1/3 of his goal already. That created a sense of urgency and FOMO.  The rest of the offering went very well, needless to say.

 5. Go after low hanging fruit first

 So you brought in your friends and family first and your offering page shows you already have investors and have raised capital. What’s next? Time to go to the next group of “low hanging fruit” and invite your customers, clients, and social media followers to invest.

 This group already knows your company. They are likely fans of your company. You do not have to pay anything to get to them. So take advantage of this opportunity and email them for a few days. Invite them to invest before the general public. Generally, I recommend giving your customers and your email list a chance to invest before your social media followers, because they will convert better in most cases. That increases the numbers on your offering page before people from the general public, who might come across your social media posts but really don’t know you, see the offering and how much has been raised. People like to follow a crowd. So use your crowd to pump up the numbers first before trying to get strangers to invest.

 Also note, these emails and social media posts are not a one off. Follow best practices on email solicitations and social posts, but you have to do far more than one email and one social post for this to work. Remember, not everyone opens every email. And more importantly, only a small percentage of your social media audience sees every post.

 6. Digital Ads

 You’ve hit up your friends and family, you’ve reached out to your social media audience and you have emailed your customer list. You now have some money in the war chest. The next three tips and tricks talk about bringing in people from the general public who may or may not know your company or brand.

 The most common way is through digital ads.

 Remember, you are also marketing your company when you run these ads. If done effectively, you could increase sales and revenues also from these ads. You may get new business opportunities from these ads, even from people who do not invest. Some people may not invest, but they may try your company or buy your products. You will have used cookies and pixels to track those who visited your offering page and didn’t invest, so you can remarket to them for sales and investments.  Many of those who did not invest will come back in and invest when you get to the end of the offering where you let them know time is running out.

 Effective digital ads for equity crowdfunding are an art, and a science. Unless you have a lot of expertise in house, you should consider hiring an outside agency to do this for you. Running ads is an expensive way to drive traffic and convert it into investors, so spend the money wisely. Look for an agency with success in Reg A and Reg CF in offerings similar to yours, and they can help define the audience, create lookalike audiences, use the right platforms for ads and advise where to spend the money – new leads, retargeting, etc. Google and Meta are the key, but others can also work. How you use Google and Meta ads are important to leave to people with experience using ads to raise investment capital.

 Remember, running digital ads is a process. Do not expect the same results in week one of running ads as you will get when the audience is refined, the ad creative is tweaked, the timing of ads is established and you have figured out what works, where it works and when it works. To really be effective, my experience has been that it usually takes 60-90 days of running ads to get it to a point where you can rely on ads to produce a consistent return. You have to be patient before scaling up your ad spend, but once you do, you should be able to determine with a decent about of certainty how much each dollar of ad spend will return for you in investment commitment dollars.

 7. PR

 Raising capital online is a numbers game. Driving eyeballs to your offering page is what the marketing is all about. There are very few things that drive as many eyeballs in a short period of time than a great PR placement that gets your offering in front of a huge crowd of people.

 Do not confuse public relations with putting out an online or on the wire press release. A press release has some benefit, but will not be likely on its own produce a lot of investment dollars. A good PR firm will get you media interviews and stories in media that reach a lot of people.  Don’t expect to end up on the Today Show or in the Wall Street Journal. If you do – Bonanza! Remember, a well-placed local media interview or two can produce great results from potential investors who may already know your company and may be more likely to invest in something local to them than something 3000 miles away.

 The key is getting the interviews or placements, and making sure to pitch the investment opportunity when you do. If you just talk about your company, but never mention the investment or the URL where people can invest, you wasted a golden opportunity.

 8. Influencers

 People get very excited about bringing on influencers and reaching a large number of people through them. I’ll be the first to tell you from experience that influencers can work – after all, Reg A and Reg CF are a numbers game and if you drive enough eyeballs to your offering page, you will produce investors. But you need to have the right influencers and the right messaging, and be ready to engage with the influencers’ audiences who ask questions or make comments. Having a social media influencer who gives cooking tips to millions of followers talk about investing in your new game-changing flying car is probably not going to produce the results you are looking for.

 One important thing to look for in addition to aligning with the influencers’ crowd – look for engagement in addition to the size of their reach. A person who posts to 1,000,000 followers and gets 15 likes and no comments is far less valuable to you than an influencer with 50,000 followers who repeatedly get 5,000 likes and 1,000 comments every time they post.

 You also have to be very careful with influencers when it comes to securities laws. Just like you must not make false or misleading statements if your company posts on social media, when you pay influencers to post for your company, they have to be truthful and not mislead. They have to disclose if they were compensated. Leaving the content totally up to an influencer can lead to disaster. An unchecked influencer may post that an investment in your company will make people rich overnight, or create other unrealistic expectations that will draw the attention of securities regulators. Keep a tight rein on what influencers post or say, and you will keep yourself out of trouble.

 9. Investor Relations

 This is, by far, the one extremely important area that I see companies fall short on. You absolutely need someone, or more than one person, to (a) communicate with investors, applicants and leads (b) to answer their questions and help them out when help is needed (c) to follow up on social media comments and posts – including comments under your digital ads and (d) to manage your ongoing emails and marketing to your investor base.

 Let me talk from experience here. No matter how much someone invests in your company – be it $100 or $1,000,000, they want to be kept informed about what is going on. The easiest way to avoid having a lot of questions and messages and phone calls from a large investor base is to communicate with them regularly, and effectively. They own part of your company – so let them know what is going on with the company they own. I strongly suggest weekly e-mail and/or video updates to help keep investors informed and engaged. These can be 5 minute videos or 3-4 paragraph emails. Remember, you want them to be brand ambassadors and company evangelists, but they will not do that unless they know what is going on and you make it easy for them to help by keeping them engaged.

 If you take care of your investors, keep them informed, and treat them like the owners of the company that they are, you will find a healthy percentage of those investors will help you promote your online offering and otherwise. If people who paid you money to invest become an army of marketers for you, your marketing budget will decrease while you continue to raise capital from the additional crowd your investors bring to the table.

 10. Perks

 What, if anything, do you give to your investors in addition to the stock the pay for?  You do not need to give away perks, but if you do, you need to do it right. Perks are things as simple as a branded hat or T-shirt that every investor gets, or as elaborate as a once-in-a-lifetime experience that the biggest investors receive. But don’t make the mistake of thinking that the perks you offer are there to drive investment on their own. Nobody invests in a company to get a hat or shirt. They appreciate getting the perks and those hats and shirts can be good marketing for your company, but nobody is making an investment decision based on getting inexpensive swag. 

 That being said, perks can be the thing that makes someone increase their investment to get to the next level of perks. Let’s say you offer no perks with a $250 investment, but offer a brand new to the market item that normally retails for $250 (but only cost you $25 to manufacture) at the $500 investment level. You may get people who invest $500 to get that item, thinking that they are getting something “free” in return - either the item or the additional securities. This is also an effective way to get existing investors to increase their investment later. Monitoring your investor base and sending out segmented emails reminding them that they can get to the next perks level with an additional investment – and telling them what those perks are – can drive additional investment. This is especially effective at the end of an offering when FOMO kicks in.

 But keep in mind, this will not work as well if you have not been keeping in touch with your investors and keeping them informed.  If someone invests, then they do not hear anything from you for 30 days, and you send them an email asking them to invest more – good luck getting them to pull that trigger again. On the other hand, if in that 30 days, they received a weekly email or video message telling them of your company’s latest news, showing them the success you are having and treating them like the owners that they are, you have a far better chance of getting them to increase their shareholdings.

One last word on perks: you must fulfill the perks when you say your will. Not only could you get into legal trouble by not doing so, but you will lose investor confidence – and thus lose their help in growing your company – if you do not timely send them what you promised them.

 These Top Ten Tips and Tricks are just a few of the important parts of your equity crowdfunding marketing campaign. Each part requires a great plan, and great execution. They also all work together and help drive eyeballs from different approaches and angles.  This is why having your team ready and prepared and engaged throughout the entire capital raise is incredibly important to your success.

 One last note – remember that the rules for marketing in Reg CF and Reg A are different. For example, you cannot include the “terms of the offering” in your Reg CF marketing except on the offering page. Make sure you get advice from competent legal counsel for all aspects of your securities marketing so you stay out of trouble.

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A & Reg CF: Specific Offering Structures and Liquidity

Once again, I asked my trusty AI image generator to create a graphic to illustrate this article’s title. Once again, AI cannot spell. In addition to “structures” with signs saying Reg A and Reg CF, we get “CFF” “Res A” and “ROO A” 

Part Five of a Six Part Series Comparing Regulation A and Regulation Crowdfunding. See Part One Here, Part Two Here, Part Three Here and Part Four Here.

In this series, I’ve been exploring the legal and regulatory issues surrounding Reg A and Reg CF, the two types of equity crowdfunding offerings. Both are incredible laws for small businesses, and selecting between which of the two laws to use for equity crowdfunding purposes can be confusing. This week’s article focuses on some specific things that are important to know before you structure a Reg A or Reg CF offering.

Liquid After 1 year  vs. Immediate Liquidity

One main issue to consider related to Reg A vs. Reg CF is liquidity. When someone invests in a Reg A offering, the securities they purchase are liquid – they can be sold immediately to anybody whether the purchaser is an accredited investor or a non-accredited investor. As a general rule, most private company investments do not have this level of liquidity that public companies enjoy. This is a definitive advantage for Reg A. This may, in reality, be more of a theoretical advantage because many Reg A offerings do not sell out and therefore there is no immediate market for buying the same stock at a higher price than the issuer was selling. But for some Reg A offerings that are tradable on a secondary market this is a huge advantage, or for companies that grow and make great strides in valuation after the Reg A offering. For example, I will discuss below the growing phenomenon that is the Series LLC offering, something that cannot be done effectively with Reg CF because of the lack of immediate liquidity.

Reg CF securities are not immediately liquid like Reg A securities or securities sold by public companies. Regulation CF securities may not be sold or traded for one year after they are purchased except if they are sold to a family member, an accredited investor, or back to the issuer.

Public Companies

While most people think of Reg A and Reg CF as vehicles to raise capital for private companies, Reg A may also be used by public companies to raise capital. Not so with Reg CF. There has not been a significant amount of Reg A use by reporting companies. This is primarily because the cost benefit of Reg A over a traditional IPO is in the lower up front cost and the far lower cost of ongoing SEC reporting that Reg A enjoys over a traditional SEC reporting company are far less of an advantage for a company already required to report like a public company. But there are some limited reasons a public company might want to use Reg A. Reg A can be a stepping stone to becoming a public company and holding a traditional IPO and getting used to some public company disclosures and reporting.

Series LLC

The Series LLC model is something being used in many verticals to lower the cost of multiple Reg A offerings and to provide a secondary market for certain Reg A securities. Put simply, a Series LLC is a limited liability company, generally formed in Delaware, that allows one issuer to sell several different “series” of securities under one umbrella, without having to go through the costs and time of doing a Reg A offering for each series of securities. In theory, each series is pretty much treated like its own company and the assets and liabilities of each Series are not shared by the other series, or the parent company.

This model is used frequently with fractional ownership of collectibles like art or vintage automobiles. It also may work well for certain real estate offerings and several other areas. Here is a made-up example to illustrate how a Series LLC Reg A offering might look:

Let’s say a restauranteur wants to open 5 new locations at a cost of $5M each, and wants to be able to tap into the local accredited and non-accredited investor markets to do so in 5 different cities. While the restauranteur could do 5 Reg A or 5 Reg CF offerings, that would require 5 separate SEC filings and everything including the expenses, that go with each offering. Or, the restauranter could file a Series LLC Reg A offering with the SEC, and each of the 5 restaurants could be a separate “series” and each series could raise capital only for one of the restaurants – but it is all done in one SEC filing. The restaurateur could raise up to $75M every twelve months under each “Series LLC” Reg A filing – and only incur the costs of the initial Reg A filing one time. Then, once each series raises capital, there can be secondary trading of those securities in various different ways without becoming a public company and listing on an exchange.

One important note – while Series LLC Reg A seems like a great idea for companies who have multiple assets to finance, they are still a relatively new phenomenon and have not been battle tested through the courts. There are differences of opinion about taxation issues, whether bankruptcy cuts across the various series into each other, and many other undecided legal issues. Some states do not recognize the Series LLC format. If you think you are a good candidate for a Series LLC< check with experiences counsel before you jump in.

Series LLC offerings are not an option for Reg CF.

Crowdfunding SPVs

Now we get to one of the most wonderful, but also potentially most frustrating aspects of all equity crowdfunding... the number of investors. The benefit of equity crowdfunding, as a whole, if to be able to tap into a large number of people who invest a small amount of money each that adds up to a large investment when totaled. But that large number of investors also creates a few compliance issues with both Reg A and Reg CF.

There is a pesky little thing called the Securities Exchange Act of 1934 and a part of that set of statutes that securities lawyers call “12(g)” that rears its ugly head when you have a lot of investors. In a nutshell, 12(g) says that an issuer must register with the SEC as a public company (and incur all the ongoing expense of full SEC reporting) if the company (a) has gross assets of more than $10M and (b) has a class of securities held of record by more than 2,000 persons or more than 500 non-accredited investors.

Obviously, these rules that were written 90 years ago make no sense in today’s world of equity crowdfunding. Nearly every successful Reg A or Reg CF offering will end up with more than 500 non-accredited investors. Fortunately, both Reg A and Reg CF have workarounds for the 12(g) investor limits.

