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The SEC Adopts JOBS Act Title IV: Regulation A+

By: Kim Wales (NY) — 03/25/2015

Today marks another milestone in the life cycle of the Jumpstart Our Business Startups Act (JOBS Act) — Regulation A+ is approved. With the three-year anniversary only two weeks away and after many recommendations submitted by myself and fellow colleagues, the Securities and Exchange Commission voted unanimously on the adoption of Title IV: Regulation A+ for small securities offerings.  This is a big step towards furthering the democratization of the capital markets for emerging growth companies.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

The rules will be effective 60 days after publication in the Federal Register.

Here are some highlights for the adoption of Regulation A+. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

1. State Blue Sky preemption and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings.

2.  Tier 1 issuers can raise up to $20m rather than the limited $5m maximum in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.  The coordinated review process by NASAA will only be used for tier 1 offers.

3.  Tier 2 offers and issuers can raise up to $50m in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

3. Regulation A+ offerings are exempt from the mandatory 12(g) registration thresholds – so long as the issuer engages services of a registered transfer agent, remains subject to and current in a tier 2 reporting obligation and meets public float and revenue requirements similar to those in small reporting companies and exchange act rules.  The details of the reporting rules should be included in the final rules.

4. The JOBS Act mandates the Commission to review Tier 2 limits every two years.

5. Issuers raising capital using Regulation A+ may submit draft offers to the SEC staff, use electronic filing process on EDGAR, ability to use test the waters solicitation materials both before and after the filing of the application process.

6. Additional Tier 2 Requirements:

– Financial statements included in the circular will be audited annually.

– Semi and annual outgoing reports and current event updates that are scaled to Regulation A offerings.

– Limit the number of securities, non-accredited investors can purchase, up to 10% of the greater of annual income of net worth natural person; and

– Limit the purchase of 10% of the greater of annual revenue or net assets of unnatural persons.

– Issuers will use Form 8a — short form registration statement concurrently with a qualification Regulation A offering statement to register securities class 12(b) or 12(g) of the total package of investor protections to be included in the implementation of Reg A offer.

“Moving Title IV forward is a positive step in stimulating the economy, however, start-ups will still find it challenging to raise money using Reg. A because the cost and process  remains burdensome for this stage of company, says Kim Wales, founder of Wales Capital.” As an advocate for the JOBS Act and policy reform, “we still need to get the rules released for Title III and raise the limits up to $5 million and exclude investment limits for accredited investors” as prescribed in my recommendation letter “Limitation of Capital Raised,” February 23, 2014. “This is the part of the JOBS Act that will help all people.”

Policy Reform for Cryptocurrency

Foreign Affairs — 02/12/2015

Industry thought leaders convened in NY  for the Foreign Affairs: Cryptocurrency Policy Reform conference.  The discussions included three pillars:

 

 

Mini-Bonds Reviewed by the Financial Conduct Authority

By: Kim Wales (NY) — 02/03/2015

A review of the regulatory regime for crowdfunding and the promotion of non-readily realizable securities by other media were published today by the Financial Conduct Authority. One area focus was of focus is on mini-bonds, which is a type of debt security, typically issued by small businesses. “Such securities run for around three to five years, in general, and offer an interest rate of between 6% and 8% a year. Such businesses may have found it difficult to secure a loan from a bank or could be start-up companies looking for funding.”

However, a ‘warning label’ should come with the buy and sell of the mini-bonds, they are a way for companies to bypass the City and borrow money directly from private investors, and have been issued by firms ranging from John Lewis to Hotel Chocolat.

The FCA review says “it is important for prospective investors to understand the risks. Mini-bonds are illiquid and can be high risk, as the failure rate of small businesses is high. There is no protection from the Financial Services Compensation Scheme (FSCS) if the issuer fails. Firms promoting these securities to the public must make the risks clear to prospective investors.”

Sometimes the return can be really high if the investor elects to take their return in the form of goods or services. For example, upmarket coffee shop chain Taylor St Baristas, which launched its mini-bond in November 2014, gave investors the choice of an 8% cash return or 12% in the form of store credit, which would reportedly add up to about 30 coffees a year for an investment of £500.

