News & Media | In the News

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

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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.

 

Eureeca Funding Platform Issued a Cease and Desist Order by SEC

By: Kim Wales, 11/13/14  —

An unfortunate yet necessary “Cease and Desist” action was taken by the Securities and Exchange Commission (SEC) against a crowdfunding platform, Eureeca, which is domiciled in Dubai and doing business in the Cayman Islands.

As a platform conducting private placements using Title II of the JOBS Act, which allows General Solicitation, and Advertising for Accredited Investors, Regulation D, Rule 506(c) and Rule 144A has drawn significant attention since September 23, 2013, due to significant changes in rules governing certain private offerings.

Historically, a Regulation D, Rule 506 offering has been exempt from SEC registration, provided that the offering is not publicly advertised and that the purchasers are largely qualified institutions or accredited investors—those whose net worth is greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation for that level of income to continue in the current year.

Title II of the JOBS Act called for the SEC to lift the ban on mass marketing these offerings, provided that the issuer has taken reasonable steps to verify that the buyers of the private securities are in fact accredited.

In the case of Eureeca, what are some of the things that went wrong?

  1. Eureeca’s posting of securities offerings on its unrestricted website constituted general solicitation and advertising.
  2. Eureeca had a disclaimer on its website that its services were not being offered to U.S. persons.
  3. Eureeca was not registered as a Broker with FINRA or the SEC; nor was there any disclosure of Broker of record on the platform.
  4. The roughly 465 deals listed on the platform were not registered with the SEC.
  5. There was no firewall that prevented at least three U.S.A investors from gaining access to the deal room on the site.
  6. There were no ‘reasonable steps taken to verify’ that investors are “accredited.
  7. “Accredited” investor definition was not disclosed on the platform, as a mechanism to educate the potential investor pool.
  8. Disclosures were lacking on the on the platform

As a result of conduct described, Eureeca willfully violated section 15(a) of the Exchange Act, which makes it unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security, unless such broker or dealer is registered is or associated with a registered broker-dealer.

Penalty

Eureeca will have to pay civil penalties of $25,000 to the Securities and Exchange Commission in 10 installments of $2500 over the next year. In my opinion they got off easy.

Things for Funding Platforms to Remember

  1. Unless you are registered with the Securities and Exchange Commission as a Broker, or partnered with Broker, you cannot legally sell securities to the accredited investor via a funding platform using Title II, Regulation D, 506(c).
  2. The entity “Registered Funding Platform” does not yet exist until the final rules are issued for Title III and FINRA registers the platform to sell securities.
  3. Listing registered broker of record and disclosure documents on the platform is a must.
  4. Seek legal advice and or contact Crowd Finance consulting companies like Wales Capital to ensure that your platform is in compliance.

 

Read the complaint here!

Unlock the capital markets for small cap and mid cap business using the JOBS Act, Regulation A+

By: Kim Wales, 11/1/2014  —

On a warm Fall, October evening in New York, some of the securities crowdfunding industry pioneers, advocates, policy influencers and solution providers gathered at the Law offices of Pepper Hamilton for Dara Albright’s Regulation A+ event.  David Weild, the founder of Issuworks and former ex-Vice Chairman of NASDAQ, closed the evening with an impassioned message about what steps are needed to spur capital formation that will  start moving money into the hands on entrepreneurs and main street investors.

Unlocking the capital markets for small cap and mid cap businesses using the JOBS Act, Title IV (Regulation A+) is top of mind after 7 years of stagnant economy. This has become the mission for everyone in room such as Brian Korn (Pepper Hamilton), Peter Einstein (Crowdfund4All), Sara Hanks (CrowdCheck), Douglass Ellenoff (Ellenoff Grossman and Schole, Kim Wales (Wales Capital and CrowdBureau), and Sam Guzik (Guzik & Associates), Chris Tyrrell (OfferBoard) and Manolis Sfinarolakis (Crowd RealityTV) to name a few.  However, Weild was very clear in his messaging, “NASAA is doing incredible harm to the economy and they need to stand down.”

The North American Securities Administrators Association (NASAA) is a special interest group that represents state securities regulators. Ironically they have taken an anti-business / anti-investor approach by attempting to block Title IV (Regulation A+) of the JOBS Act – otherwise known as Reg A+. Regulation A+ includes the biggest opportunity presented by the Securities and Exchange Commission’s (SEC) proposal for preemption of State Blue Sky in 40 years. In addition, qualified purchasers can invest up to 10 percent of their net worth. Finally, Title IV of the JOBS Act increases the offering limit from $5 million to $50 million in a 12 month period.

