Understanding the Risks of Alternative Investments

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Danger is one of the key segments of contributing. Every open door accompanies its own particular danger or mix of dangers. To completely evaluate a venture opportunity, it is essential for speculators to see how related dangers could influence the security of their venture and any potential additions. The following are some normal sorts of danger that can be connected with option ventures.

LTV

The advance to-worth proportion is the proportion of an advance to the estimation of the financed resource. (e.g., a $5M advance taken out on a benefit esteemed at $20M will have a 5/20, or 25% LTV) When a credit for a sum is at or close to the assessed estimation of an advantage, the advance to-worth proportion is considered high. On the off chance that a bank ever needs to offer the resource for recover the speculation, as on account of default or abandonment, high LTV proportions convey an improved probability that the deal sum may not be sufficient to cover the exceptional key advance parity.

Default Risk

Default danger is the danger that the borrower won’t have the capacity to reimburse the related interest and essential on a specific credit. Basically all loaning conveys some default hazard, however there are a couple approaches to attempt and relieve default hazard. A conventional route is to take a gander at the recuperation rate, or the sum a financial specialist can hope to get back if a default happens. Crowdfund Builder works with originators who have a demonstrated reputation of accomplishment and recuperation rates in the event of downturns to attempt to relieve any default dangers.

Focus Risk/Diversification Risk

The most straightforward approach to clarify focus hazard/broadening danger is with the well-known axiom, “Don’t put all your investments tied up on one place”. The thought is that if something turns out badly with that one wicker container, every one of the eggs could be lost. There are numerous approaches to be presented to fixation hazard. Putting all assets in the same business, topographical area, or sort of venture instrument (eg. just putting resources into coastline development) could convey focus hazard. The most ideal approach to check this kind of danger is to go for a broadened speculation technique by placing interests in various “wicker bin”. Most individual Crowdfund Builder speculations are bundled into portfolios that are expanded topographically (on account of land), crosswise over case sorts (in prosecution financing), and in different ways. You can likewise enhance crosswise over various sorts of benefit classes by putting resources into various open doors through Crowdfund Builder.

Liquidity Risk

Market (resource) liquidity danger is the shot of being not able offer your speculation when you fancy, at an equitable cost. The liquidity of advantages relies on upon the atmosphere and structure of the business sector in which the benefit will be sold. Treasury securities are normally regarded to be very fluid speculations since it is not hard to discover purchasers willing to pay a honest cost for that venture. Land liquidity can be influenced by a few variables, including the quantity of dispossessions in the zone or the eagerness of banks to offer new home loans.

Vulnerability in Timing

Speculations are regularly made on a “drifting” timetable. This implies the payout date is a deadline, or a normal date, yet not an ensured date. With occasion based installments, as with suit money, there is dependably a chance the case may settle before or after the normal payout date. A default on land venture can expand vulnerability around a payout date. This is increasingly a “bother hazard” as opposed to a real hazard. This sort of danger might be utilized to build the yield of a speculation without the loan specialist going out on a limb of chief misfortune.

Foremost Risk

Foremost hazard is the likelihood that a loan specialist won’t get back a few or the greater part of the key adjust, the sum that they had initially contributed. Crowdfund Builder brings a moderate technique with ventures; be that as it may, a misfortune is constantly conceivable. For instance, if a land property isn’t sold for the normal sum, there is a possibility of vital misfortune for financial specialists in that property.

Recurrence of Payments

Installment recurrence on an obligation can be yearly, semi-yearly, quarterly, or month to month. The recurrence of an installment can influence the cost or yield (return) of a speculation. For option ventures that are firmly attached to resources, unforeseen increments (for instance, early reimbursement) in the recurrence of installments can lessen the arrival to the loan specialist on the speculation.

Higher anticipated that profits are utilized would remunerate financial specialists why should willing go out on a limb. Returns are, in any case, never ensured. It is critical to painstakingly measure all the distinctive dangers that accompany a venture and to comprehend your ravenousness for danger before making any kind of speculation.

RULE 506(C)

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RULE 506(C): WHAT CAN I SHOW ON MY SITE, TO WHOM, AND WHEN?