Other well-known names that have launched mini-bonds include Hugh Fearnley-Whittingstall’s restaurant and food business, River Cottage, which was offering interest of 7% a year plus 10% off at its outlets, and retailer Hotel Chocolat, whose most recent bond let investors choose between an annual return of 7.25% in the form of in-store credit, or 7.33% in the form of a monthly box of chocolates.

Many of the bonds have been launched via Crowdcube, a crowdfunding websites, and successfully raised £1m in less than 36 hours for River Cottage.

Just days ago it was revealed that almost 1,000 small investors who put a total of £7.5m into mini-bonds known as “secured energy bonds” are unlikely to see a penny of their money back after it emerged the cash was siphoned off to an Australian company that later went bust.

The FCA said it had reviewed the promotions of a number of mini-bonds on crowdfunding platforms and via direct advertising, and had a number of concerns.

It added: “Firms are failing to make clear that mini-bonds are investments that place investors’ capital at risk, and are not deposit-based or capital-protected products.”

The regulator also said it was misleading to compare the interest rates on mini-bonds with those available from traditional savings accounts, where people’s money was not at risk.

The FCA added that while mini-bonds were sometimes put into the same category as retail bonds, which are another way of raising money from private investors, there were important differences. For example, while investors can usually buy and sell retail bonds, mini-bonds are generally not traded, so investors’ money is effectively locked in until maturity, as the mini-bond cannot be sold on before the end of its term. “This should be made clear to prospective investors,” said the FCA.

The FCA Publishes UK Equity Crowdfunding Review

By: Kim Wales (NY) — 02/03/2015

The Financial Conduct Authority publishes its crowdfunding review. Turbulence in the markets spawned a new industry for capital markets in 2012 called Equity crowdfunding, which as of now has transacted £67m of equity investment in the United Kingdom, according to statistics from AltFi, a data provider. TrillionFund, Crowdcube, Seedrs and SyndicateRoom represents the largest platforms that are etching their footprint in the landscape, as such 35 smaller start-up platforms are following their path and up to 10 of those are in the process of being evaluated for licenses. Early on the Financial Conduct Authority recognized the vital importance of facilitating capital formation in markets that were effectively broken or inefficient.

Unlike sites such as Kickstarter, where donors contribute money to projects often in exchange for token “rewards”, equity crowdfunding allows investors to buy shares in the companies. This can be a little more risky than another blossoming area, peer-to-peer lending which shortens the time line for the lenders to receive a return on investment given the nature of the risk profiles of the borrowers. A study last year indicated that some 62 per cent of funders on equity crowdfunding sites have no experience of early-stage investment which heightens the regulators caution towards investor protection rules.

“A light touch approach” was the thesis behind the initially published rules in March 2014 and was broadly embraced by most industry participants. In stark contrast to the United States, the FCA made a conscious decision to allow the nascent industry to grow and evolve without unbearable rules. The FCA affirmed, “they see no need to alter course” as things as the marketplace is evolving. This publication provides a complete high level overview to the UK market with the expectation being that a more complete review will be conducted in 2016.

The FCA is keen to promote innovative financial technology as well as individual investing in the stock markets, and is understood not to want to kill off the fledgling sector. However, the FCA has warned investors “it is very likely you will lose all your money” in equity crowdfunding, which involves taking stakes in unlisted companies that are often in their early stages.

Some companies failed to meet capital requirements last year, while others made misleading claims that they were placing retail investors on an equal footing with venture capitalists, the FCA said.

“This becomes significant if venture capitalists are able to profit from successful investment opportunities but crowdfunding investors find, when an investment succeeds, that equity dilution means they do not share in the profits to the same extent,” said the FCA.

To read the published review click here.

Financial Conduct Authority Review of Crowdfunding Rules

Financial Conduct Authority Review of Crowdfunding Rules

A New Bitcoin Exchange and Crowdfunding 2.0

By: Kim Wales (NY) — 01/23/2015

Over the past few weeks Bitcoin value has taken beating and in the past 12 months we’ve been hearing a lot about how Bitcoin’s underlying technology is going to decentralize the central banks monetary system, but also notary services, DNS, authentication, intellectual property ownership and data storage. And with all of the optimism surrounding Bitcoin, Europe’s leading Bitcoin exchange, Bitstamp, was forced to suspend operations, after losing millions of dollars worth of virtual currency due to a breach in its systems in early January 2015.