Reg CF solved this problem by allowing a “Crowdfunding Vehicle” to be created that, in essence, puts all of the Reg CF investors into a special purpose vehicle (“SPV”) that only appears as one entry on the issuer’s cap table. Not only does this solve the 12(g) problem but it also alleviates concerns that follow up rounds by VCs or institutional investors may be affected by those groups not wanting to deal with thousands of people on a cap table. One note: entities such as a company or LLC may not invest through a Crowdfunding Vehicle.

Crowdfunding vehicles and SPVs are not allowed in Reg A offerings. But Reg A does have a workaround for the 12(g) investor limitation problem. A Reg A issuer may have more than 2000 total investors and/or more than 500 non-accredited investors if (a) the company is current on all required SEC filings, does not have a public float of $75M, or if not publicly traded had revenues of less than $50M in the most recent year and engaged an SEC registered transfer agent.

Can Only U.S. Companies Use Reg A or Reg CF?

Here is another difference between the two equity crowdfunding laws.

Reg A can only be used by “an entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada.” Reg CF may only be used by an issuer that “organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia.”

What does this mean? Simply put, for Reg A your company must have been (a) formed under U.S. or Canada law and (b) have its principal place of business in the U.S. or Canada. Reg CF only allows a company formed in the U.S. to utilize the law but does not have the “principal place of business” requirement that Reg A has.  This basically means that with some legal restructuring, a foreign company may use Reg CF even if their principal place of business is in another country outside the U.S. as long as the entity formed to raise Reg CF capital is formed in the U.S. But that company’s offices and operations may be anywhere in the world.

#regulationA, #RegA. #RegCF, #regulationcrowdfunding, #equitycrowdfunding, #crowdfunding, #RegAPlus, #funding, #capitalraise, #fintech, #JOBSAct, #capitalraise, #smallbusiness, #smallbusinesstips, #securities, #securitieslaw, #equity, #StartupLife, #startups

Coming next week: Part 6 of the 6 part series: Kendall’s Tips and Tricks For A Successful Reg A or Reg CF Offering. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A and Reg CF: Funding Portals and Broker Dealers and Online Investment Websites, Oh My!

Part Four of a Six Part Series Comparing Regulation A and Regulation Crowdfunding

See Part One Here, Part Two Here, and Part Three Here.

Once again, my AI image generator does its best to illustrate the title of this article. I’m fairly sure funding portals and broker-dealers are not really fighting to the death in an ancient Roman arena, and even if they are – the funding portal would probably have two swords like the broker-dealer, and not try to “gladiate” with one sword and one sword handle. And what the hell is a “funding poltal” anyway?

The two equity crowdfunding provisions of the JOBS Act, Regulation A and Regulation Crowdfunding (Reg CF) are very similar laws but also very different. While both opened the door to new capital formation for private companies — particularly allowing anyone to invest in these companies and not just wealthy people — the way these securities offerings are actually executed is very different and subject to hundreds of pages of SEC rules. One of the biggest differences is where a company may hold these offerings online. That is the subject of this new article in my series breaking down the similarities and differences of the two groundbreaking equity crowdfunding laws.

Can I hold the offering on my own website?

For Reg A — yes you can. For Reg CF, no you cannot.

Regulation A does not specify where the securities offering that can raise up to $75M may reside online. As a result, a company may hold the offering on their own website if they want. Or, they may host it on a website they do not own. Or, they could hold the offering on both at the same time. Reg A gives a company plenty of choices when it comes to where the offering is found online.

Not so with Reg CF. With Reg CF, your company may raise up to $5M but it must only reside online on an “intermediary” website. This means either a broker-dealer owned website, or a new entity that came into existence with Regulation Crowdfunding called a funding portal. A funding portal is a FINRA and SEC regulated entity that may only host Reg CF offerings. A funding portal is much like a mini-broker dealer — but with significant restrictions as to what it can do to help market your offering. You cannot hold a Reg A or any other kind of securities offering on a funding portal… they are exclusively for Reg CF offerings.

Why would I host a Reg A offering on my own website?

Let’s talk about Reg A where you can host the offering on your own website. If your company already has a large engaged customer base, social media audience, fan base or other large group of people who love what you do, then holding a Reg A offering on your own website is often a great idea. Or, if you have a large marketing budget to send huge numbers of people to your offering page, why not send them to your own website rather than somewhere else? You will still need software to process the investments, and in most cases you will need a broker-dealer behind the scenes to make the offering legal and compliant in some of the 50 states. But hosting the offering on your own website brings about many advantages.

First, you have complete control of the design and content on your own site. This keeps your branding consistent and the look and feel of your Reg A offering can be the same as the look and feel you already established for your company.

Second, you control the traffic. You are directing potential investors to come to your site, and not to a third party site. Think of it this way — a majority of the people your company drives to the Reg A offering page will not invest. They may watch your video and read about your company, but statistics show that only a small percentage will actually pull the trigger and become investors. On the other hand, every one of those non-investors now knows more about your company and your brand. They may well become customers, clients, social media followers, and fans. They can buy your product online or use your services perhaps, even if they don’t invest. If they were sent to a third party site and decided to not invest, they would then need to leave that site, find your company site, and then make a buying decision to have the same potnetial economic effect as if you just sent them to your site to begin with.

Third, you control the data. This is the most important one, and the fact that many third-party sites that host offerings do not tell you. When you host the offering on your own site, you have access to all of the data from the traffic you send there. When you are on someone else’s site, you may not have access to any of that data.

The most obvious benefit to this for experienced e-commerce folks is the ability to re-market to traffic. Through the use of pixels, Google Tag Manager, cookies and other well-known marketing methods, someone who came to your website may be remarketed to — but if they are sent to someone else’s site you may not have complete control over this. Think about how you look at that new pair of shoes online, and then for the next week all you see are those shoes in your social media feed, in ads alongside websites you visit, and even in emails. That could be your company reminding someone who is a hot or warm lead — they were interested enough to visit your Reg A offering page once — to take a second look and to get them over the investment finish line. Or, even if they do not invest, they can be marketed to as customers of your products and services.

The second most important benefit, and one somewhat related to the retargeting I mentioned above, is the ability to market to “abandons” or those who not only got to your offering page, but started to invest then dropped out for some reason. In my experience from being involved with a lot of Reg A and Reg CF offerings, at least 25% of people who start the investment process typically abandon the investment for one reason or another. If you are hosting the offering on your own site with software giving you transparency — you now have the ability to directly market to those folks who abandoned. Email marketing, text messages, phone calls — you know who these people are and you have their email address and phone number. Closing these hot leads can means hundreds of thousands of dollars, or even millions of dollars, in many cases. But if you are on someone else’s website, and they do not provide you with information about who abandoned the investment application, you left a lot of people who were interested in vesting and a lot of their money sitting on the table.

Should I use a funding portal for my Reg CF offering, or a broker-dealer?

Given that you have no choice with Reg CF and must hold the offering on someone else’s website, you have a choice to make. Do you want to hold it on a funding portal alongside dozens of other companies trying to raise capital from the same audience, or do you want to use a specialized broker-dealer that sets up a webpage they control for you that looks as much as possible like your company website?

This is a complicated question with no one-size-fits-all answer. But you have to pick one or the other because Reg CF requires you to only have the offering hosted in one place — unlike Reg A where you could have the offering simultaneously hosted in several places.

Let’s look at the factors that help determine whether your Reg CF offering is better off on a funding portal or a broker-dealer website.

Fees

Look at the fees charged by funding portals and broker-dealers in detail. As a general rule, broker-dealers will charge lower fees than a funding portal — but that is not always the case when you factor in all fees.

The “success fee” meaning the percentage of every dollar you raise that is paid to the funding portal or broker-dealer can range dramatically. Some funding portals charge upwards of 7% for this fee, while some broker-dealers charge far less. Some funding portals also charge an equity fee, where they get paid an additional fee of your company’s equity based on how much money you raise. Broker-dealers may also charge this equity fee for Reg CF.

That fee is only a piece of the puzzle to consider. The other three fees to be aware of are (a) any up-front fees (b) payment processing fees and (c) escrow fees.

Many funding portals and broker dealers charge up-front fees — even though they may defer those until your first closing. These fees can cover due diligence, setting up offering pages, and much more. It is not unusual to see this fee in the $5,000+ range. Make sure you factor this fee in when making a decision.

Payment processing fees are a whole different world, and can be very difficult to understand in some cases. When someone invests using a credit card, debit card or an ACH bank-to-bank transfer, there are companies in the middle of that process that charge to move the money around — these are the payment processors. Credit card fees can be 4% or more, which means, as a company, you are really only getting 96% of what you raise if you have to pay this processing fee. Keep in mind, you may be able to pass that fee along to investors — but how many of us cannot stand seeing that we as consumers are paying an extra charge when we buy concert tickets for example. You will lose some investors when they get to check out in the investment process and see that their $500 investment is really a $520 investment to get $500 worth of stock.

Make sure you get detailed payment processing fees from the funding portal or broker-dealer, including what fees you are charged if someone cancels their investment or attempts a chargeback. When you add up payment processing and the funding portal success fee, you are often at 10% or more of every dollar you raise going to pay for these services. Factor all of this in to your final decision as to where to host the Reg CF offering, and whether to pass some of those fees along to investors.

Escrow fees are the last piece of the puzzle. Reg CF offerings require a “qualified third party” — typically an escrow account — to hold funds from investors until they are disbursed to your company when you hold a closing. These escrow accounts come with additional fees — and those fees need to be factored into your hosting decision. Opening the escrow account alone can be a $1000+ charge, and breaking escrow to hold a closing typically also has a fee associated with it. Wiring your funds to you also has a fee attached. These fees can add up, especially if you hold multiple closings during your offering.

Data Transparency

I mentioned this earlier but this is something you absolutely need to know before you go with either a funding portal or a broker-dealer. Ask them what data you get from the investors you are sending to their website using your marketing dollars. Ask them if you get this data in real time through a dashboard. Most importantly, ask them what data you get when someone starts to invest, but abandons the process.

As I publish this article, major players in the funding portal industry still refuse to share any abandon data with companies using their services. So that 25%+ of people you paid to send to the funding portal who abandon the investment process — you will never even know they existed because some funding portals will not share any of that data with you — and they make some specious claims as to why they cannot share data with you that you have every right to possess. Sure, the funding portals know who those people are. The funding portal has their contact information. You paid for that investor to go to the funding portal and you do not even get the benefit of trying to close that investor. But you can be assured that those people you paid for are being marketed to by the funding portal for other companies raising capital on their site. At this time, you have a far better chance at transparency of this data with a broker dealer like Cultivate Capital (whose parent company I own part of, for full transparency) that specializes in Reg A and Reg CF offerings, and who gives you access to all of the available data rather than hiding it from you like some funding portals will do.

Target Amount. Another factor to keep in mind when choosing a funding portal or broker-dealer involves your “target” amount that Reg CF requires. Every Regulation Crowdfunding offering must set a target amount that must be raised in order to hold a first closing and get your new capital into your company bank account. Most of the bigger funding portals are now requiring that you raise the first $50,000 or more yourself before your company’s Reg CF offering is even shown to the funding portal’s investor base. This makes it difficult for a small company trying to raise capital on a tight budget, as you will not have access to this money to use for marketing the offering or otherwise until that target threshold is met.

Broker-dealers tend to allow you to set your target amount at a lower number to hold your first closing. They tend to not be as restrictive on how often you can hold a closing and get your money after the first closing when the target amount has been met.

What Other Rules Do They Impose? Both funding portals and broker-dealers may impose additional rules to how your offering can be structured. You need to find out up front what those rules are, as they may not fit within how you want your company’s investor base to look. For example, some funding portals will try to push you into using a SAFE, preferred equity, or some other structure that you are may not be comfortable with. A SAFE, in particular, can be confusing to new investors who may love your company already, but do not understand what they receive when they invest in an “agreement for future equity” versus a straightforward “here are your shares of stock in our company!” Ask about these requirements up front before you decide — and remember — when you are going to your customers, fans, social media followers and the like — the more difficult it is for them to understand their potential investment, the more likely they will not invest.

Audiences. This is one area that is very tricky and I can tell you without question based on my experience that many companies get sucked into picking a funding portal because of the number of “investors” on the funding portal. But beware of thinking that a funding portal with a large number of users means your offering will get funded by those people.

Let me use the exact words of one of the biggest funding portals to prove to you that the grand majority of investors in your offering will not come from the huge database of possible investors that the funding portal so highly touts as the reason to pick them.

“Do you have a strong community of friends, supporters, fans, or customers? Remember, about 67% of a typical (Reg CF offering) comes from the founder and team’s community, and the other 33% comes from our community. The first $50,000 comes entirely from your network, so it’s crucial to have the support of your community for a successful… round.”

While this funding portal says 33% comes from their “investors” my experience industry-wide is that it is almost always closer to 5–10% in most cases, and that 90–95% of investors come from the company raising capital and their marketing efforts.

Think about it logically. All of those investors on the funding portal got there because some company raising capital sent them there to invest in that particular company. Let’s say three of those companies whose investors are now part of the funding portal’s database were selling (a) glow-in-the-dark talking condoms (b) a moonshot flying car in the very early stages of development and (c) a cutting edge tech device that made clipping your toenails easier. Your company is a successful pizza restaurant chain that want to raise capital to expand and open new locations. Do you think there is any overlap in interest for your company and the condom, flying car or toenail clipper investors? No, there isn’t.