NASAA aggressively lobbies Congress and has hired high powered attorneys to stop state blue sky preemption for certain private placements. Small businesses creates 64% net new jobs for the economy which is the vast majority for U.S. and should be the engine for economic growth. However, at play is protecting revenue stream and power at NASSA; that is thwarting the opportunity for small and emerging business to thrive and survive.

In addressing NASAA’s concerns, Weild aptly points out that state regulators will continue to have anti-fraud laws which they can use but calls their present stance “laughable”. “If you want to stop all fraud lets just stop all business …We all know that is not the right answer,” says Weild.

While there are clearly members of NASAA that disagree with this anti-business policy for now the group has paradoxically taken a position that is to the detriment of the economy. Weild also tackles other issues that are in need of regulatory change, including tick size reform, that are bogging down small cap IPOs.

David Weild’s closing address is a must watch for Anyone who is pro-economy and pro-small business :

Congressman Patrick McHenry: Three Leg Stool Approach Needed for Regulation A+

By: Kim Wales, 11/1/2014 —

With the national election scheduled in two weeks, Congressman Patrick McHenry finds the time to continue advocating for small business and emerging growth companies in the changing markets under the JOBS Act for Title II, Title II and Title IV at Dara Albright’s New York Event held on October 21, 2014.  Ultimately, Congressman McHenry’s delivered a keynote address that focussed on capital formation issues and offering a way forward.

In the keynote address, McHenry discusses: 1). the state of play in Washington; 2) outlines the three Titles of the JOBS Act that he is passionate about; 3) provides three leg stool for Regulation A+; 4) offers an explanation about why are we working through the question of Capital Formation?; 5) provides key take away; 6) Q&A:

Summary:

State of Play: Gridlock in Washington, based on the work product witnessed or not witnessed by the American people. The JOBS Act is the most significant re-write of securities law in the last 80 years.  There is greatest hope for capital formation and economic sustainability is built into Title III – Regulation Crowdfunding so long as Investor Protection and Capital Formation remain at the forefront of a developing robust marketplace.

Congressman McHenry highlights three Titles of the JOBS Act that he is passionate about and has tirelessly lobbied and advocated for on behalf of the American people and he remains hopeful that “right and just” will win at the end of the day.

  1. Title II (Regulation D, Rule 506(c) and Rule 144A: Lifting the Ban on General Solicitation, which was a straight forward piece of legislation that went live on September 23, 2013. Working well while in it’s infancy.
  2. Title III (Securities Based Crowdfuding): The ambition of Title III was to update outmoded securities law and merge technology with finance. Currently, the law remains deeply flawed and the rule has been pending for a substantially long time (over 700 days). What should have been structured at the Commissioner level has turned into a top priority at the SEC.  Now Congress needs to fix the problem, and the SEC must work with Congress because things like cost structure does not work as laid out in the final proposed rules.  To mention a few flaws that do not work: a). audited financial statements for offering $500K or greater; b). issuance capital raise limits up to $1 million; and c). prohibition on testing the water.
  3. Title IV (Regulation A+) – The biggest opportunity presented by the SEC’s proposal is the preemption of state blue sky law. Regulation A, lifts the capital raise limits from $5 million to $50 million; in addition, a qualified purchaser can invest up to 10 percent of the net worth in an Reg. A offering.  What is needed is a well written set of laws and rules for Regulation A. This is now become a top priority for McHenry!  “We must get the rules right so that is not a  dead letter upon arrival but rather it can be a lively opportunity.”

Further, by implementing Title IV, this will allow for us to fix the question of securities based crowdfunding, more specifically equity crowdfunding because of great opportunities afforded the main street entrepreneur, retail investor, and risk takers. “In order to get this right, there are 3 legs to the stool of this alliance”, says McHenry.

3 Legs to the stool of this alliance:

  1. Congress and SEC getting this question of regulation of law correct and done.
  2. Galvanize the democratization of finance: significant amount cultural shift in the marketplace must take place and we the people must be drivers of the shift; alongside helping to create useable public policy in Washington.
  3. Open structure data on the market: we must have the best information on the markets and best market structure that can follow as a result of open structure data. This most importantly can help to move Congress and SEC in the right direction.

Why are we working through the question of Capital Formation? Entrepreneurs may not be connected to the right side of the tracks to get financing for their companies. Delivering the entrepreneur to the marketplace and connecting them to the world of capital so that we can all live better tomorrow and have real vibrant economic growth!