In a strong and bold move by, Tyler and Cameron Winklevoss believe they have the answer a “fully regulated” Bitcoin exchange based in the United States. It is intended to break through as the frictionless payment method many believe it can be. However, in order to stabilize the value of Bitcoin and get more of the naysayers onboard, Bitcoin must evolve into “an ecosystem that is free of hacking, fraud and security breaches,” wrote Cameron Winklevoss in a blog post announcing the Gemini exchange.

While most of the products and services that were supposed to emerge on top of the bitcoin protocol have yet to see light, there’s actually one application of the bitcoin protocol that has been developed by several bitcoin 2.0 startups: decentralized crowdfunding.

Bitcoin is already driving the early stages of frictionless capitalism. A startup company, BitPesa, has launched a Bitcoin remittances company that intergrates with Kenya’s mobile money system M-Pesa. The pilot involves 15 diaspora originally from Kenya but who lives in London. These individuals regularly send money back to their home countries via traditional remittance mechanism. For the pilot program, the participants will only be able to use the BitPesa platform. This could prove a win for all in reducing transaction fees and placing more money in the pockets of local community people. This could spur business creation, job creation and ultimately decreasing the wealth inequality gap.

“A growing number of US investors, traders, financial institutions and businesses wanted to get involved with bitcoin directly, but had no options other than to trade overseas or sit on the sidelines.” An extended entry “GEMINI SAYS IT’LL HAVE TOP-NOTCH SECURITY AND FDIC INSURANCE!”

Gemini is set to standardize the way in which Bitcoin is traded for buyers and sellers bridging the gap that currently exist in the marketplace while expanding what some platforms powered by blockchain technology remove the need for trusted third party.

The evolution of the crowdfunding has merged with Bitcoin, allowing startups to raise funds by creating their own digital currencies and selling “cryptographic shares” to early backers. This means that investors in crowdfunding campaigns get tokens that represent shares of the startup they support and can actually benefit from the token value appreciation.

In part, revolutionizing the way companies can raise money while at the same time adding a return on the investors holding in Bitcoin is what I find attractive in the model, once implemented properly. The bitcoin community has coined the term “Bitcoin-powered crowdfunding” as real crowdfunding. Enthusiasm around these projects is also tied to the fact that these platforms would be a real source of investment for other types of blockchain-powered applications and would help with the funding of Bitcoin infrastructure.

Platforms like Swarm, Koinify and Lighthouse are three decentralized crowdfunding platforms that have generated a buzz in the Bitcoin community.

As soon as the exchange gains regulatory approval from Benjamin M. Lawsky, the superintendent of New York’s Department of Financial Services, Gemini will proceed forward. A test model of the exchange is already up and running, according to the Times.

It is too early to know Bitcoin’s fate since it is not clear whether a central bank or other regulatory entity will govern it; that final decision may ultimately rule in its success or demise. However, even with uncertainty, venture capitalist are swooning the market and the adoption rate of Bitcoin continues to increase by a number of well-known retailers, including Overstock, Expedia and Dell.  Each started accepting Bitcoin for domestic sales through their websites over the past few months.

One thing is for sure, the capital market is being reformed and this in turn will influence how capital formation will be achieved in the coming years.

RBS fosters economic growth with P2P Lending Partnerships

By: Kim Wales (NY) — 01/23/2015

As we eagerly await the Securities and Exchange Commission to release the final rules for Titles III and IV of the Jumpstart Our Business Startups Act (JOBS Act) in the United States that will open the gateway to equity and debt based crowd finance for start up and emerging growth companies.

A continued push to restore confidence, foster transparency and get money into the hands of the most needing enterprises is apparent in the United Kingdom with the Royal Bank of Scotland’s move to partner with online lending marketplaces, Funding Circle and Assetz Capital. On heels of Santander Bank implementing a similar strategy in 2014, these partnerships show an emergence of acceptance that bridges traditional finance with digital debt crowd finance, which is an enticing mechanism to financing small medium enterprises.

Chancellor of the Exchequer, George Osborne, said “It is great to see companies like Funding Circle forging a new partnership with RBS to ensure that small British companies have the best access to funding”.