But once you send thousands of your pizza-loving customers and fans to the funding portal and they invest — the number of investors on the funding portal goes up again! And now your pizza fans and customers who became your investors are now getting marketed to constantly by the funding portal who is trying to sell your investors stock in companies that make glow-in-the-dark talking condoms, flying cars and hi-tech toenail clippers.

Broker-dealers may or may not do the same thing, so this is a question to ask before you make your final decision. But whatever you do, weigh the value of +/- 5–10% of the money you ultimately raise in a Reg CF offering coming from the funding portal’s “millions of investors” versus the 25% or more of investors you sent to the funding portal that abandon the investment process, but the funding portal never gives you any of their data to remarket to.

Making a decision about where to host your Reg A or Reg CF offering is more complicated than most think. It’s easy to get sucked in by the hype of big audiences of possible investors and to think this is a short cut to funding your company. It’s also easy to simply look at fees and to go with the lowest success fee. Consider all of the options, the money, the data, and everything else above before making a decision as to where your investors will see your equity crowdfunding offering.

#regulationA, #RegA. #RegCF, #regulationcrowdfunding, #equitycrowdfunding, #crowdfunding, #RegAPlus, #funding, #capitalraise, #fintech, #JOBSAct, #capitalraise, #smallbusiness, #smallbusinesstips, #securities, #securitieslaw, #equity, #StartupLife, #startups

Coming next week: Part 5 of the 6 part series: Specific Offering Structures and Liquidity. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A and Reg CF: How Does a Company Receive The Capital It Raises?

Part Two of a Six Part Series Comparing Regulation A and Regulation Crowdfunding. See Part One Here

My fascination with bad AI art continues. This is what my AI image generator spewed out when I asked it to illustrate the title of this article.  Don’t ask me why the computer is wearing shoes and has Mickey Mouse’s arms and hands. And just to be thorough – one important disclaimer! No matter what form of equity crowdfunding you choose, you will never receive a wheelbarrow full of cash.

So you have decided to hold either a Regulation A or Regulation Crowdfunding offering. There are a few things to consider when deciding whether Reg A or Reg CF is the best fit for you. One thing to consider is how and when your company will receive your new capital infusion once you launch and start raising funds from investors. The rules surrounding this for Reg A and Reg CF are very different.

Minimum or Target Amount

One big difference between Reg A and Reg CF is the concept of a “target offering amount.” Under Reg CF, a company raising capital cannot hold a “closing” and receive any investment funds until the “target offering amount” is reached.  There is no such requirement under Reg A, and an issues can start taking funds out on most Reg A offerings as soon as funds are raised.

The target offering amount is the amount of money set as a minimum raise by the company raising funds.  This is not the same as the maximum amount allowed by law (Reg CF - $5,000,000 in any 12 month period, Reg A Tier II $75,000,000 in any 12 month period), but rather a number that is often artificially set as a floor – if the Reg CF issuer doesn’t raise this target amount, the offering is terminated and all investors are refunded their money. Some funding portals require an issuer to raise $50,000 to $100,000 as a target amount, meaning the issuer cannot take any funds to use for any purpose until $50,000 to $100,000 is raised.

Reg A has no “target amount” legal requirement, but in some cases a company raising funds can have a self-imposed requirement of a target or minimum amount. These offerings are known as “Min-Max” offerings – the company raising funds does not want to accept funds until their “min” or target amount is reached. A great example of this would be an issuer who needs to raise $100,000 to buy a new piece of equipment. If they raise $40,000, or even $90,000, they will not be able to purchase the equipment. In this instance, an issuer may choose to refund all the potential investors rather than accepting a fraction of the money they needed to fulfill the reason for the raise.  This min-max type of offering is purely voluntary in Reg A offerings.

21 Days

This is the second big difference between Reg A and Reg CF when it comes to a company receiving funds from its offering. No company can actually accept investments in a Reg CF offering until 21 days after the date on which the Reg CF offering is live and publicly displayed on a funding portal or broker-dealer website.  In other words, while investors can see the offering online, and can fill out the forms and process their payments, none of those investors can be accepted and no money can be released to the issuer until the Reg CF offering has been online for 21 days. 

Reg A has no such time limitation. Unless it is a min-max Reg A offering, the issuer can close on and take investment funds as soon as it wants after launching its Reg A offering.

Reg CF Rules Allowing Investors To Opt Out

This is the third, and perhaps biggest difference between Reg A and Reg CF when it comes to an issuer being able to receive the new capital it has raised. Let’s start with Reg A. With Reg A, once an investors makes an investment commitment – they fill out the online forms, process their payment and sign their subscription documents – that investor is basically locked into their investment, and once the issuer holds a closing – and countersigns the subscription agreement – that investor is issued their securities and the investor’s funds are sent to the issuer.  It’s very simple and straightforward.

Not so with Reg CF.

In a Reg CF investment application, there are several rules to be aware of, and these rules allow an investor to cancel their investment prior to a closing.  And, I can tell you from experience, some investors will cancel their investment commitment for various reasons when given the chance to do so. This means an issuer cannot rely on the investment funds it believes it has raised based on investment commitments, until a few hoops are jumped through. 

Let’s start with the most basic of these rules: in Reg CF an issuer launching and offering must set a “deadline” date to reach its target amount. If the issuer doesn’t reach its target amount by that deadline, then typically (a) the issuer will extend the deadline – which subjects the issuer to a new set of “material change” rules below – or (b) the offering ends and the investors are refunded all of their money.

So let’s look at what happens if a Reg CF issuer reaches its target goal before the deadline, and wants to hold a closing – take the funds it has raised to date and issue securities to the investors. Under Reg CF (again – this is not required under Reg A) if an issuer reaches the target offering amount prior to the deadline, it may hold a closing earlier than the deadline if it (a) provides notice about the new, earlier offering deadline at least five business days prior to such new offering deadline and (b) gives a description of the process to complete the transaction or cancel an investment commitment, letting investors know they can cancel their investment until 48 hours prior to the new deadline and (c) the investor does not cancel its investment commitment before the 48-hour period prior to the offering deadline.

As you can imagine, this notice to investors that they can cancel their investment is not a great thing for issuers. Particularly if some time has passed between the investment commitment and the proposed closing – some people may decide they’d rather have their money back than invest. Not to belabor the point – but this cancellation feature can cost Reg CF issuers a lot of money in lost investments – and it is not something a Reg A issuer has to deal with.

This same procedure must be undertaken by a Reg CF issuer every time they hold a closing with any potential investors in that closing. Again, no such requirement for Reg A issuers.

Here’s another one that applies to Reg CF and not Reg A. If a Reg CF issuer makes a “material change” to the terms of its offering or to the information it provides to investors, a notice must be sent any investor who has made an investment commitment explaining the material change and telling the investor that its investment commitment will be cancelled unless the investor reconfirms his or her investment commitment within five business days of receipt of the notice. If the investor fails to reconfirm its investment within those five business days, the investment is cancellated and the investor refunded. As you can imagine, this is another situation where issuers can easily lose investors. Unlike the other notice provision of Reg CF where no material change has occurred, and an investor is simply given notice of the change, with a material change the investor must affirmatively respond to the notice or they are automatically cancelled.

There is no such requirement of automatically cancelling investor commitments under Reg A, although a Reg A issuer does have required SEC filings when a material change occurs. 

Multiple Closings and Escrow

Both Reg A and Reg CF allow for multiple “closings” throughout an offering. This means a company raising funds can take in investment dollars and issue shares as often as they want, by law. With Reg CF, the first closing is subject to the 21 day rule mentioned above, but after that there is no limit on the number of times a company may choose to hold other closings.

However, there are costs to each closing that vary depending on whether you are using Reg CF or Reg A. For Reg CF, investor funds must be held in a “qualified third party” account (typically an escrow account) until the target amount is raised and the 21 days since launch have passed, before an issuer can request a closing. Every funding portal and broker-dealer, and every qualified third party have their own rules and costs associated with holding a closing, or a series of closings known as “rolling closings.”  These fees can get expensive and are one of the fees that issuers should ask about before choosing a funding portal or broker-dealer. Some typical changes surrounding these closings are a per closing fee (which can be several hundred dollars), fees to transfer the funds to your account, and sometimes other administrative fees which add up and make it economically unfeasible to hold closings, for example, every day.

With Reg A, there is no requirement to hold investor funds in a qualified third party account or an escrow account, unless the offering is a Min-Max offering, in which case funds must be held in an escrow account until the minimum is met and a closing takes place.  As a result, closing costs can be less expensive in Reg A, but some Reg A offerings use escrow regardless of the legal requirement, and therefore end up in a similar situation to Reg CF when it comes to frequent rolling closings.

There are also other limitations that may be imposed by the funding portal or broker-dealer who is acting as a legally required “intermediary” on Reg CF offerings. At one point, funding portals were not allowing multiple closings, and some limited rolling closes to only 2 per offering. While this is not quite as limited today as it used to be, an issuer preparing to raise capital who wishes to hold multiple closings should inquire in advance with the funding portal or broker-dealer to see if there are any limits on the number of closings they can hold during the offering.

#regulationA #RegA #RegCF #regulationcrowdfunding #equitycrowdfunding #crowdfunding #RegAPlus #funding #capitalraise #fintech #JOBSAct #capitalraise #smallbusiness #smallbusinesstips #securities #securitieslaw #equity #StartupLife #startups

Coming next week: Part 3 of the 6 part series: Marketing and Distribution. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A vs. Reg CF: Which JOBS Act Equity Crowdfunding Regulation Is Right For You?

When the JOBS Act was passed into law in 2012, small businesses in United States were given the opportunity to finally be able to tap into the crowd – everyday people – to raise capital even if the company was a startup, early stage or otherwise not going to be able to attract private equity or venture capital money. After 80 years, the heart of the American economy, small businesses, could finally raise capital from anyone, not just wealthy or well-connected individuals or institutions, and still remain a private company.

Over the past few years, two provisions of the JOBS Act have allowed small businesses (and some large businesses!) to raise billions of dollars from investors that for decades would not have been allowed to invest. Regulation A (also called Reg A or Reg A+) and Regulation Crowdfunding, or Reg CF as many call it, changed the landscape for small businesses that needed money to grow. While most people decide which of these provisions to use based on the amount of money they are trying to raise (Reg A allows an offering of up to $75M in one year while Reg CF is limited to $5M per year) there are many factors to be considered by a company seeking capital that go far beyond the simple question of “How much do I need to raise?”

 As a securities attorney who has handled many of both types of offerings, and as a crowdfunding consultant who has helped direct the marketing and other non-legal facets of both Reg A and Reg CF offerings, I have some insights that most do not have. In this new series of articles, I’ll share many of the things companies need to consider when they choose which regulatory exemption from SEC registration to use in order to raise capital from the crowd.

 I’m going to break this down into several articles that I will post over the next few weeks to save you from having to read the War and Peace version of how to democratize capital raising all at one time!

 Also, note that Reg A involves two tiers: not-so-coincidentally named Tier I and Tier II.  because Tier I has limited use for most companies raising capital and is rarely used compared to Tier II.

 This week: The Basics.

 Who can raise capital?

 For both Reg A and Reg CF, only a company (usually a corporation or an LLC) can raise capital. Individuals cannot raise funds with either Reg A or Reg CF.

 Regulation A is only available only to companies organized in and with their principal place of business in the United States or Canada.

 Regulation CF requires the company raising funds to be organized under the laws of a state or territory of the United States or the District of Columbia. There is no “principal place of business requirement” for Reg CF which opens the door to foreign companies using the law with some restructuring.

 Who can invest in a Reg A or Reg CF offering?

 Anyone, regardless of their level of income or net worth, may invest in a Reg A or Reg CF offering. This includes anyone in other countries, as long as it is legal in their jurisdiction to invest and assuming there is no ban in the United States on that person or anyone from their country investing.

 Are their limits on how much someone can invest in a Reg A or Reg CF offering?

 There are no limits on the amount any person or entity may invest in either type of offering, if the investor is “accredited.” An accredited investor is defined in 17 CFR § 230.501(a) and there are many criteria that allow one to meet the definition, but the most common two categories are (a) any natural person whose individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000 (not including the person's primary residence not included as an asset and indebtedness that is secured by the person's primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, not included as a liability or (b) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

 For an investor who is not accredited, they may still invest in a Reg A or Reg CF offering. In both cases, the amount one may invest is limited. In the case of Reg CF, it is further limited by the amount that person has invested in other Reg CF offerings in the past 12 months.

 I’d explain the formulas behind the limitations here, but it would only confuse you and make you ask yourself why these two provisions of the JOBS Act that basically allow companies to do the same thing to not have the same formula to determine how much money a non-accredited investors is allowed to invest. The good news is that this calculation is done behind the scenes through software that makes it fairly easy for an investor to determine how much they are legally allowed to invest. The other good news is that Congress didn’t put the burden on companies using Reg A or Reg CF to check the math or verify the numbers an investor uses. Unless the company is aware the investor is not “accredited” the company is allowed by law to rely on the investor’s representations.

How much capital can a company raise?

 In any one year period, a company may raise up to $5M with Reg CF.

 In any one year period, a company using Reg A may raise up to $75M with Tier II of Regulation A, and up to $20M with Tier I. This is commonly misconstrued to mean any company raising between $1-$20M must use Tier I, which is not true. A company may raise from $1-$20M with Tier I, and from $1-$75M with Tier II.

