When raising capital, a company must comply with securities laws. As previously discussed, all offerings of securities, must either be registered with the SEC or exempt from such registration. Rule 506(b) is the most commonly used securities exemption for private companies. Even after complying with the basics of this exemption, there are many nuanced requirements that, if missed, can jeopardize qualifying under the exemption. Failure to comply with Rule 506(b) can subject an issuer and its officers and directors to various penalties. The SEC and state regulators can institute investigations and administrative and civil actions, enter various orders, and impose significant monetary penalties, and can transmit evidence to the U.S. Attorney General, who can bring criminal proceedings. In addition, violating securities registration requirements entitles the purchasers to rescission rights under federal and state laws. This blog post compiles some of the best practices for conducting a 506(b) offering in a bullet-pointed list for easy reference.
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Verifying Accredited Investors in a Rule 506(c) Offering
Companies raising capital that are relying on Rule 506(c) (often informally called “Accredited Investor Crowdfunding”) for their offering of securities have several options as to how to verify whether their investors’ are indeed “accredited investors.” Since most offerings of securities generally rely on Rule 506(b) which allows for the investor to self-verify (e.g., through a simple questionnaire), founders are not as familiar with the verification process of Rule 506(c). This post will briefly explain Rule 506(c) and describe some of the options companies have to verify its investors as accredited investors.
[Read more…]The Legal Pitfalls of Rewards-Based Crowdfunding Campaigns
Rewards-based crowdfunding sites, such as Kickstarter and IndieGoGo, have become a common way to get innovative businesses and products off the ground. The premise behind these crowdfunding sites is that, by raising small monetary contributions from a large number of people interested in supporting the business idea via the Internet, companies and entrepreneurs can amass enough capital to fund a fledgling project or venture. In exchange for supplying the funds, the funders are to receive the product being developed or certain other specified incentives, assuming that the entire funding goal is met by a certain deadline. If it’s not, the funds are to be returned to the backers.
The concept of crowdfunding has actually existed for some time. Players in the music industry launched online campaigns to fund tours and albums as far back as the late 1990s. It wasn’t until the mid to late 2000s when the word “crowdfunding” began to be used, and with the launch of major crowdfunding sites like IndieGoGo in 2008 and Kickstarter in 2009, the phenomenon took off and reached the popularity it sees today.
This post describes the common legal pitfalls associated with conducting a rewards-based crowdfunding campaign and steps to take to alleviate those pitfalls. [Read more…]
What Do Startups Need to Know About Data Privacy Law?
It’s hard to imagine a startup that does not collect some form of sensitive information in digital form, and the collection, use, and disclosure of such information is regulated under federal, state, and even international laws. The purpose of this post is to outline the legal framework that creates your obligations to safeguard customer data and the consequences of failing to comply with these laws. Startup founders that understand their legal obligations and make the investment to comply with them can reduce the likelihood of liability and ultimately compete more effectively by earning a reputation for protecting their customers. [Read more…]
Can Initial Coin Offerings Be Regulated As Securities? The SEC Says Yes.
Recently, there has been a lot of buzz involving so-called “Initial Coin Offerings” (ICOs), which are crowdfunded offerings powered by distributed ledger technology (a.k.a. “the blockchain”), which is also the technology behind cryptocurrencies, such as Bitcoin. Instead of selling equity, companies that use ICOs sell digital “tokens” to investors. These tokens entitle the holders to certain rights, such as the right to a portion of the future cashflow of the company or voting rights. Unlike a traditional legal contract, the rights of token holders are not enforced through courts but rather through software code (also called “smart contracts”). Although the ICO concept has gained traction very quickly and allowed various companies to raise over a billion dollars’ worth of digital currency directly from investors, many have suspected that ICOs, like their IPO counterparts, involve the issuance of securities; however, until recently, the Securities and Exchange Commission (SEC) had not yet weighed in.
On July 25, 2017, the SEC, in order to “caution the industry and market participants,” released an investor bulletin highlighting the risks of an ICO for investors and publicized an in-depth investigative report on a recent ICO that the SEC determined involved a sale of securities. [Read more…]