Peer – to – Peer (P2P) has expanded rapidly after the financial crisis of 2008 as banks scaled back lending – leaving many smaller businesses without any access to finance.

Starting early February, RBS, the state-backed bank partnership with Funding Circle and Assetz Capital will enable it to refer some smaller businesses that it is unable to finance on to the P2P platforms. RBS said its aim is to “expand choice” for customers with loan applications that do not meet the bank’s criteria, by sign-posting them towards the P2P lenders, as well as other alternative sources of finance.

Working hand and glove with RBS, P2P platforms Funding Circle and Assetz Capital will extend bank clients located in Scotland and southwest of England that have been turned down for loans by the bank a new and nimble way to obtain debt financing for their businesses. Clients must indicate on their loan application that their information can be shared with an external third party in order for the bank to bridge the gap in helping the client obtain the financial resources. RBS is expecting to work with up to five such platforms in the coming months.

This new P2P partnerships, which do not involve fees being paid to the bank, follow plans from George Osborne, chancellor, to force banks that reject loan applications from small companies to refer them on to alternative sources of funding. The RBS referral scheme, which plans to expand nationally over the next three months, comes ahead of government plans to make referrals compulsory due to criticism that Britain’s largest banks are failing to provide sufficient credit to the sector. “A key part of our long-term economic plan is to ensure that British businesses are able to access the finance they need to grow and succeed,” said Osborne.

Kudos to the Chancellor, RBS and Santander Bank fostering the economic recovery needed during the most trying periods in history for some generations. The ecosystem to support a capital market that is multi-layered will need to be able to support competing and related interests globally as related to technology, banking facilities, communication, and distribution channels.

It is my belief that the markets that succeed in balancing public and private interests are the markets that will go the furthest in facilitating capital formation through shifting traditional paradigms. Efficient markets need to improve the allocation of capital and enhance long-term economic growth.

JOBS Act: SEC Proposes Revising Section 12(g) for Titles V and VI

By: Kim Wales (NY) — 12/18/2014

The Securities and Exchange Commission released proposed rules that would implement Title V and VI of the Jumpstart Our Business Startup Act. The Commission proposes amendments that would revise the rules adopted under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) to reflect the new, higher thresholds for registration, termination of registration and suspension of reporting that were set forth in the JOBS Act. The proposed rules would also apply the thresholds specified for banks and bank holding companies.

What’s next: Public Comment Period (comments should be received on or before February 18, 2015).

Read the full proposal here:

SEC 12g

 

 

 

 

ESMA Calls for European – Wide Common Approach for Crowd Finance

By: Kim Wales (New York) — 12/18/2014,

The European Securities and Market Authority (ESMA) calls for EU Regulations to include crowd finance by issuing an Opinion (Reference: 2014/1378) and Advice (Reference: 2014/1560) whitepapers. The goal is too assist NCAs and market participants, and to promote regulatory and supervisory convergence. ESMA has assessed typical investment-based crowdfunding business models and how they could evolve, risks typically involved for project owners, investors and the platforms themselves and the likely components of an appropriate regulatory regime. ESMA then prepared a detailed analysis of how the typical business models map across to the existing EU legislation, set out in sections 1 to 6 of the Advice document.

ESMA Chair, Steven Maijor said: “ESMA’s aim is to enable crowdfunding to reach its potential as a source of finance, while ensuring that risks to users of crowdfunding platforms are identified and addressed in a proportionate and convergent way across the EU.”

Crowdfunding is relatively young and business models are evolving. Crowdfunding opens a gateway for startup and emerging growth companies to tap ‘the crowd’ to raise finance for projects and businesses  by means of an internet-based registered platforms through which business or project owners ‘pitch’ their idea to potential backers, who may accredited or non-accredited investors. ESMA’s focus is on crowdfunding which involves investment, as distinct from donation, non-monetary reward or loan agreement.

Within investment-based crowdfunding a range of different operational structures are used so it is not straightforward to map crowdfunding platforms’ activities to those regulated under EU legislation.  EU financial services rules were not designed with the industry in mind.

In addition, Maijor commented “We believe that there are benefits both for investors as well as for platforms by operating inside rather than outside the regulated space.”