The SEC no-action letters issued to FundersClub and AngelList early in 2013 created some confusion around the deal-specific information that can be shown to prospective investors. Let’s try to clear that up.

Rule 506(b) Deals

You cannot show your Rule 506(b) deals to just anyone browsing the Internet, because that would be “general solicitation and advertising,” which is permitted under Rule 506(c) but still prohibited under Rule 506(b). If you’re a real estate portal, you can say “We have great real estate deals on our site,” but you can’t say “Look at this multi-family rental project in Austin.”

Both FundersClub and AngelList hid their deals behind a firewall. A user couldn’t see the deals until he registered at the site and promised he was accredited. In the 2013 no-action letters the SEC approved this arrangement, sort of.

I say “sort of” for three reasons:

The two no-action letters weren’t actually about registering users. They were about whether FundersClub and AngelList had to register as broker-dealers. Nowhere do the no-action letters say “We agree that, because you hide your deals behind firewalls, you’re not engaged in prohibited general solicitation and advertising.”
The no-action letters were issued by the Division of Trading and Markets within the SEC, not the Division of Corporation Finance. Typically, the Division of Corporation Finance would deal with so-called “exempt offerings” (offerings that are exempt from the general registration requirements of the Securities Act of 1933), of which general solicitation is a part.
Most intriguingly, the no-action letters aren’t exactly consistent with prior SEC rulings dealing with the online solicitation of customers, specifically the IPONET rulings in 2000. Those rulings assumed that the person doing the online solicitation was a registered broker-dealer; by definition, FundersClub and AngelList were not broker-dealers.
As a result, we can’t be 100% certain that the SEC, if asked point blank, would approve those arrangements from the perspective of general solicitation and advertising.

Nevertheless, the no-action letters were issued and the Crowdfunding industry has adopted the FundersClub and AngelList model: if you’re doing Rule 506(b) deals, you put the actual deals behind a registration firewall.

Once an investor registers at your site he can see the deals, but he can’t invest in them. In a series of no-action letters issued long before the JOBS Act, the SEC established that once an investor has become a customer, he has to wait before investing – the so-called “cooling off period.”

Some sites today are using a 21 day cooling off period, presumably because Title III incorporates a 21 day cooling off period. But the Title III rule is irrelevant to Rule 506(b). Thirty days is probably better, although, again, the notion of a cooling off period comes from SEC rulings, not a statute.

One more twist: at the end of the cooling off period, your investor can invest only in new deals, not deals that were on the site when he registered.

Rule 506(c) Deals

Rule 506(c) is far simpler. If you are doing only Rule 506(c) deals, you can show anything to anyone anytime.

Using Rule 506(c), you can show every detail of every deal to every casual viewer, even before the viewer has registered at your site. If you think that’s a bad idea from a marketing perspective or because you’re trying to protect confidential information, no problem. You don’t have to show all the details on your home page, but you can.

You can also make users register before they can see deals, just like Rule 506(b). If you take that route, you can ask users whether they’re accredited when they register, as you would under Rule 506(b), but you don’t have to ask. You can let everyone see the deals, accredited and non-accredited alike.

If you ask whether users are accredited – because you think it’s a good idea from a marketing perspective – that doesn’t mean you have to stop non-accredited investors at the door. Non-accredited investors can see the deals, too. Maybe they’ll tell their accredited friends.

Suppose a user tells you she’s accredited when she registers. Can you take her word for it? At that point in the process, absolutely! We don’t want to spend money or time on verification yet, and we don’t want to create transactional friction where we don’t have to.

With Rule 506(c), there is only one critical moment: when your investor is ready to write a check. At that point you must verify that she’s accredited, not merely by asking her but by looking at her tax returns, or getting a letter from her lawyer, or, most likely, having her verified by a third party service like VerifyInvestors or Crowdentials.

There’s no cooling off period with Rule 506(c), either. Your investors can see all the deals and invest right away.

Have I mentioned before that Rule 506(c) is better for Crowdfunding?

FinLaw: Who will buy your company’s stock?