Take Away: Communicate and Build Relationships. Make sure that we have connection with policymakers in Washington. The SEC has an open door policy — go to Washington and introduce yourself. Go to Capital Hill and get to know your U.S. Representative. If you don’t have relationships, go an introduce yourself, to your State Ccongressman and Senator. Inform them about sound public policy. Build these relationships!

Congressman Patrick McHenry takes the final question: Kim Wales, crowdfunding industry pioneer and founder of Wales Capital and CrowdBureau ask Congressman McHenry the last question: “You talk about lobbying our Senators and Congressman, but there is a lobbying group called NASSA that is an influential body as it relates to small securities offerings across all of the states. How do we balance the discussion with that organization and their influence on all of the states in terms of pushing this bill forward (Title IV – Regulation A+)?”

 

How to Get Funding in England?

July 26, 2014 — New York, NY

How to get funding in England?  Funding for Lending (FLS), the Bank of England and Treasury scheme, initially to boost bank lending to households and companies, opened for business at the beginning of August 2012.

The aim of the scheme was to increase bank lending by up to £70bn.

The government changed the rules in January 2014, with this type of funding is no longer used to support mortgage lending.  The scheme aimed to bolster the economy, by halting a downward spiral of lending and borrowing that the UK had experienced since the onset of the credit crunch and international banking crisis.

Banks and building societies are able to access the funds until the end of January 2015.

How does it work?

In essence, the Bank of England is letting commercial banks borrow funds from it cheaply, so that the banks then pass this on in the form of cheap loans to firms.

What is the point?

The point is to encourage the UK’s commercial banks to borrow more money, and more cheaply than at present, so they can then in turn lend it to companies who wish to borrow.

Is it working?

The debate is fierce. Some report banks are still unwilling to lend to business. Others say businesses are unwilling to take on new debt and are paying back loans. Either way, repayments are rising faster than borrowing, leaving the latest “net” lending figure (for the first quarter of 2014) down.

So what are the mechanics of FLS?

Banks and other lenders approach the Bank of England, if they want. They swap assets they already have, such as loans, with the Bank. It in turn provides them with pieces of paper known as Treasury bills, for a four-year period.

The commercial banks are then able to use these bits of paper as top quality backing with which to borrow cash in the wholesale financial markets, from other lenders. With the Treasury’s backing, the idea is that they will be able to borrow funds at very cheap rates.

How will the taxpayer be protected in this arrangement?

The collateral pledged by commercial banks will have to be worth more than the high-grade paper being offered by the Bank of England. So, for every £1 of Treasury bills they borrow, the assets being pledged will have to be worth, say, £1.10 or £1.20. Thus if the value of that asset subsequently falls, the Bank of England will not suffer from the top slice of any loss.

What about savers?

They have suffered an unforeseen knock-on effect of FLS. The availability of cheap funds from the Bank means that lenders do not need to try so hard to attract funds from the general public, to then lend on to borrowers. That is why it is now almost impossible to find a savings account offering more than 3% interest.

 

Japan Advancing in Crowdfunding

July 27, 2014 — New York, NY

When microbrewery owner Saburo Setsuda needed to replace a bottling machine last year, his bank said no to loan but introduced him to a Tokyo firm that helped him raise funds online.

In January, the first time Mr. Setsuda tried crowdfunding, which lets Internet users put money toward projects or companies in return for a cut of profits, he raised nearly ¥4 million in just 18 hours. The funds went for a new bottling machine to pack beer flavors like blueberry and brews made from hot-spring water from this area in central Japan. The second time, in March, he raised ¥1.2 million for a refrigerator.

In May, lawmakers passed legislation in Japan—similar to the U.S. JOBS Act (Jumpstart Our Business Startups), which increases the number of investors a private firm may have—to make it easier for companies to provide these services online.

When crowdfunding emerged, after the 2008 financial crisis, many investors simply used crowdfunding sites to donate a couple of hundred dollars to projects they found worthy. Now, more are showing interest in platforms that give participants a return on their money.

In Japan, where Prime Minister Shinzo Abe is trying to jump-start economic activity, politicians have viewed crowdfunding as a way to nudge some of the trillions of yen in household savings out of low-yielding deposits and into the hands of entrepreneurs.

In May, lawmakers passed legislation—similar to the U.S. JOBS Act (Jumpstart Our Business Startups), which increases the number of investors a private firm may have—to make it easier for companies to provide these services online.

