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.

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

By: Kim Wales (NY) — 01/19/2015

India’s SEBI considers crowdfunding as an alternative to helping young budding businesses find funding. There are thirty-eight countries leading the advancement of policy reform to tackle the economic challenges in their homelands through initiatives like crowdfunding. The Jumpstart Our Business Startups Act of 2012 motivated many nations to revisit their securities laws that involves entrepreneurs and small groups of people raising funds for their ventures through various online platforms involving individuals as well as organizations.

In countries like India, the regulatory commission SEBI is evolving guidelines in consultation with government for funding arrangements for start up and emerging growth companies.

At a seminar held by PHD Chamber of Commerce and Industry, SEBI whole-time member Rajeev Agarwal said on Wednesday, “while it is still in a nascent stage in India, compared to large markets like the US, China and the UK, crowd funding is catching up fast especially in the wake of emergence of social media as a key platform for such activities.”

The market regulator had, in July last year, come out with a draft framework on crowdfunding. Under the proposed framework, the issuer entities and their promoters and directors would need to meet ‘fit and proper’ criteria of SEBI, while they can not use multiple platforms to raise such funds within a year, among other provisions that may prove beneficial to economy.

According to SEBI, there is a need for funding for SME through alternative sources as 2008 global financial crisis made it difficult for banks to lend money to the ventures or start-ups, which may have high risk element.

However, SEBI said there is possibility of systemic risk associated with crowd-funding as well as chances that investors could be defrauded.

SEBI whole time member on Wednesday noted that the finance minister made allocation to the extend of Rs 10,000 crores to extend funding facilities for SMEs and other splinter groups in the budget for 2014-15 “which has yet to be utilised for the desired purpose”.

“The government and SEBI are making guidelines for the utilization of this fund, especially for start up entrepreneurs,” Agarwal said.

He also assured that SEBI would continue to protect the retail investors and promote trading in SMEs on the exchanges within the existing guidelines but expressed inabilities of the regulator to broad-base policy measures in this regard.

However, Agarwal said that while the crowdfunding issues has been discussed by the international board of SEBI in detail, India may have to wait longer to bring in guidelines on the same.

“The subject has not even been debated in great details in advance economy such as US and Europe and that India should wait for some time before contemplating regulations and directives on the matter,” Agarwal said.

SEBI Consultation Paper

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, 11/13/14  —

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!

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 :

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+)?”

On August 8, 2014, ESMA published the final translated Guidelines on reporting obligations under the Alternative Investment Fund Managers Directive.  The Guidelines provide clarification on the information that alternative investment fund managers (“AIFMs”) must report to national regulators, the timing of such reporting and the procedures to be followed when AIFMs move from one reporting obligation to another. The Guidelines, which apply to national regulators, will apply from October 8, 2014.   In addition, AIFMD_Top 10 Guidelines as presented by Wales Capital in  2013 can be reviewed as cross reference.

Read the Guidelines here.