Member States and NCAs have been working out how to treat crowdfunding, with some dealing with issues case-by-case, some seeking to clarify how crowdfunding fits into existing rules and others introducing specific requirements.

 Official Press Release

Screen Shot 2014-12-18 at 12.23.06 PM

 

 

SEC 33rd Small Business Forum on Capital Formation Recap

By: Kim Wales, 11/26/2014 —

The 2014 Securities and Exchange Commission Government-Business Forum on Small Business Capital Formation ensued on November 20, 2014 at the SEC headquarters in Washington, D.C.

In usual form, since the signing of the Jumpstart Our Business Startups Act (JOBS Act), the crowd (attorney’s, issuers, intermediaries, regulators, investors, service providers and) scurry to wait with baited breathe to hear the status of the pending rules for Titles III (Crowdfunding) and Title IV (Regulation A+). Remaining true to form the Commission did not provide any dates on when the final rules will go live for either.

The Forum is known to advance some recommendations in the past that has influenced the health of the capital markets; though it seems like no movement has been made on the recommendations that came from the 2013 Forum, specifically focusing on Title III, as I was a panelist presenting on for the “Panel Discussion: Crystal Ball: Now that you raised money, what’s next for the company and the markets?” Waiting patiently over the webcast or in person we were sure that the Thirty-Third forum would not disappoint.

What resonated from each Commissioner and more specifically from Commissioner Gallagher in his introduction was hope that day’s discussion would “embrace the full scope of the public and the private markets in small business securities which encompasses a fully robust capital market ecosystem for small businesses which requires both.”

Further, he continued –“There is a need for continued innovation in secondary trading in the private marketplace. If additional guidance from the SEC—for example, with respect to a private resale exemption—would help the market to develop further, we should move forward on that now.”

3 Key Points from the Commissioner’s Opening Remarks

READ MORE HERE

Article Revised 11/27/2014

JOBS Act (Title II): Bill Gross to Manage $500M Alerts Investors using Social Media

By: Kim Wales, 11/24/2014 —

While Wall Street continues to be a little apprehensive about adopting social media into their day-to-day operations, money manager Bill Gross who describes himself as a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach in his latest investment report released on November 3, 2014. Gross proves his prowess by taking to social media site Twitter to announce to the world his next big opportunity and outpacing some of compatriots in the world of social information to gain an advantage.

Following the announcement, Gross said on Twitter, through Janus’ official account, that he was “honored” to be managing the new account for Soros.

Bill Gross will manage $500 million for George Soros' at Janus Capital

Bill Gross will manage $500 million for George Soros’ at Janus Capital

Social information is slowing influencing Wall Street investment decisions as we witness events that continue to move markets since the signing of the Jumpstart Our Business Startups Act (JOBS Act), and the ‘go-live’ of Title II, general solicitation and advertising that went live on September 23, 2013.

Reed Hastings, CEO of Netflix was the first that took to the social media site Facebook highlighting the opportunity embedded social information for investors.  Hasting’s actions highlighted the uncertainty surrounding that the application of Regulation of Fair Disclosure to social media. The Regulation stated that information must be published in a manner “reasonably designed to provide broad, non exclusionary distribution of the information to the public.” And Hastings believed that the 245,386 subscribers to his Facebook page were sufficiently broad under the current guidelines.

Proving that capital markets are democratizing,  Hastings’ Facebook post led to the SEC decision to accept the use of social media as a way for companies to communicate material, non-public information both recognized and reinforced the importance of social media as a source of information on Wall Street ad Main Street.

SEC Says Social Media OK for Company Announcements if Investors Are Alerted

As reported by Bloomberg’s Mary Childs and Katherine Burton, “Janus is seeking to raise its profile and rebuild a brand damaged by missteps and departures of money managers. The firm, which had $174 billion under management as of Sept. 30, attracted more than $1 billion of estimated net subscriptions to two bond mutual funds in October after the Sept. 26 hiring of 70-year-old Gross, who co-founded Pacific Investment Management Co. in 1971.”

Despite the slow adoption to social networks by Wall Street these are clear signs that a ‘change in sea’ is underway and Gross’ perch over the California shores is giving him a clear view on how to navigate online and off.