Just over half of the ¥1.6 quadrillion ($15.7 trillion) in Japanese household assets are in cash or at banks. Only 11% is in stocks or bonds, compared with 42% in the U.S. and 23% in Europe, according to the Bank of Japan.

Meanwhile, strict regulations keep banks from extending credit to some firms, which may have a good business idea but other issues, such as debt, that prevent lenders from funding them. Banks are lending out less than 70% of the deposits they hold.

Normally, that is where venture capital might step in, but economists say Japanese firms tapping crowdfunding often prefer to remain relatively small, and aren’t looking for Silicon Valley-style backing, which tends to be aimed at companies targeting large-scale growth.

Crowdfunding is still small in Japan, estimated at ¥8.2 billion, or $80 million. Meanwhile, the global market, which was less than $1 billion in 2010, was estimated to reach $5.1 billion in 2013, with the North American market accounting for $3.7 billion, according to a report the research firm Massolution published in April last year.

In Japan, the most well-known crowdfunding companies offer investors annual returns ranging from 2% to 10%, with the average at 5%. Investors are repaid over a few months, or as much as a few years. They run the risk of not being paid at all if the company they are backing fails.

Skepticism about promised returns is a hurdle to attracting more investors. After decades of near-zero interest rates on savings deposits, many investors are suspicious of pledges of returns of 4% or 5%.

“Because interest rates have been so low at financial institutions, Japanese people began to believe that interest rates were something supposed to be low,” said Kaz Ohmae, who started the crowdfunding platform Crowdbank.jp in December. “We have to change that perception.”

Crowdbank.jp provides funds to small firms in Japan and overseas and lists an average 5.2% return on its website. In just half a year, the company has received more than ¥650 million in investments for companies it serves and is shooting for ¥10 billion in the next few years, Mr. Ohmae said.

Yasuyuki Yabumoto, a 43-year-old telecom worker with two decades of investment experience, has put ¥1 million in crowdfunding via Mr. Ohmae’s company since April. He is planning to invest more but wants to go slowly.

“At this stage I’m carefully assessing crowdfunding’s risk and return, especially the default rates of companies that receive investments,” said Mr. Yabumoto, who also invests in stocks, currencies and bonds.

Many early-bird crowdfunding investors have prior investment experience. Nanae Obara, who works in the financial industry in Tokyo, said the ¥400,000 she has spent on crowdfunding over the last two years has been a way to diversify her portfolio of stock and investment-trust holdings.

Some politicians have expressed concern about risks, and the law passed earlier this year requires that crowdfunding companies provide adequate information about investments online. Still, there is also optimism that crowdfunding could help individual investors earn more on their savings.

More money flowing to firms in rural Japan could cut their dependence on government subsidies, said former Economy Minister Motohisa Furukawa. Mr. Furukawa helped launch a government debate on crowdfunding after seeing how online fundraising helped companies in areas of northern Japan affected by the 2011 earthquake and tsunami disasters.

Rather than feeling threatened by the potential competition from crowdfunding companies, many of Japan’s small lenders are excited.

“There is a lot of need from companies who have good ideas, but not good finances. It seems contradictory, but it’s hard for us to give them money,” said Keishi Furusato, who works in the loan and company-support division at Hida Credit Cooperative, the lender that introduced Mr. Setsuda, the brewer, to crowdfunding.

Though Hida Credit Cooperative doesn’t put up any money in crowdfunding arrangements, the hope is that companies that benefit and thrive will come to them in the future for loans. Mr. Furusato said that three to four other firms in Takayama, a town of 92,000, look likely to start crowdfunding soon.

Dublin Chambers of Commerce calls for Non-banking Financing Solutions for SME’s

July 28, 2014 — New York, NY

The Dublin Chamber of Commerce is calling on the Government to give business owners early access to a portion of their pension funds for the specific purpose of business growth.  It calculates that up to €7.5bn worth of SME financing could be unlocked if this idea was implemented.  It forms part of the Chamber’s Budget submission which they are publishing today. The Chamber says the Government now needs to focus on non-banking financing solutions for SMEs.

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Staying with the enterprise theme and anyone hoping to set up a business might consider going the co-op route. Legislation comes into effect today easing the regulatory burden on co-operative societies and making it easier to set up and run one. Minister for Enterprise Richard Bruton introduced reduced fees for the registration of co-operative societies about a year and a half ago. Among the changes will be an extension of the examinership process to co-ops.