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By Scott Andersen, Reprinted from CrowdFundBeat

There is a maxim used by securities professionals that “stocks are sold, not bought.” This maxim summarizes the view that for a securities offering to be successful, it needs a broker-dealer to solicit and recommend the offering to prospective investors.

Now with the JOBS Act and companies selling securities directly to investors through general solicitation (advertising), the question is raised: who will buy your company’s stock? Moving away from a broker-dealer to reliance on advertising alone requires careful planning for an offering to be successful. This is difficult for a company that has not raised capital before. For one, there may be no securities professionals involved in structuring the offering, or marketing or selling it. Other professionals, such as attorneys, may recommend a Reg A offering but are not retained to provide guidance on how to market a successful offering. Failure means a blow to a company’s reputation and coffers; simply wasted money.

To raise capital under Rule 506(c) or Reg A, a company must plan carefully its marketing campaign, including how it will attract interest in its securities offering, how it will draw visitors to its website hosting the offering, and why it is likely that an investor will press the “invest now” button and invest? The company is driving the ship here, and must take responsibility for the offering to be successful. If the company lacks the experience or confidence to do so, it should hire a broker-dealer to solicit the offering as this will increase its odds of success. Broker-dealers have existing relationships with investors whom they can solicit and can provide advice on the terms of the offering. A company initiating a marketing campaign needs to find ways to introduce itself to the public and network to and develop relationships with prospective investors. The marketing should not be limited to creating a website and video and then expecting investors to come find the company as this alone generally will not work.

A few things to consider:

While a company may view its securities offering as great and a no brainer, others including prospective investors may not necessarily see it the same way. A company needs to market the offering, and in a manner compliant with securities laws.

Who is the targeted audience? Customers of a company and true believers are an ideal target audience. If not them, who? And what is the marketing strategy for reaching them?

Is a Reg A the right type of securities offering? Maybe a Reg D or Title III make more sense initially, especially if this is the first time a company is raising capital. In this way, a company pays lower legal fees while having an opportunity to test its online marketing strategy, the offering is ready to launch faster, and with Title III, a company can tap into a funding portal’s network of investors.

The minimum offering should both help a company take the next step in growing its business and be low enough that it is realistic for the company to successfully raise this amount.

A securities offering is not a race, and speed is a lot less important than success. Careful planning of a company’s marketing strategy is essential, and the company should obtain the help it needs to be effective, persuasive and compliant.

The key goal for any securities offering is to be successful. Without a proper marketing strategy, how can any company expect to attract visitors to a website to invest? Without a proper marketing strategy, the answer to the question of who will buy your company’s stock is clear: possibly no one.

***

About: Scott Andersen
Scott is principal at finLawyer.com and General Counsel of FundAmerica. He was most recently the Deputy Regional Chief Counsel at FINRA, and prior to that was the Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. He concentrates his practice on securities law and regulatory defense.

The information in this article is provided for general informational purposes only and is not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.

Evaluating Crowdfunding for Architectural Projects

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By Rachael Everly, Reprinted from Crowdfund Beat

Crowdfunding is often described as a practice to start off online investment campaign by popular people and generate funds or finances for specific related projects. This practice can leverage entrepreneurs, tech enthusiasts or businessmen who can spur some community support and start a petition to motivate people for investing some small dollar contributions. But can it help architects?

How is Crowdfunding Relevant with Architecture?

Crowdfunding can be applied to a range of investment opportunities provided for a viable project, services or the idea of a physical structure which can present itself as a worthwhile investment option for the people. People like to invest for something which is sustainable and worthwhile. Crowdfunding can fund construction projects if the role of the architect is clearly defined to present investment models and communication digital tools to encourage more and more people for investing. The investment can only be leveraged if architects work with local communities and develop and implement creative design ideas to help the community as a single unit and create both short and long term goals.

The people would only invest for something of value which would help them in the long run and would serve the community such as an urban skyscraper, a pedestrian bridge, a religious structure or any improvement construction plan to renovate or restore any old cultural heritage building. People are willing to invest on improvement projects by making small contributions to help develop their community.