 I’m not going to get into the details of Reg A Tier I versus Reg A Tier II in this article for one simple reason: the use of Reg A Tier I is very limited for most companies. The reason for this in a nutshell comes down to one major factor: Reg A Tier II allows a company to raise capital anywhere in the U.S. without having to comply with every state’s Blue Sky laws while Tier I is the opposite and requires the issuer to comply with those laws in every state where investors will be solicited. Compliance with state by state Blue Sky laws is extremely expensive and could easily double or triple the cost of getting a Reg A Tier I offering live. Imagine having to have your offering circulars to raise capital undergo review by each state’s securities regulators, instead of just the SEC. Imagine the legal bills of trying to come up with filings in each state that are the same, and every time one of 50 state regulators or the SEC tells you to change one random paragraph, then having to go to all the other states again to make sure that they are happy with the change one regulator 2,000 miles away required. Imagine watching your bank account get drained as you pay even more attorneys’ fees.

 Suffice to say, Reg A Tier I is an often excellent choice to raise capital if you plan to only target residents on one state (an example would be a local restaurant who wants to open more locations in the same city), it is not a great choice for a company trying to reach investors across the fruited plain.

 How much does it cost to raise capital?

 For a company that is already formed, typically it costs approximately $15,000-$25,000 in out of pocket expenses to get a Reg CF offering live. The costs after the offering is live typically involve mostly marketing expenses, which can vary dramatically from case to case.

 For a company that is already formed, typically it costs approximately $50,000-$75,000 in out of pocket expenses to get a Reg A offering live. Just like Reg CF, the costs once the offering is live typically involve marketing expenses which can vary dramatically.

These numbers are general guidelines, and the cost could be far lower, or much higher, depending on all of the circumstances.

What legal documents do I have to prepare?

In order to start raising capital with a Reg CF offering, a company must file a document called Form C with the SEC which contains certain required legal disclosures, risks factors, company information, information about the securities you are selling, financial statements and more. Note that some funding portals – who are a sort of mini-broker-dealer – will offer to draft and file the Form C for you to save money. Before taking this extremely risky chance, consider the risks of allowing non-lawyers to draft legal documents for you that investors will be relying upon. Your company, and perhaps the principals and directors of your company, will be on the hook for whatever is contained in that Form C filing.  There are potential criminal penalties for those whose names are signed to these documents if they are not prepared correctly. Securities laws are complicated and paying a seasoned securities lawyer with Reg CF experience to draft and file this important document for you is something most prudent companies do.

 In order to start raising capital with a Reg A offering, a company must file a document called Form 1-A with the SEC. Typically, this is a far more extensive document than Reg CF’s Form C, even though it contains much of the same basic disclosure requirements. In reality, Form 1-A is basically a shorter form of a prospectus used by companies that hold an IPO. Form 1-A undergoes a review process with the SEC and must be “qualified” before you can go live and start raising capital.

 What financial and accounting requirements must I meet to file my proposed offering with the SEC?
This can get complicated, so I’ll give you the basics which apply in most situations.

Reg A is simple. With Tier II, all offerings must include up to two years of financial statements audited by an independent CPA. If your company is less than two years old, you must have audited financial statements from inception to the present.

 Reg CF is a bit more complex, and what financial statements must be included in your SEC filing depends on how much you plan to raise, and whether this is your company’s first Reg CF offering or not and whether the date of the offering is more or less than 120 days after the end of your company’s prior fiscal year.

 The basic rules are:

 If you are planning to raise less than $124,000, you may disclose internally created financial statements for the past two fiscal years certified as accurate by your management.

 If you are planning to raise between $124,000 and $618,000, you must disclose independent CPA reviewed financial statements for the past two fiscal years.

If you two are planning to raise between $618,000 and $1,235,000 and this is the first time your company has used Reg CF, you must disclose independent CPA reviewed financial statements for the past two fiscal years. If you have previously used Reg CF, you must disclose independent CPA audited financial statements for the past two fiscal years.

 If you two are planning to more than $1,235,000, you must disclose independent CPA audited financial statements for the past two fiscal years.

 Also, for Reg CF, if your company has audited financial statements available for the relevant time period, you must disclose those.

 After you start raising capital, are there any ongoing filings to make with the SEC?

 For both Reg A and Reg CF, there are ongoing reporting requirements. While none of these are as expensive or burdensome as those required of fully registered public companies, they are very important to remain compliant with federal securities laws. The main reports to be filed are discussed below, although other reports may be required.

 Reg CF only has one major ongoing SEC reporting requirement. An issuer that sold securities in a Regulation CF offering is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year and must post the report the company’s website. The annual report requires similar financial information to what is required in the Form C offering statement that is initially filed to start a Reg CF offering, but the financial statements do not need to be audited or reviewed by an independent CPA. This filing requirement ends when one of five events occurs:
(1) the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);

(2) the issuer has filed at least one annual report and has fewer than 300 holders of record;

(3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;

(4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or

(5) the issuer liquidates or dissolves in accordance with state law.

 At that point, the issuer may file notice on Form C-TR reporting that it will no longer provide annual reports.

 For Reg A, Tier II, there are more reports to file to remain compliant. Similar to Reg CF’s annual report on Form C-AR, Reg A issuers file an annual report on Form 1-K within 120 calendar days of the issuer’s fiscal year end. Form 1-K requires two years of audited financial statements. It also requires an update of information from the issuer to information previously filed. It also requires disclosures relating to the issuer’s business operations for the prior three fiscal years (or, if in existence for less than three years, since inception) as well as related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors, including certain executive compensation information, management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

And requires an update of information from the issuer requires issuers to update information previously filed and to provide disclosures relating to the issuer’s business operations for the prior three fiscal years (or, if in existence for less than three years, since inception) as well as related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors, including certain executive compensation information, management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

Additionally, Reg A Tier II requires a semiannual report to be filed on Form 1-SA within 90 calendar days after the end of the first six months of the issuer’s fiscal year. Form 1-SA requires issuers to provide disclosure primarily relating to the issuer’s interim financial statements and management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

Reg A also requires an issuer to file a “current report” on Form 1-U within four business days of the occurrence of one (or more) of the following events: fundamental changes; bankruptcy or receivership; material modification to the rights of securityholders; changes in the issuer’s certifying accountant; non-reliance on previous financial statements or a related audit report or completed interim review; changes in control of the issuer; departure of the principal executive officer, principal financial officer, or principal accounting officer; and unregistered sales of 10% or more of outstanding equity securities.

 How fast can I get an offering live?

 This is a hard question to answer because there are so many variables. One variable – how long it takes your company to get its financial statements done - almost always takes longer than expected and without those statements, you cannot file with the SEC under Reg CF or Reg A.

Some companies do not have their books in order, or their books are not to GAAP (Generally Accepted Accounting Principles) so there can be delays getting the basic financial statement requirement complete which holds up the entire process.

 But realistically, I tell my law firm clients that it is about a 3 month process to get a Reg CF offering live from the time I am hired, and a 4-6 month process to get a Reg A offering live. That being said, there are times I have been able to get an offering live on a shorter timeline, and times it took longer than those estimates.

 Coming next week: Part 2 of the 6 part series: How Does a Company Receive The Capital It Raises? Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Does Equity Crowdfunding Work? Yes it does. Here are the numbers.

Asking an AI Image Generator to create a graphic based on the title of this article produced this strangely confusing and bizarre image.

When the JOBS Act was enacted into law in 2012, I pivoted my law practice and soon thereafter became recognized as one of the leading experts on Regulation A and Regulation Crowdfunding (Reg CF). I wrote about it for Entrepreneur. I spoke around the world to crowds of people who wanted to learn more. More importantly – I refused to fall into the “those who can’t do something, teach it” category – I have been legal counsel for companies raising capital as well as broker-dealers, funding portals and others in the industry since the law was passed. As both a securities lawyer and as a “quarterback” who provides non-legal advice and acts as a project manager for equity crowdfunding offerings, I have helped raise a lot of money for companies from pure start-ups to unicorns.

I see this burgeoning industry from the inside every single day. Because of my position in the industry, I also get asked a lot of questions from those on the outside peeking in. One question I get asked the most often is, “Does it really work?”

 While I can give numerous real-world examples from my own experience, nothing beats a good study from a group of industry experts. The folks at Crowdfund Capital Advisors do an amazing job of tracking the Reg CF industry and providing reporting, statistics and insights that are invaluable to anyone interested in this new world of finance that democratizes the capital raising process. Here are some findings they published in May 2024, with a bit of commentary from your truly to help with perspective.

 Needless to say, looking at their data makes it easy for me to answer the question of “Does it really work?”

 The answer is a resounding, “Yes!”

 More than 6,500 U.S. startups and other small businesses have raised nearly $2.48B in capital through 8,400 investment rounds.

 In most cases, these companies were too early stage for venture capital or private equity. With competition for angel investors being intense, equity crowdfunding provides an ability to raise capital from the crowd, and not to be forced to rely on bank loans or credit card debt to fund a small business.  

More than 2,000,000 Americans have invested in Reg CF offerings, averaging about $1,200 per investment.

 It is no longer uncommon for large numbers of people to make smaller investments in startups online through equity crowdfunding. This also exemplifies how support from a company’s network of customers, fans, and supporters coupled with interest from local communities supports the democratization of small business finance. 

Women & Minorities constitute nearly 50% of successful Reg CF issuers and often opt for Reg CF over venture capital for their funding needs. 

Women and minority founders find it very hard to raise capital from venture capitalists and private equity funds. For example, Fast Company recently reported that companies with solely female founders continue to receive only 2% of the venture capital invested annually. Equity crowdfunding is the great equalizer. In fact, Reg CF funding portals such as Rise Up Crowdfunding, a collaborative effort with the Coca-Cola Company, cater only to women or minority owned and operated companies.

 Reg CF has created or supported over 400,000 jobs, has been used by companies in more than 1,750 cities across all 50 states, and has caused $7.5B in economic stimulus through business expenditures, with the majority of spending and jobs staying local.

 Small businesses continue to be the lifeblood of the U.S. economy. Reg CF has helped local communities through job creation and local spending that would not likely have occurred if those same small companies had to rely on traditional capital raising methods.

 Reg CF has attracted companies from over 620 industries.

 While certain industries like real estate, tech and those involving consumer products tend to be more widely seen using equity crowdfunding, nearly any industry can use this capital raising tool successfully if they understand the process and market their offering correctly.

 14 firms that raised money using Reg CF have pursued public offerings and 71 have been part of a merger or acquisition.

 Let’s face it. All investors want a return, even if they only invested a small amount. Equity crowdfunding isn’t charity – it is a very real investment into a company. Giving investors a return is important to the health of any business. Given that this law has only been usable for 8 years, seeing this many companies proceed to an IPO or a merger/acquisition is pretty remarkable.

 The simple bottom line is that equity crowdfunding works when you do it the right way. These numbers and observations reflect that in pretty dramatic fashion. Interestingly, they do not include capital raised, jobs created, and the economic impact of Regulation A which allows a small company to raise far more capital online than Reg CF, and which has been responsible for billions of additional investment dollars flowing into small businesses across the country.

Equity crowdfunding is here to stay, and will continue to grow. It’s an exciting time for small businesses.

Lessons To Be Learned From The SEC’s Recent Penalties for ICO Companies

“Learn from the mistakes of others” - Ancient Philosopher Kendall Almerico

The Securities and Exchange Commission recently brought their regulatory hammer down on several ICO-related companies. After months of public statements from officials and rumors of numerous subpoenas and investigations, the SEC sent a strong and undeniable message to companies that have held unregulated initial coin offerings, and to those who are considering it.

Don’t do it.

There are lessons to be learned from these recent regulatory actions. These lessons confirm what I have been preaching in my securities law practice to all of the coin/token/crypto companies I have been talking to or representing: Follow the existing securities laws to raise capital selling tokens or be prepared to suffer some extreme consequences. In this article, I will dig into the story of Carrier EQ, also known as AirFox, whose story is a perfect illustration of the dangers a company faces when they hold an ICO without following securities laws.

I am going to get into a lot of specific facts because what AirFox did is so common in the ICO world, so we can all learn from their mistakes. I will also explain in layman’s’ terms what happened to AirFox as the SEC reviewed their offering, in an effort to provide a “heads-up” to companies that still believe they can get away with holding an ICO in the United States without going through the SEC. It appears that AirFox did not receive very good advice in their ICO, and despite all the recent warnings and negative publicity, I still have ICO companies contacting me wanting to use these same methods (“But I’m selling a utility token!”) that got AirFox in trouble.

Two things are obvious after this SEC enforcement action:

1. You cannot call what you are selling a “utility token” and have securities laws magically not apply to your offering (see Lesson 7 below), and

2. Unless you can definitively prove what you are selling is not a security, you need to follow securities laws in your offering.

The AirFox ICO

AirFox is a U.S. company that sells mobile technology that allows prepaid mobile phone customers to earn free or discounted airtime or data by interacting with ads on their smartphones. From August to October 2017,[1] AirFox offered and sold blockchain-issued digital tokens called AirTokens in an ICO where the company raised about $15 million to create a new international business and ecosystem. AirFox told potential ICO investors that the new ecosystem would include the same functionality of AirFox’s existing U.S. business (allowing prepaid mobile users to earn airtime or data by interacting with ads) and would also add new features such as the ability to transfer AirTokens between users, peer-to-peer lending, credit scoring, and eventually using AirTokens to buy and sell goods and services other than mobile data. In the ICO, AirFox stated that AirTokens would potentially increase in value as a result of AirFox’s efforts, and that AirFox would provide investors with liquidity by making AirTokens tradeable in secondary markets.

