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:

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

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

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

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.

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.

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!