The Real Story

Colombia’s 66 story skyscraper BD Bacatá Downtown is crowd funded through small contributions from local investors and people. The fundraising drive is executed through various crowdfunding campaigns while catering interests of the local community in owning a percentage of the overall project. All crowdfunding investment helped to build the huge skyscraper by using heavy machinery and equipment as the planned skyscraper will comprise of 66 stories, 216 meters high above the city of Bogota.

It easily gathered interests from the people for their community welfare and each citizen had a collective goal and shared regional interest to work together to help architects construct this skyscraper. Crowdfunding for such architectural project can take time for additional research and analysis and help people to understand potential opportunities and implication for the development of such projects through innovative financing mechanisms.

Another project in the making is the ‘I make Rotterdam’ project in the Netherlands. It is how crowdfunding helped the architectural designers to fund for a constructional development to help the community to alleviate pedestrian traffic. All the investors will have their names enlisted across visible planks so that everyone would know who helped in the making of this constructional marvel. Crowdfunding thus can motivate and encourage people to make worthwhile investments and help their community for a noble cause.

Managing The Risks Of Crowdfunding

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By Evan Bundschuh, Reprinted from Crowd Fund Beat

For new ventures looking to raise capital or test their market/product, crowdfunding has proven to be the go-to solution with an ease and excitement that other methods of funding lack. With that excitement though comes challenges. As a fairly young platform with a legal landscape that has yet to develop, the risks of crowdfunding are often overlooked. While the risks may seem invisible, mistakes are inevitable, as are the lawsuits and damages that follow. The challenge is forecasting when and where the potential dangers/disasters will arise (before they do) in order to protect your business, its directors, and its newly formed brand. We outline these risks not to discourage the usage of crowdfunding but to bring risk concerns to the forefront so that they can be properly assessed, managed and mitigated.

  1. Poor communication and lack of transparency. When it comes to describing the performance/effectiveness of your product, prices, associated fees, turn around times, etc. be as descriptive and transparent as possible. In a well published recent case, a disgruntled buyer filed a lawsuit over the failure to disclose a simple shipping fee, ultimately bankrupting the company which could not afford to issue full refunds to its purchasers.
  2. Lack of solvency and reserve capital: The same case example above also highlights the importance of having enough reserve capital on hand for the unexpected. The unexpected can come in the form of disgruntled backers demanding returns, expedited fulfillment costs following unexpected success, or attorney’s fees to defend your IP to name a few.
    Poor customer support & upsetting dissatisfied customers. Whether or not you are contractually required to provide a full refund, consider erring on the side of generosity when encountering dissatisfied backers. Dissatisfied customers are, without saying, the most vocal and the most likely to take action, whether that be taking to social media to inflict brand damage or taking legal action. Most crowdfunding backers are also of the tech generation and know how to effectively utilize social media outlets to voice dis-taste for a company.
  3. Failure to qualify and diversify: In order to help ensure business continuity, attempt to source from multiple suppliers/manufacturers and diversify your supply chain when possible. Dependence on any single supplier/manufacturer can prove financially damaging if/when they encounter a loss. Losses can range from natural disasters to political unrest to bankruptcy. The inability to obtain your product is only the tip of the iceberg. It’s the inability to fulfill orders and deliver on your goods sold that can quickly escalate financial damages sustained. Developing and maintaining vendor qualification checklists also help ensure manufacturers, suppliers, vendors and outside parties meet certain risk criteria to ensure product quality and business continuity.
  4. Exposing your (unprotected) intellectual property: For companies planning on filing patents, it’s wise to discuss this with a qualified IP attorney as early in the process as possible and before beginning any campaign. Beginning a crowdfunding campaign also begins a one year “time to file” clock, as it is considered public disclosure. If any patents are planning to be filed, that have not been already, they must be filed within that one year clock. Once expired, the ability to file can be lost. In addition to working with an IP attorney to protect your own IP, it is equally important to do so early in the process to ensure that you are not infringing on others. Without thorough trademark searches, you are exposing your company to potential trademark infringement claims.
  5. Overlooking a proper insurance portfolio: When it comes to placing insurance, companies will often only place what is either being requested of them, or seek out the coverage that is believed to be “standard”, but may fail to listen to the advice of their actual broker. The most commonly requested insurance is general & product liability. While this is often a good place to begin, securing only the most basic insurance leaves many of your exposures still exposed. For companies without excess capital and an in house risk manager, this can be particularly problematic. Placing insurance protections for: cargo (during shipment), the directors & officers of the company, product recalls and cyber liability for data breaches is equally important. Considering that many of policies require careful review, coordination and negotiation further highlights the importance of working with a knowledgeable broker that can help you assess your risk and craft a proper portfolio.
  6. Compliance & accusations of fraud: With crowdfunding bypassing any meaningful reporting/oversight, the threats of fraud accusations are increased. A recent FTC Alert warns companies engaged in crowdfunding to: 1) ensure crowdfunding promises be kept, and 2) utilize crowdfunding funds only for the purposes advertised. The SEC has also issued a recent alert (among others) adressing acceptable donation limits. Understanding the compliance environment and implementing best practices & strong internal controls can help avoid accusations of fraud.
  7. Lack of sufficient R&D: It is important that sufficient R&D has been performed under varying conditions before bringing any product to market. Will this product cause electrical shocks? Is this product mixed or bottled in a factory that contains allergens? Is there any potential for injury? Is the product properly labeled? Is it in compliance with all US customs laws? Are the claims that we are asserting, properly supported? Purchasing product liability insurance does offer protection, but it’s no substitute for sufficient R&D, internal controls and legal counsel. For higher risk products a product liability audit may also be recommended.
    Implementing outside ideas: It’s important to read the platform’s user agreements and understand exactly what implications they have. There has been much talk about the concern of companies implementing product feedback from users/backers. Whether it be in the form of comments on the platform or elsewhere, implementing ideas provided by users/backers can create a potential legal issue.
  8. Overlooking tax liability & implications: Complete tax compliance can be deceivingly difficult. Crowdfunding poses many tax questions and areas of concern including applicable securities laws, differing state laws, and requirements of 1099’s to name a few. Before launching any campaigns be sure to contact an accountant or financial advisor that understands the crowdfunding sector.Source @ http://www.gbainsurance.com/