Any advisor who even has a basic understanding of securities law would look at this and say “Hey, AirFox, you are selling securities. You are selling tokens to the general public, that you are alluding to an increase in value, to finance a new business.” Apparently, AirFox’s “crypto advisors”[2] and lawyers (if they had any) did not bother to Google “what is a security?”[3]

The SEC Penalties

On November 16, 2018, the SEC instituted “cease and-desist proceedings” against AirFox. This means, in laymen’s terms, that the SEC told AirFox to “Stop Breaking The Law!” because the SEC is about to come in, and effectively shut their company down with penalties. As a result, AirFox reached a settlement with the SEC so they could have some hope of continuing in business. The settlement requires AirFox to:

· Pay a $250,000 fine,

· Inform each person that purchased AirTokens of their right to get their money back if they still own the tokens or if they can show they sold them for a loss,

· Issue and post a press release on the company’s website notifying the public of the SEC’s order, containing a link to the order, and containing a link to a “Claim Form” for investors to get their money back,

· File the appropriate paperwork with the SEC to register the AirTokens as a class of securities — this means the AirFox now must follow all securities regulations and ongoing reporting requirements as to these tokens — an extremely expensive requirement, and

· Deal with a lot of other ongoing reporting requirements related to these penalties to keep the SEC informed.

In essence, the SEC made AirFox pay a large fine, forced them to return up to $15 million back to investors, publicly admit on online and in the press that they broke the law, and be subject to a ton of time-consuming and expensive paperwork (disclosing information like audited financial records that investors typically need to decide if a stock is a good investment ).

How many companies that held an unregistered ICO could financially stay viable with the imposition of such penalties? My suspicion is that there are very few.

What do we learn from the AirFox settlement?

1. The SEC is going to follow the Howey test[4] at least as a baseline to determine if a token sold in an ICO is a security. AirTokens were “securities” under the Howey test because people buying the tokens would have had a reasonable expectation of obtaining a future profit based upon AirFox’s efforts, including AirFox revising its app, creating an ecosystem, and adding new functionality using the proceeds from the sale of AirTokens.

Lesson: If your token offering cannot pass muster with a well-known 76-year old Supreme Court ruling, you are selling securities.

2. If you sell tokens that are securities, you have to either (a) register the securities with the SEC or (b) qualify for one of the well-known exemptions from registration such as Regulation D or Regulation A when you sell the tokens. In other words, follow existing securities laws. AirFox, like many ICO companies, did neither of these things, which is illegal.

Lesson: This isn’t rocket science. Either file an S-1 and register your token offering or be sure you qualify under one of the exemptions from registration (like Regulation A) before you sell any tokens to anyone.

3. The SEC is going to read your “white paper”[5] and review everything[6] related to your token offering. With AirFox, the SEC specifically noted that “in September 2017, AirFox explained to prospective investors in a blog post that the ‘AirFox browser is still considered ‘beta’ quality and will continue to be improved over the coming months as we execute on the AirToken plan.’” This blog post helped the SEC satisfy one of the Howey prongs of what constitutes a security: Money from the token sale was being used in a common enterprise for the company raising capital to build their business.

Lesson: Follow securities laws in all offering documents, marketing materials, media interviews, and everything whatsoever associated with the token offering.

4. AirFox’s white paper informed investors that 50% of the proceeds of the offering would be used for engineering and research and development expenses. In AirFox’s whitepaper, the company proposed a potential timeline of development milestones which covered from August 2017 through the second quarter of 2018.[7] Again, the company’s own documentation showed they were selling securities under Howey, by explaining that the company was going to use the funds from the token sale to fulfill their business plan.

Lesson: If you are using the funds from the token offering to build your business, follow your business plan, or build your ecosystem the tokens will be uses in, you are probably selling securities.

5. In its ICO, AirFox raised approximately $15 million by selling 1.06 billion AirTokens to more than 2,500 investors. The number of investors is important: A company selling securities is required to register their equity securities under “Rule 12(g)”[8] if the class of securities was held of record by more than 2,000 persons and more than 500 of those persons were not accredited investors. In other words, if you sell securities to 2,001 total investors, or 501 non-accredited investors, you have to be registered with the SEC.[9] With more than 2,500 investors, AirFox would be subject to these expensive registration requirements, if their tokens were considered to be securities.

Lesson: Watch the number of investors in your offering. Even when you are selling tokens that are clearly securities, you must pay attention to the rules surrounding how many investors you are allowed based on the laws applicable to your offering.

6. AirTokens were available for purchase by individuals in the United States and worldwide through websites controlled by AirFox. The company is based in the United States. The websites selling the tokens in the U.S. were controlled by the company. This all subjected AirFox to the jurisdiction of the SEC.

Lesson: If your company does business in the U.S., or wants to touch the U.S. investor market, you need to follow U.S. securities laws. If you are not a U.S. company[10], and do not sell or market at all to U.S. investors, most of this article may not apply to you at all.

7. The terms of AirFox’s the ICO required purchasers to agree that they were “buying AirTokens for their utility as a medium of exchange for mobile airtime, and not as an investment or a security.” In other words, AirFox assumed they could agree with their token purchasers that they were selling a “utility token” and not a security. It doesn’t work that way. Calling something a “utility token” and saying it “is not a security” is meaningless to the SEC. As the SEC notes “at the time of the ICO, this functionality was not available. Rather, the AirFox App was a prototype that only enabled users to earn and redeem loyalty points, which could be exchanged for mobile airtime. According to the company, the prototype was “really just for the ICO and just for investment purposes so people know . . . how it’s going to work” and “[did not] have any real users” at the time of the ICO. Despite the reference to AirTokens as a medium of exchange, at the time of the ICO, investors purchased AirTokens based upon anticipation that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts.”

This quotation from the SEC is important for two reasons:

· It makes it clear that the AirTokens violate the Howey test. Investors purchased AirTokens anticipating that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts. That is, almost literally, the definition of a security contract from Howey — someone investing in a company where the company’s efforts will increase the value of the investment.

· More importantly, the SEC seems to have cracked the door open a little. The SEC specifically set out several reasons why the AirTokens are securities and not “utility tokens” …but what if those reasons did not exist? What if this ICO had taken place later, and the following facts had been in existence:

(a) At the time of the ICO, the tokens’ functionality was available,

(b) The app was a not a prototype but was fully functional,

(c) The app had real users at the time of the ICO,

(d) The tokens were being used onlyas a medium of exchange at the time of the ICO, and

(e) Purchasers of the tokens had no anticipation that the value of the tokens would rise through the company’s future managerial and entrepreneurial efforts, because the tokens were not allowed to be traded on an exchange or otherwise.

While the marketplace for such tokens would not likely yield nearly $15 million in purchasers like in AirFox’s ICO, it seems that the SEC mightentertain characterizing tokens in the scenario[11] above as not being subject to securities laws.

Lesson: You can’t call what you are selling a “utility token” and have securities laws magically not apply to you. What you call your tokens is irrelevant to the SEC’s legal analysis.

8. AirFox’s whitepaper described an ecosystem to be created by the company where AirTokens would serve as a medium of exchange and that the company would maintain the value of AirTokens by purchasing mobile data and other goods and services with fiat currency that could be then purchased by holders of AirTokens and that the company would buy and sell AirTokens as needed to facilitate the purchase and sale of goods and services with AirTokens. In other words, the investors in the tokens would, again, be relying on the future efforts of AirFox, clearly one of the Howey prongs that make the AirTokens clearly securities under the law.

Lesson: If you are relying on the future efforts of the company selling the tokens to give the tokens value, the tokens have failed one portion of the Howey test.

9. Prior to the ICO, AirFox communicated to prospective investors that it planned to list the tokens on token exchanges to ensure secondary market trading. Obviously, liquidity in any investment is a huge part of the investment decision by a purchaser, and AirFox made it clear (a very common trait in unregulated ICOs) that their tokens would be traded on crypto exchanges, so buyers could sell them and potentially make a profit. This satisfies the “investment” arm of the Howey test. If investors have a reasonable expectation of profit from being the tokens, the tokens are very likely securities.

In fact, in the middle of the ICO, AirFox announced that it was reducing the token supply from 150 billion to 1.5 billion without changing the anticipated market cap “to alleviate concerns raised by many current and potential token holders and token exchanges who prefer each individual token to be worth more.”

Imagine a tradition initial public offering of stock, where the IPO company suddenly changed the number of shares of stock available but kept the valuation of the company the same. “Hey, those shares you first-in buyers got for $20 are now worth $2000 each because we decided to sell 1/100thof the number of shares.” This kind of market manipulation would likely end of with a few people in federal prison.

Lesson 1: If you tell purchasers of your token that the tokens are going to be traded and that you are going to do things to make the tokens more valuable for these investors, you are selling securities, without any question.

Lesson 2: Changing the material terms of a securities offering in the middle of it = bad idea.

10. The SEC noted the following interesting bit of information. Following the ICO, AirFox attempted to list AirTokens on a major digital token trading platform, and answered an application question that asked, “Why would the value increase over time?” AirFox’s response was “As time lapses the features and utility of AirToken will go up as we continue to build the platform. As of today, the people are able to download our browser to earn and purchase AirTokens to redeem mobile data and airtime across 500 wireless carriers. Over the next two years, the utility of the token will expand and therefore, more people across the world will need to have AirTokens in their possession to participate on our platform and ecosystem.”

Lesson: The SEC reads and reviews everything, including interactions a company has with third-party companies.

11. AirFox offered and sold AirTokens in a general solicitation to potential investors. This means AirFox advertised the ICO to the general public and solicited investments from anyone willing to send them money. In the securities world, general solicitation is limited to certain types of securities under certain exemptions, and allowing any investor to purchase securities, regardless of their accredited status, is not allowed in most cases.

Lesson: If you are going to advertise your token offering (and how else would you get the word out and find investors?) you need to follow securities laws and regulations related to general solicitation.

12. Through a “bounty” campaign, AirFox provided “free” AirTokens to people (crypto advisors) who helped the company’s marketing efforts. AirFox entered into an agreement with a crypto advisor who had previously led similar ICO promotions by other companies. This crypto advisor received a percentage of the AirTokens issued in the ICO in exchange for his services, recruited other people to translate AirFox’s whitepaper into multiple languages and to tout AirTokens in their own internet message board posts, articles, YouTube videos, and social media posts. More than 400 individuals promoted the AirToken initial coin offering as part of the bounty campaign. These individuals also received AirTokens in exchange for their services.

While the SEC did not specifically address this point in their ruling, I would not be surprised to see some regulatory or legal investigation undertaken against these crypto advisors. Depending on several factors that there is not enough publicly available information to know for certain, it is possible these crypto advisors may have conducted illegal broker-dealer activities subject to various regulations. The advertising and marketing of securities is highly regulated and based upon the representations made by those who were paid “bounties” by AirFox, it is also possible that some of these individuals did not follow existing laws and regulations as to how such advertising should be conducted.

Lesson: Follow all securities laws and regulations related to marketing, and only deal with advisors who understand and follow securities laws. When interviewing advisors, ask them about their experience in token offerings that were done in compliance with SEC regulations, not their experience with unregulated ICOs.

13. AirFox aimed its marketing efforts for the ICO at digital token investors rather than the anticipated users of AirTokens.

· AirFox promoted the offering in forums aimed at people investing in Bitcoin and other digital assets, that attract viewers in the United States even though the AirFox App was not intended to be used by individuals in the United States.

· AirFox’s principals were interviewed by individuals focused on digital token investing.

· In a blog post, AirFox wrote that an AirToken presale was directed at “sophisticated crypto investors, angel investors and early backers” of the AirToken project and in a pre-sale, prior to the public offering, AirFox made AirTokens available to early investors at a discount.

AirFox made no effort to market the ICO to the anticipated users of AirFox tokens — individuals with prepaid phones in developing countries. Instead, AirFox marketed the ICO to investors who “viewed AirTokens as a speculative, tradeable investment vehicle that might appreciate based on AirFox’s managerial and entrepreneurial efforts.”

Lesson: If you are going to claim you are selling “utility tokens” in an offering, you should sell those tokens to the ultimate users of the tokens. If you do not, you are likely selling securities to speculating investors, and your argument of selling “utility tokens” falls apart very quickly.

Conclusion (The Final Lesson)

I’ve been talking to (and in some cases, actually representing) token and crypto companies ever since the DAO decision when the floodgates opened to companies realizing that the only safe way in the U.S. to issue a digital asset, token or coin is to follow securities laws. It’s not that hard. Every mistake AirFox made was avoidable, and everything they did to violate well-established securities laws could have been avoided if they had received good advice. Selling investments to U.S. citizens is one of the most highly regulated industries in the world. To think a company can avoid following these well-established laws and regulations just because of a new technology, and because “everyone else is doing it,” is ridiculous.

Can I start openly selling cocaine online to anyone who wants to buy it because I keep the records of the sales on a distributed ledger and track each kilo on a blockchain? No, and nobody would be so stupid to try.[12]

This is not that difficult. The final lesson is: If you want to sell tokens without following securities laws to the U.S. market, you need to be 100% certain they are not securities, and that is going to be very difficult to do in most cases. If you and your advisors are not 100% certain that what you plan to sell is not a securitiy, get advice from reputable securities counsel before you do anything.

Once more thing: if you find yourself creating arguments to get around parts of the Howey Test rather than being able to definitively prove your tokens do not fit the Howey definition of a security, then the SEC is most likely going to disagree with you, and deem your tokens to be securities.

[1]It is important to note these dates. One month before the AirFox ICO, in July 2017, the SEC announced that it viewed the tokens offered by The DAO, an ICO that raised more than $150 million in 2016, as securities. This ruling was widely reported and sent shockwaves through the “unregulated” ICO industry. It would be hard to imagine that those advising AirFox were not aware of the DAO ruling when they started their ICO one month later.