Commonwealth Capital Adds New Crowdfunding Chapter to Its Premier E-Book

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CHICAGO, July 28, 2016 /PRNewswire/ — Commonwealth Capital LLC, a pioneering provider of Corporate Finance Advisory and Regulation Crowdfunding services, announced today that it has updated its popular e-book with a new Chapter Two dedicated entirely to crowdfunding.

Secrets of Wall Street E-Book (PRNewsFoto/Commonwealth Capital LLC)

Secrets of Wall Street E-Book (PRNewsFoto/Commonwealth Capital LLC)

The definition of the term “crowdfunding” has evolved in recent years. The term was originally used for donation-based crowdfunding only, but is now used to define capital-based crowdfunding — also known as Regulation Crowdfunding — under Title II (2) and then under Title III (3) of the Jumpstart Our Business Startups (JOBS) Act of 2012.

The JOBS Act has significantly leveled the investment playing field, encouraging a growing number of entrepreneurs to begin fielding their own crowdfunded offerings. Unfortunately, in their excitement to take advantage of these new opportunities, many entrepreneurs fail to recognize that significant legal and managerial risks remain when raising crowdfunded capital. These risks can be devastating professionally and personally if not identified and addressed from the start.

“What most entrepreneurs don’t understand is that seeking capital though Regulation Crowdfunding is a securities offering and is still a very tricky business,” said Timothy D. Hogan, CEO of Commonwealth Capital. “We’ve witnessed too many entrepreneurs making too many unnecessary mistakes and we want to do our part in correcting that problem.”

To help entrepreneurs get started right, Commonwealth Capital provides a complimentary 40-page Abridged Edition of the e-book, downloadable from its website. The new Chapter Two includes comprehensive excerpts and summaries from the 685-page document known as the SEC Final Rules regarding crowdfunding. More importantly, the Abridged Edition enables entrepreneurs to make qualified decisions on whether a securities offering is right for their company’s capitalization needs.

A complimentary copy of the Abridged Edition can be downloaded at http://commonwealthcapital.co/get-your-ebook. The complete, 140-page Expert Edition can be purchased online and downloaded at http://commonwealthcapital.co/purchase-expert-edition-e-book/.