[2]Some “crypto advisors” are persons (nearly always without a law degree) who advertise that they have “helped companies raise millions” in other ICOs (none of which followed U.S. securities laws). They often have influence in the ICO community and on ICO review websites where, in many cases, the review of an unregistered ICO is based on how much money you pay the website.

[3]Or, their advisors Googled it, read the Howey test, and decided “Let’s make like an ostrich and ignore the obvious.” Advisors to ICO companies should not take the attitude of “but everyone else is doing it and raising millions of dollars so it must be okay” or, my favorite, “there are no rules for ICOs, these are unregulated!”

[4]SEC v. W. J. Howey Co., 328 U.S. 293 (1946). The “Howey Test” is the U.S. Supreme Court’s definition of what a security is and has been the law for 76 years. In a nutshell, the four-part Howey Test determines that a transaction represents an investment contract if a person (a) invests his money (b) in a common enterprise and is (c) led to expect profits (d) solely from the efforts of the promoter or a third party.

[5]A “white paper” in the ICO world is a document that explains the business and the offering. In most cases, these documents are heavy on technical language regarding the tokens and blockchain but offer little to no guidance on the financial health of the business and rarely disclose all the risks of investing in the offering. In many cases, these “white papers” are not even close to what a securities lawyer would draft for any securities offering. But, many ICO companies apparently are advised to believe their white paper, with its page of legal disclaimers copied from other white papers found online, will magically protect them from any securities laws repercussions.

[6]The SEC will look at a company’s white paper, any other offering documents, websites, social media, media interviews, and any other online or offline matter related to the offering. If it is publicly available, the SEC is going to review it. Even if it is not publicly available, the SEC may subpoena it. In the AirFox case, the SEC noted that AirFox talked about prospects for development of the AirToken ecosystem on blogs, social media, online videos, and online forums and even gave a specific example of quotes from AirFox’s principals making claims in a YouTube video.

[7]These are typical White Paper 101 inclusions in an ICO. A breakdown of what the funds will be used for (which is actually a normal part of a securities law compliant offering document) and a timeline. While there is nothing wrong with these disclosures, the problem is that these white papers rarely discuss the risks involved with the offering, and almost never disclose anything about the financial condition of the company — staples of a compliant securities offering.

[8]17 CFR 240.12g-1

[9]There are notable exceptions to this rule under certain exemptions from registration, including under Regulation A, as amended in the JOBS Act.

[10]Without getting too technical, if you are a New York City based company, with offices and employees in Manhattan, who sets up a shell company in the Virgin Islands that has no office or employees and you run that company out of New York, you are not being clever and avoiding the fact that the SEC is probably still going to consider you a U.S. company. All you have done is sent up a red flag.

[11]There are other factors to consider, as Howey is just part of the analysis as to whether something is, or is not, a security. But, for illustrative purposes, this section of the SEC’s analysis is very helpful for companies considering a token sale, because it illustrates a potential path to a token not being subject to securities laws, and the possible ability in very narrow circumstances to sell a token outside of securities laws.

[12]Okay, someone might be dumb enough to try. Never underestimate the stupidity of some people. The TV show America’s Dumbest Criminals filled three years of episodes with people who might have tried this. For the record, if a stupid criminal tries this, and says it was my idea, please remember that they are, as noted, a stupid criminal and do not believe them.

Disclaimer (because I am wearing my lawyer hat): Kendall Almerico is a securities lawyer who represents companies raising capital in JOBS Act offerings (Regulation A in particular) and companies that want to sell tokenized securities in a compliant manner through a security token offering. This article does not contain legal advice and should not be relied upon bu anyone for legal advice. It is simply the opinions of Kendall Almerico interpreting certain matters that were recently in the news. Do not rely on this article for legal advice as every situation is different. In all cases, consult your own attorney or advisors.

There, I said it.

Everything you wanted to know about crypto offerings but were afraid to ask

With Securities and Exchange Commission Chair Jay Clayton making the public announcement last July he believes every ICO he’s seen is a security, every company in the cryptocurrency, blockchain and token world was put on notice that raising capital by selling coins or tokens was entering a different phase in the United States. As a result, securities lawyers like myself, have been flooded with calls and requests for our services.

I was interviewed by one of my favorite journalists, Tony Zerucha at Bankless Times, about how ICOs, token offerings and the like can be legally done these days and you can (and should) read the entire published article here. For those who want the CliffNotes version, here you go:

• Any U.S. company that wants to raise capital by selling coins, tokens or cryptocurrency, and any company that wants to access the 325 million potential investors who live in the United States, must follow securities laws at this point. With my work in the JOBS Act legal realm, I have been been talking to dozens of crypto companies. Because the grand majority will use one of two JOBS Act provisions: Regulation D, rule 506(c) (if they limit the offering to accredited investors), or Regulation A+ if they want to access the entire U.S. population, those of us who specialize in JOBS Act offerings and equity crowdfunding have become quite popular.
• I've lost count of the number of companies I have had to turn down at this point because they already have done something that is not compliant or legal. The first step is to make sure each company has not already screwed up what they want to do because they were not well informed as to how they should proceed. I ask some pretty simple questions to start, and you would be surprised at how few companies have the right answers.
• I start with the basics. I ask every company to explain to me in a sentence why they need a token and how blockchain is integral to their business. If I had a Bitcoin for every company that came to me with a concept that used the term “blockchain” or “token” without even knowing what it meant or how it was going to be used, I’d be a Bitcoin billionaire. Or maybe a Bitcoin millionaire, depending on the fluctuating exchange rates.
• You would be amazed at how many people cannot answer this question in one hour, much less one sentence. Some businesses do not need a blockchain, or a token. For example, I do a pretty good job of running a law firm without a blockchain. A pilot does not need a coin to fly an airplane. A chef does not need a utility token to cook a perfect steak. I realize that blockchain technology is revolutionary in many ways for many things. But, you can’t just throw the term “blockchain” into every business model. If a company is not able to explain in simple terms why they need blockchain in their business, they probably don’t need blockchain, and probably should not be doing a coin offering.
• I hate it when I hear, “Kendall, our pre-sale is next week. Would you take a look at our white paper and be sure we are okay?” If they are already online soliciting for their sale, there is a good chance they’ve already violated a law or two. And if they already have anything scheduled in terms of a sale, it’s probably too late for any securities lawyer to help unless they are willing to pump the brakes.
• I also hear this one a lot: “We’re okay because we’ve hired” followed by ‘a top ‘ICO’ ‘Blockchain’ or ‘Crypto’ consultant on our Board of Advisors.”  I ask these companies if their advisor is a securities attorney who has experience with the JOBS Act and securities token offerings, and then I look at my iPhone to see if the call has been disconnected because there is always dead silence. Ninety-five per cent of these “crypto experts” have absolutely no idea how to do a securities law-compliant token offering in the United States, and many charged these companies a lot of money to give them bad advice.
• I received a ton of emails, most of them spam, over the past few years with the newest hottest ICO offers, and I saw the news about the crazy amount of money being raised. I think most securities lawyers saw these ICOs raising millions with no disclosures, no investor protections, no financial statements and no real information revealed other than hype and the repeated use of the term “blockchain.” Not only were these obviously sales of securities, many of them were just blatant scams that couldn’t pass a sniff test in allergy season. No, I can’t say that seeing the SEC jump in and state regulators filing enforcement actions and class action suits being filed was at all surprising.
• A company needs to assume that what they are selling is a security, because the SEC is certainly going to assume that. You can’t call something a “utility token” and assume you can get away with not following securities laws. It does not matter what you call it, if it cannot pass the Howey Test, or if you are selling it with the idea that the purchaser may be buying something that will increase in value over time, you should treat it like a security. There are well defined exemptions that allow U.S. companies to sell securities without registering, so follow those laws in your token sale, and the capital raise portion should be legal.
• To me, Reg A+ is the holy grail for token security offerings. Everyone can invest, not just rich people. The tokens sold can immediately be listed on an Alternative Trading System (ATS) and are liquid and tradable. I love that the SEC must qualify a Reg A+ offering before it can be sold. This means if you have any problems in your offering, there is a likelihood it is going to be flagged by someone at the SEC before you start selling, rather than after when something goes wrong like with Reg D or Reg S. It is not cheap to do, but nowhere near as expensive as an S-1 and full registration with the SEC. You will have ongoing reporting requirements and a company is limited to raising $50 million per year. While most companies would be thrilled with raising $50 million per year, this limitation would prevent some companies from using Reg A+ if their capital needs are higher. That said, a Reg A+ raise can be done in conjunction with a Reg D offering, if it’s structured correctly, to raise more that the limit.
• The big questions are: What happens after someone purchases the token or coin? Can they sell it outside of an ATS? How? Can they use it as a currency? Can they use it as a utility token? There is a huge amount of uncertainty as to how the courts and regulators are going to treat security coins and tokens after they are in the hand of investors. This is one reason why I like Reg A+ so much. As soon as the offering closes, the Reg A+ securities tokens may be listed on a secondary trading platform and be bought or sold. This immediate liquidity is a huge selling point. There are rules and restrictions that limits sales under Reg D and Reg S, so this is not possible with either of those exemptions.
• My experience is that the SEC is very open to this new method of raising capital, as long as you follow securities laws and protect investors. The SEC is well aware that if they shut down all crypto offerings, another country will become the leader in this area, and billions of dollars of capital will flow out of the U.S. They do not want this to happen, so they are working with securities lawyers and their counterparts at the CFTC, Department of Treasury, FinCen and others to try to find solutions. Yes, you have a target on your back if you do a crypto offering. But, as long as you have a justifiable legal basis in securities law for what you plan to do, the chances are the SEC is not going to stand in your way.

As I said in the interview, the days are gone of some random millennial plagiarizing a white paper found on Google while their tech geek buddy sets up a website to promote and accept Bitcoin for an ICO followed by millions of dollars magically appearing, unless those people want to risk going to jail or being sued.

Anyone who wants to do this right in the U.S. is going to need experienced securities counsel. They are very likely going to need a licensed broker-dealer. They are going to need a secondary trading platform. They are probably going to need accountants and maybe auditors. Doing this right is not going to be cheap. But, then again, getting sued or arrested and having your business shut down is far more expensive than simply doing this legally and compliantly from the beginning.

Read the entire interview here, to learn more:

Do You Need A Broker-Dealer For Regulation A?

In my role helping companies raise up to $50 million in new capital using equity crowdfunding, I am frequently asked if a company that wishes to pursue a Regulation A+ capital raise must hire a broker-dealer for the offering. I have written an in-depth article about this on Medium, which you can read here (if you like to read stuff lawyers write and enjoy footnotes and long-winded legal analysis). On the other hand, if you want the simple Cliff Notes version, keep reading below!

The simple answer to the title question above is that moving forward with a Regulation A+ offering without a broker-dealer attached is a dangerous move for an issuer, even though it technically can be done. However, if an issuer wants to sleep well at night and not worry that one of the 50+ state securities regulators or the SEC will come knocking on their door, then bite the bullet and hire a broker-dealer who is licensed in all 50 states and by FINRA for your Regulation A+ offering.

The big issue related to hiring a broker-dealer for most issuers is the cost. A broker-dealer will likely have up front due diligence costs, and will charge a percentage of the funds raised in the offering as a commission. This raises this important question: Will an issuer save money by not hiring a broker-dealer? 

Up front, maybe. In the long run, probably not. As illustrated below, in order to go forward on a Regulation A+ offering without a broker-dealer, an issuer may have to register as a “dealer” in many states and at the federal level, which will cost thousands in legal and filing fees. Assuming everything is done correctly and runs smoothly, registering with all of these entities could involve hefty up-front costs, and in most cases far more than the broker-dealer would have charged for due diligence. More importantly, if anything is done wrong in that registration process in any of the venues, or if any state or federal securities regulator thinks something was done wrong, then there will be huge costs to fight the enforcement actions that could arise all over the country.

Why do companies even consider taking on all of this risk by not hiring a broker-dealer?

Regulation A+ of the JOBS Act is silent as to whether an issuer must hire a broker-dealer in order to sell unregistered securities to the general public under this JOBS Act exemption. Given this silence, most legal authorities agree that the law and SEC rules related to Regulation A+ do not, on their own, require an issuer to hire a FINRA licensed broker-dealer to sell their unregistered securities.  Therefore, some issuers feel this is enough of a justification to go at it without a broker-dealer.

What these companies are missing is that the text of Regulation A+ and the SEC regulations related to the statute are not the sole consideration in this matter given that securities are being sold. Other state and federal laws and regulations that regulate who may sell securities may prevent an issuer from selling their own Regulation A+ securities without a licensed broker-dealer in some jurisdictions. The JOBS Act waiver of state Blue Sky review does not necessarily prevent the states from regulating who can sell Regulation A+ securities in their state. Because each state has its own set of laws related to who is allowed to sell securities, who must be registered to do so, and under what circumstances securities can be sold by that entity, there are valid concerns that a state regulator could impose significant penalties on an issuer who chooses to sell its Regulation A+ securities within that state, without a broker-dealer licensed in that state.

So, you ask, what is the worst case scenario if a company decides to try to save a few dollars, and sell their Regulation A+ securities on their own? Let me give you the scenario that would keep me awake at night, and the one that typically compels me to advise my clients to hire a broker-dealer and not go at it alone:

Let’s say the company sells its Regulation A+ securities to a little old lady in Florida, without using a broker-dealer registered in Florida. The company does not do well, or the stock is listed on an exchange and the price drops. Little old lady hires a lawyer, and wants her money back. She also contacts the state securities regulators in Florida, and tells them about this mean and awful company that took her retirement savings away from her.

The lawsuit and the state securities regulators review will probably show that the company did not comply with every aspect of Florida securities law, in particular, by not hiring a broker-dealer (which would have rendered the case moot).

Do you think a Florida jury is going to side with a company that violated state law and sold stock to the little old lady? Do you think securities regulators are going to help the little old lady, or the company that violated its state’s securities laws?

The result could be rescission of the agreement to sell the stock – meaning the little old lady gets her money back. There could also be rescission ordered for all investors in the state, meaning a huge financial problem for the issuer who has to give money back to everyone who invested, not just the little old lady. On top of that, fines and penalties could be ordered. And, to make matters worse, a court or the state regulators could extend the penalties against the officers and directors of the company personally, particularly if they were involved in selling activities themselves.

Ouch.

All avoidable by simply hiring a broker-dealer.

I’m not alone in my concerns here. Kat Cook is the Chief Compliance Officer for Keystone Capital Corporation, a FINRA licensed broker-dealer with experience in Regulation A+ arena and other areas of the rapidly emerging FinTech industry. Cook believes that this threat is very real of having to rescind all subscriptions agreements and return capital raised if a state securities regulator finds that local laws were not complied with. “Compliance with Reg A+ means that the issuer should hire a very knowledgeable JOBS Act securities attorney and retain a supporting broker-dealer to help…or prepare to give the funds raised back to the investors,” warns Cook.

If you want far more in-depth analysis and some state law citations that let you dig deep into this, click here https://medium.com/@KendallAlmerico/do-you-need-a-broker-dealer-for-regulation-a-7308535d9b19 and read my Medium article.

Kendall Almerico is an attorney based in Washington DC whose practice involves JOBS Act related securities offerings such as those involving Regulation A+ or Regulation CF. This article should not be considered as legal advice, and the opinions expresses in the article are personal opinions of Mr. Almerico and should not be relied upon by anyone as legal advice. Other lawyers may have different opinions. The topics covered in this article are very complex, and any company considering using Regulation A+ or selling securities in any manner should seek the advice of competent and experienced legal counsel before making any decisions related to the matters set out in this article.

Five Ways to Learn the Nuts and Bolts of Crowdfunding

Crowdfunding is a multibillion dollar worldwide industry that continues to disrupt the traditional world of corporate finance, as well as change the way products go to market. Businesses new and old, small and large, are now incorporating both rewards crowdfunding and equity crowdfunding. The capital raising playbooks have changed. The interest in how to use crowdfunding and equity crowdfunding effectively is reaching new heights every day.

Where is the good information?

It's no surprise that a lot of good information is already out there about how crowdfunding works. Unfortunately, though, bad information is also rampant on the internet. In my JOBS Act law practice, I field questions every day as someone who "quarterbacks" equity crowdfunding campaigns for companies raising millions of dollars of new capital.

These questions make it clear that most people still do not truly understand how crowdfunding works, or what it takes to raise capital successfully using these amazing tools. Clearly, more education is desperately needed.

I try to do my part with Entrepreneur.com columnsand media appearances. But I've found that there are some other ways to help yourself and learn the nuts and bolts of crowdfunding:

1. Look at successful crowdfunding campaigns.

Take the time to study and see how a successful crowdfunding campaign worked. Imitation is the sincerest form of flattery. Looks at crowdfunding home runs like Pebble Time and Coolest Cooler that both raised millions of dollars with rewards crowdfunding campaigns.

Watch their videos. Look at their perks. Learn from their successes. See the common threads that go through successful rewards crowdfunding campaigns: a great video, simple and easy-to-understand text on the campaign or offering page, a clear “call-to-action” and great rewards.

2. Look at unsuccessful crowdfunding campaigns and see what went wrong.

Kickstarter, Indiegogo and other crowdfunding platforms are filled with failures you can learn from. Did that make a bad video? Did they not explain their campaign well? Did they have bad rewards or perks? Look up these companies online and on their social media and see what they did to market their campaign.

In most cases, you will see that they did not market at all, the biggest mistake a crowdfunding campaign can make. Do some research, and don’t make the same mistakes.

3. Learn from marketing experts.

Crowdfunding is all about marketing. Getting the word out, driving traffic and messaging correctly are the keys to every successful crowdfunding campaign. If you know how to market your business or your product, you know how to drive traffic to a crowdfunding campaign.

If you are a marketing novice, read books by marketing gurus and watch their online videos.  Learn from people like Gary Vaynerchuk and Seth Godin who have large amounts of great material available online. Read, learn, and implement! A crowdfunding campaign with poor marketing will be a failed crowdfunding campaign.

4. Attend a crowdfunding conference.

To do a deep dive and learn about both rewards and equity crowdfunding, one of the best methods is to attend a crowdfunding conference. One such event is The Global Crowdfunding Convention in Las Vegas run by crowdfunding pioneer and top expert Ruth Hedges. Hedges, whose roots in the crowdfunding industry are exemplified by her invitation to the White House for its Crowdfunding Champions of Change event when the JOBS Act was passed. 

Hedges puts on a multi-day event that covers all aspects of the crowdfunding world. To illustrate how far crowdfunding has come in a short time, this year's Global Crowdfunding Convention, held at Planet Hollywood October 23-24, 2017, is sponsored by Microsoft.

5. Learn how to make a compelling video.

A great crowdfunding video enhances your chances of success. A terrible video practically guarantees failure. In addition to watching videos from successful campaigns and seeing what they did right, learn a little about video production yourself.

There are tons of YouTube videos about simple video creation -- things like basic lighting and decent audio -- that make a huge difference in what your crowdfunding video will ultimately look and sound like.

Learn how to tell your story with passion, explain your campaign, and most importantly, how to ask for either a donation or investment. The "ask" is an incredibly important part of every crowdfunding campaign, and one all-too-often missing -- particularly from failed campaigns.

So, crowdfunding fans, with these tips you can read, research and learn on your own, or have it spoon fed to you in Vegas while you eat at a ridiculously huge buffet.

Also, try to get tickets to the latest Cirque Du Soleil show. Either way, education about how to prepare for, launch and conduct a crowdfunding campaign is the key to all success in this amazing new world of raising capital online.

Remember the Lesson of the Blown $63 Billion Investment? Then Get Busy With Equity Crowdfunding.

Crowdfunding is shrinking the risk of investing in potential next-big-things.

How could you make $63 billion investing through equity crowdfunding? It’s easy. Just find the "next big thing."

In 1976, Ron Wayne owned 10 percent of a small, startup company with two young, renegade founders working from a California garage. Not wanting to take the risk of being liable for 10 percent of the company’s debts, Wayne sold his stock for $800. Had Wayne held on to that stock in Apple Computer, today it would be worth about $63 billion.

Does that mean you should buy $800 worth of stock in every company using equity crowdfunding to raise capital online? Of course not. But, Wayne’s story illustrates that having the ability to invest in companies at the earliest stages can lead to huge returns. It also shows that those who invest relatively small amounts in startups could generate millions -- cue Dr. Evil ...or even billions! -- of dollars in profits.

I know investing in startups is risky. The Small Business Administration says that about one-third of all startups fail in the first two years. The U.S. Bureau for Labor Statistics says that 50 percent of new businesses fail within five years. Really, all investing has risks. Even investing in blue chip stocks can lead to financial disaster. In November 2006, the country’s largest bank, Bank of America, probably seemed like a safe investment at $55 a share, after years of its stock price climbing without fail. But when the bank’s stock plummeted below $4 a share in 2009, the blue chip stock no longer seemed like such a good investment. Let’s do the math on that one. If, in 2006, you had invested in Bank of America the same $800 Wayne sold his Apple stock for, your investment was worth $58 three years later.

With legalization of JOBS Act equity crowdfunding, for the first time in 80 years, anyone can invest in startups, new companies, growing private companies and other small businesses that only rich and well-connected investors were legally allowed to invest in before. Those nerdy guys down the dorm hallway making an app that lets you ride around town in the backseat of someone’s car rather than a taxi that smells like Bourbon Street on a hot August night? It’s true, you may be able to buy shares in the next Uber through equity crowdfunding.

How do you pick the startup winners and leave behind the losers? What can you do to increase the odds that you will make a good return investing in startups? Here are some tips from your favorite equity crowdfunding expert.

1. Does the business model make sense?

Warren Buffett has made a fortune investing in companies with simple businesses models. If you see a crowdfunding campaign and do not understand what a company does or how they will monetize or scale their business, you probably should pass on that company.

2. Look at the management team.

Who are the founders of the company? Harvard Business Review says that experienced entrepreneurs -- failed entrepreneurs included -- have a much higher predicted success rate then first time entrepreneurs. Check out the management team, and research their prior experience and accomplishments.

3. Find committed founders.

Startups have a better chance of success when the founders make the company their full time job. That means they are getting paid a reasonable salary they can live on. I don’t want to see the founders working two hours a day on the startup and 10 hours a day at Subway making sandwiches to make ends meet.

4. Look at the use of investment funds.

As an investor, you need to understand how the company intends to spend the money you give them. See if the funds the startup is raising will be sufficient to reach important milestones like building a prototype, taking a product to market or ramping up production to scale a business.

5. Be patient.

Even if one or more of the equity crowdfunding companies you invest in becomes successful, it could take five or more years to get a return on your investment. You will probably have to wait for a “liquidity event” such as an IPO or an acquisition by another company. Think about our $63 billion example. Wayne sold his Apple stock in 1976. Apple went public in 1980, four years later, and instantly created more millionaires than any company in history. But the stock splits over the next 30+ years, and the increase in the company’s value during those decades, are what would have amounted to Wayne being a multi-billionaire, rather than a just another millionaire (sarcasm intended).

As Aristotle said, “Patience is bitter, but its fruit is sweet.” 

5 Ways Digital Marketing Powers Your Equity Crowdfunding Campaign to Succeed

When you research something online, you become a hot lead.

Under the JOBS Act, small companies now have two methods of equity crowdfunding to raise millions of dollars in capital online from the general public. Unfortunately, most people think that all a company needs to do is post a cool video, some fancy graphics and some engaging text, and the investment money will start pouring in. Wrong.

As one of the foremost experts on crowdfunding, I have seen this time and again. When companies ask me why their equity crowdfunding campaign failed, the answer is nearly always the same -- they did not market the offering correctly. Crowdfunding is not the "field of dreams." Just because you build it, does not mean investors will come. Companies have to drive investors to their equity crowdfunding campaign with effective marketing.

Ever wonder why you looked at that gadget on Amazon, and for the next two weeks you are suddenly bombarded by ads for that gadget or similar products every time you are online? Welcome to the wonders of digital advertising. Someone is paying to serve you those ads, knowing you are a highly likely buyer based on hidden bits of data called pixels and cookies some company was kind enough to attach to your computer while you browsed. By looking at anything online, you have become a hot lead to someone trying to sell you something.

The same logic works for equity crowdfunding. If your company is funding a new product, for example, it’s easy and cost effective to put ads in front of potential investors, based on data of their prior online habits. A crowdfunding marketing plan involves many aspects, but these five tips related to digital marketing are essential to equity crowdfunding success.

1. Use Facebook ads.

An effective Facebook ad campaign allows a company to effectively target likely investors based on Facebook users’ location, demographics and interests. Stephanie Heinatz, CEO of The Consociate Group, is not only a public relations guru with a special expertise in the digital marketing space, but has also successfully marketed several equity crowdfunding campaigns. “Facebook is the number one platform in social media marketing where you can target a customized audience. No more wasting money on a megaphone of messaging to who-knows-who. Facebook is like picking up the phone and selling directly to someone.”

2. Use “lookalike” audiences.

If you have an email database of customers or investors, you can create a lookalike audience and serve ads to them on Facebook. Delray Wannemacher of First Look Equities is a financial industry veteran whose success in driving investors to equity crowdfunding offerings comes from delivering ads to lookalike audiences created from his proprietary investor database. Wannemacher exemplifies this with a case study showing the impact that a well-designed, targeted audience ad campaign can have on a crowdfunding offering. “One Facebook ad campaign we ran showed an improvement on the amount of investments per day of 252 percent, with the average investment being three times higher than before the campaign.”

3. Search Engine Marketing (SEM).

The most basic form of SEM involves paying for certain search terms and having Google drive traffic to your crowdfunding campaign based on what you paid for. Heinatz explains "With SEM, we know somebody is a potential investor based on their search terms, so you are directly reaching out to people who have already identified themselves as someone looking to make a purchase or an investment.”

4. Twitter and LinkedIn ads.

With these two popular social media sites, Heinatz emphasizes context over content. “Twitter is a fast moving headline source, but you can use Twitter advertising to promote and grow your community. LinkedIn ads work best in a B2B context and can be used to drive people to a lead generation page for the right crowdfunding offerings.”

5. Email marketing.

While email marketing may not be as sexy as newer marketing tactics such as social media and video, it can still be a huge factor in driving a successful equity crowdfunding offering. Rob Clarke and Andrew Eckard of Lin Digital have spent almost a decade crafting successful digital marketing strategies for local, regional and national businesses, and both agree that email is a crucial factor in driving conversions. Eckard explains, “There are plenty of digital platforms available to deliver your message, but good old fashioned email marketing continues to offer one of the best opportunities to build relationships and drive sales.” Clarke added, “Early momentum is crucial in any crowdfunding campaign, and building your email list to engage people in what you are doing before asking them to invest or contribute will put you at a huge advantage on launch day.”

Digital marketing is an essential part of every equity crowdfunding offering, just as it has been for rewards-based crowdfunding. Working with the right professionals with the correct strategy and knowing who to target is the key to success. One last tip from your favorite crowdfunding expert: Digital marketing is a process that takes time. Most say it takes a potential investor seeing an average of five ads before they make a decision to invest. Converting digital advertising is a process, so start early in the crowdfunding campaign.

BrewDog plc Gives Original Investors a 2,765% Return: Equity crowdfunding has a poster child.

Originally Published at Entrepreneur.com on May 10, 2017

BrewDog plc, the irreverent Scottish craft brewery that has built a successful international business through many rounds of equity crowdfunding involving 50,000+ online investors, recently announced that a U.S. private equity company has acquired approximately 22 percent of the company in a $264 million transaction. This minority investment values BrewDog at $1.24 billion.

BrewDog's Lineup of Craft Beer

Most importantly, this transaction allows BrewDog's “equity punks” -- the name for its shareholders who invested in the company through crowdfunding -- to sell a portion of their stock to the private equity firm, providing some liquidity to these investors. By doing so, BrewDog has offered a substantive response to critics of equity crowdfunding who wonder how small investors will benefit from these types of offerings.

Keep in mind, BrewDog is still a private U.K. company. Their shares are not publicly traded on any exchange, which also gives some liquidity for their early crowdfunding investors, despite the company remaining private. For those who invest in private companies, whether through crowdfunding or otherwise, we all know returns on private company investments before the company becomes public are few and far between.

James Watt, BrewDog’s co-founder, explains: “Shares purchased in Equity for Punks I are now worth 2,765 percent of their original value. Even craft beer fans that invested in Equity for Punks IV, which closed in April 2016, have seen the value of their shares increase by 177 percent in just one year.” The deal gives BrewDog plc’s army of equity punks the opportunity to sell 15 percent of their shares (capped at 40 shares per investor) at the $1.24 billion valuation.

BrewDog Founder Martin Dickie and James Watt

This has tremendous significance to the world of equity crowdfunding. With Regulation CF, where a startup company can raise up to $1 million online, and Regulation A (the “Mini-IPO”), where a company can raise up to $50 million online from anyone in the general public, the popularity of raising capital online grows every day. Crowdfunding has become a multi-billion industry in a very short period of time. But because the JOBS Act, the law that made equity crowdfunding legal, only went into effect in 2015, success stories with an exit for investors are rare. BrewDog's success, using U.K. laws very similar to the JOBS Act, and leading to a return on investment for those who backed the company online for the past few years, bodes well for the development of equity crowdfunding under the newer U.S. laws.

This is welcome news to those in the equity crowdfunding industry. It was not long ago that the $2 billion buyout of Oculus by Facebook caused the media and many rewards crowdfunding backers to lose their minds. Oculus had run a rewards-based crowdfunding campaign on Kickstarter that raised $2,437,429 from 9,522 backers. In rewards crowdfunding, no shares in the company are sold, but rather the backers received the virtual reality hardware and software in return for a donation. When Facebook acquired Oculus for a couple of billion dollars, some backers from the Kickstarter campaign went ballistic, claiming they did not receive a return on their “investment.”

At the time, a New York Times editorial and a Bloomberg column showed that even the media failed to grasp the huge difference between rewards-based (a donation) and equity crowdfunding (an actual investment). The Bloomberg article even accused Oculus of pulling off a scam because the supporters of its Kickstarter campaign did not get a share of the profits from the buyout. One blogger was so angered that he wrote an article with one of the better headlines in the history of blogging -- “I'd Rather Stick My Head In A Whale's Blowhole Than Play Facebook's Oculus Rift.”

As I pointed out at the time, each of Oculus’ 9,500+ Kickstarter backers knew that they were not investing in the company, and that they were not getting equity when they swiped their credit cards in exchange for an early version of Oculus’ new VR headset. Had equity crowdfunding been legal in the U.S. at the time, and had Oculus run the same campaign on an equity crowdfunding website, those who invested would likely have seen phenomenal returns. However, equity crowdfunding wasn’t legal at the time.

Now, equity crowdfunding has its poster child.

BrewDog has raised tens of millions in several equity crowdfunding rounds since 2010. They have built a community of tens of thousands of people who have not only invested, but who have also become brand ambassadors and evangelists for everything BrewDog. And now, those investors will have an opportunity to not only continue to savor the perks of having invested, like free beer and online discounts, but also to see a financial reward for their equity crowdfunding investment.

BrewDog plc's headquarters and Scotland brewery

Equity crowdfunding finally has a success story that should spur on the growth of this nascent industry. BrewDog has given us an example of how investing in equity crowdfunding offerings is far different than donating to a Kickstarter or Indiegogo campaign. Investors finally have an example of how an equity crowdfunding investment can bring them a very real return.

How Will Donald Trump's Presidency Affect Crowdfunding?

Image credit: Joe Raedle | Getty Images

Originally published at Entrepreneur.com on January 10, 2017

Donald Trump will soon be inaugurated as the country’s 45th president and will potentially impact the burgeoning crowdfunding industry in a "yuge" way. Before I share my thoughts as one of the country’s top crowdfunding attorneys, let me tell you what five industry leaders believe the Trump presidency will mean for crowdfunding.

Disclaimer: This is NOT a political article. For those on the right, please don’t send me red baseball caps embroidered with “Make Crowdfunding Great Again.” For those on the left, please do not label me or the crowdfunding leaders in this article as “deplorable” or worse.

Indiegogo has been at the forefront of rewards crowdfunding since the very beginning. Indiegogo’s co-founder and Chief Business Officer, Slava Rubin, had this to say: "It's obviously impossible to know exactly how the next four years will play out since the new administration hasn't moved into the White House yet. Trump's platform included easing up on banking regulations -- which the stock market has reacted well to -- and it will be interesting to see how that translates for equity crowdfunding. The one year anniversary of Title III is coming up this May, so that will be a good time to examine what kind of progress has been made under the new administration."

RocketHub was one of the world's pioneering crowdfunding portals and has developed into a global community for entrepreneurial growth through a partnership with luxury lifestyle network ELEQT. RocketHub's CEO Ruud Smeets shared his take on the Trump presidency.

“Any abrupt change in the political landscape is a challenge and can have ripple effects throughout one's business," Smeets said. "Having a strong support 'crowd' can be a great benefit to any entrepreneur, especially in times of change. The emerging Trump presidency may create more volatility, but it also holds the promise of potentially bringing less regulation and more freedom for innovation and entrepreneurship. That would be good news for alternative funding options like crowdfunding, which still is a highly regulated market space with certain barriers to growth. It remains to be seen though how Trump’s plans on healthcare, international trade, isolationism and any attendant currency effects will affect small business ownership as a whole.”

Roy Morejon, whose firm Command Partners has been one of the most prolific and successful PR and marketing agencies in the crowdfunding space said the initial effects of a Trump presidency seem to be positive for the crowdfunding industry. Recent meetings with top technology leaders from Apple, Microsoft, Amazon, Facebook, Intel and Tesla seemed to be productive with innovation and jobs being a top priority.

"With Trump's business background, American innovation and job creation should flourish," Morejon said. "At our crowdfunding marketing agency, we're seeing a flurry of activity in the equity crowdfunding space in hopes that Trump will alleviate some of the red tape with some of the current crowdfunding regulations.”

Ruth Hedges is one of the pioneers of the JOBS Act and executive producer of the Global Crowdfunding Convention, the largest and longest running crowdfunding convention in the country. Here are her thoughts on the Trump presidency related to crowdfunding: "As America enters uncharted waters with social safety net programs and medical insurance for 20 million people threatened with destruction, we'll need to call on crowdfunding to provide help to those people who will surely suffer, because crowdfunding is not red or blue, black or white, Christian, Muslim or Jew. It is not left or right, but showcases the best of our humanity. And it demonstrates the potential to bring together people from all backgrounds and beliefs to work for our common good as Americans."

Craig Denlinger is one of the go-to auditors for financial reports needed to comply with equity crowdfunding laws. His firm, Artesian CPA, has provided the SEC financial filings for several companies using Regulation A+ to raise capital. Denlinger said "while it is difficult to decipher between what Trump says and what Trump intends, I anticipate that Trump will be a positive force for the crowdfunding community based on his words and actions to this point. With the incumbent SEC Chair Mary Jo White set for early retirement next month, Trump is poised to appoint a more regulation-averse head of the agency looking to scale back on barriers to innovation and job creation. Trump’s planned federal hiring freeze and quotes such as 'eliminating two regulations for every one created' or 'rank all regulations and cut those least important' further confirm this belief.”

The experts have spoken. Here is my two cents.

The “crowd” is a dynamic group that effects change one dollar at a time. With its support, Pebble Watch raised $32,000,000+ in two Kickstarter rounds, BrewDog raised more than $40,000,000 through several equity crowdfunding offerings, and countless other ideas and businesses have been afforded the opportunity to succeed. Crowdfunding brings people together in a way that is truly American because political affiliation isn't a factor in the equation. Each project or offering can be a melting pot of Democrats, Republicans and maybe even Whigs -- anyone can support a business they like regardless of gender, race or religion. Even Congress managed to find common ground to pass the JOBS Act with bipartisan support.

Because navigating the legal maze of rules and regulations is presently the biggest thing hampering equity crowdfunding, President Trump will have a positive influence on the industry if he delivers on his promise to reduce regulations. Reducing regulations will slash attorney fees and compliance costs for companies wishing to use equity crowdfunding. I truly hope the Trump administration will remove unnecessary red tape and open the door for even more democratization of the capital formation process through equity crowdfunding.

And, if the new administration wants to create a new unpaid cabinet position of “Secretary of Crowdfunding” to help them reduce the barriers to entry for small businesses, I happen to know a lawyer/writer/entrepreneur who lives in D.C. and might be available to fill that role.

Equity Crowdfunding's First Report Card

Originally Published at Entrepreneur.com on September 7, 2016

Three months have now passed since Title III of the JOBS Act legalized true equity crowdfunding where startups can raise up to $1 million in capital online to jumpstart and grow their companies. As an attorney whose practice centers around the JOBS Act and helping companies raise funds through crowdfunding, I am excited to see that Regulation CF’s first report card shows some very encouraging grades for entrepreneurs everywhere.

Image credit: Chip Somodevilla | Getty Images

Let’s remember: the JOBS Act was signed into law on April 5, 2012 and it took the Securities and Exchange Commission four years, five months and six days (but who’s counting) to put out the rules that allowed this law to finally go into effect.  On May 19, 2016, the multi-named law (in addition to being called “Title III” and “Regulation CF,” is known as the CROWDFUND Act – which is a ridiculously contrived acronym Congress concocted that stands for “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act”) went into effect. Three months later, equity crowdfunding gets its first report card. The early results look like the law is on the verge of making the honor roll, as it finishes its first quarter of securities law kindergarten.

• Despite limitations in the law that prevent a Regulation CF offering from marketing the campaign like a rewards campaign on Kickstarter, or like a Regulation A+ Mini-IPO, the rate of success of these new equity crowdfunding campaigns has been pretty good. Eighty-two Title III equity crowdfunding campaigns were filed with the Securities and Exchange Commission in the first quarter and 20 campaigns have exceeded their target amount so far. That 24.4 percent success rate is two to three times the success rate that most rewards-based crowdfunding sites like Indiegogo or GoFundMe reportedly have.
• The average investment commitment to date is $810, which is more than 10 times the average donation on Kickstarter, the most well-known rewards-based crowdfunding site. This should not be surprising, given that investors are actually buying equity and owning stock in these companies, not just paying for a “reward” or a pre-sale of a product to be manufactured.
• Three campaigns have already raised $1,000,000, the maximum allowed by the law. This is remarkable when you put it into perspective. This means that 4 percent of all Title III equity crowdfunding campaigns raised $1,000,000 in three months. According to Kickstarter’s published statistics, of all rewards-based campaigns on their site, only .06% have raised $1,000,000. For those of you without a calculator (or an abacus) that means one out of 25 equity crowdfunding campaigns was able to raise $1,000,000, compared to one out of 1,667 on the most popular rewards-based crowdfunding site. 
• The target goal of Regulation CF offerings so far has been a huge predictor of success. Companies that set lower and realistic target goals (the minimum amount they need to raise to be allowed to keep the committed investment funds) have exceeded these minimums by 423 percent. Companies that have set unrealistic target goals have failed miserably. As I preach to my clients, set the lowest realistic goal that allows you to fulfill your promises to investors with the money they are giving you, then blow through that goal and be able to over-perform. As I mentioned in one of my Entrepreneur articles many moons ago, setting a realistic crowdfunding goal is one of the biggest predictors of crowdfunding success. These numbers prove my point, again.

While I still feel that another part of the JOBS Act -- the Regulation A+ Mini-IPO -- is a better law and gives a company more bang for their buck because they can raise up to $50 million rather than being capped at $1 million, the early report card is encouraging for Title III and it appears that the law will be a success despite the legal limitations it imposes. If we can just get Congress to fix those remaining issues with the law, most notably removing the unnecessary marketing restrictions, Regulation CF has a chance to fulfill its original promise.

A special thanks to one of the pioneers of the JOBS Act, Sherwood Neiss at Crowdfund Capital Advisors for putting together these numbers. And a special thanks to the American public and to risk-taking entrepreneurs everywhere for proving that equity crowdfunding can truly be a game-changer for small businesses and an evening of the playing field that democratizes the investment process for all of us.