About Commonwealth Capital LLC
Commonwealth Capital LLC, a pioneering provider of Corporate Finance Advisory and Regulation Crowdfunding services, is a subsidiary of Commonwealth Capital Advisors (CCA). Since 1998, CCA has successfully engaged hundreds of start-up and early stage companies in their quest for raising millions of dollars in capital. As former Wall Street investment bankers and experts in compliance matters related to selling securities, the company’s executives are intimately familiar with the criteria employed to successfully raise seed, development and expansion capital. Learn more at www.commonwealthcapital.co.

Watch: Regulation A Plus Panel

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Crowdfunding in Emerging Markets

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A new report, Crowdfunding in Emerging Markets: Lessons from East African Startups, captures lessons learned from East African entrepreneurs who were among the earliest adopters of crowdfunding in the developing world.

Crowdfunding is the practice of raising monetary contributions from a large number of people, typically online, to fund a project or venture. In the past 10 years, crowdfunding has evolved into a $16 billion market, largely concentrated in North America and Europe.

In developing countries, the crowdfunding market is expected to reach $327 million this year—about 2 percent of the global total. Despite this slow adoption, crowdfunding has been heralded as an opportunity to expand access to capital for entrepreneurs.

To better understand the challenges of crowdfunding in emerging markets, the World Bank Group conducted interviews with a number of East African technology entrepreneurs who ran crowdfunding campaigns, both successful and unsuccessful. From the interviews emerged six lessons about when, why, and how to launch crowdfunding campaigns:

Crowdfunding is more difficult than most entrepreneurs anticipate and is not for everyone.
Business needs should dictate platform choice.
Payment systems impact platform choice.
Quality and quantity of contributor networks are key.
Entrepreneurs should tap into complementary resources and organizations to increase their likelihood of success.
Crowdfunding can have non-monetary benefits.

Crowdfunding in Emerging Markets by CrowdFunding Beat on Scribd

Improving Legal Documents in Crowdfunding: Get Rid of the State Legends!

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By Mark Roderick, crowdfunding attorney with Flaster/Greenberg PC.

I see lots of offering documents like this, with pages of state “legends.” The good news is that in Crowdfunding offerings – Title II (Rule 506(c)), Title III (Regulation Crowdfunding), and Title IV (Regulation A) – you can and should get rid of them.

The legal case is pretty simple:

Before 1996, states were allowed to regulate private offerings. Every state allowed exemptions, but these exemptions often required legends, differing from state to state. The National Securities Market Improvement Act of 1996 added section 18 to the Securities Act of 1933. Section 18 provides that no state shall “impose any conditions upon the use of. . . .any offering document that is prepared by or on behalf of the issuer. . . .” in connection with the sale of “covered securities.” The securities sold under Title II, Title III, and Title IV are all “covered securities.” Hence, section 18 prohibits states from imposing any conditions regarding the issuer’s offering documents, including a condition that requires the use of a state legend.

If the capitalized legends just take up space, why not include them anyway just to be safe? Take Pennsylvania’s legend as an example:

These securities have not been registered under the Pennsylvania Securities Act of 1972 in reliance upon an exemption therefrom. any sale made pursuant to such exemption is voidable by a Pennsylvania purchaser within two business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is not a written binding contract of purchase, within two business days after he or she makes the initial payment for the shares being offered.

If you include the Pennsylvania legend “just to be safe,” you’ve given Pennsylvania investors a right of rescission they wouldn’t have had otherwise!

Two qualifications.

First, the North American Securities Administrators Association –the trade group of state securities regulators – suggests including uniform legend on offering documents. I include this or something similar as a matter of course:

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

Second, some states, including Florida, require a legend to appear on the face of the offering document to avoid broker-dealer registration. Because Section 18 of the Securities Act doesn’t prohibit states from regulating broker-dealers, some lawyers recommend including those legends, while others believe those requirements are an improper “back door” way for states to avoid the Federal rule. I come out in the latter camp, but opinions differ.

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.

How CrowdFunding is Disrupting Old Banking

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By Julie Hanna and Reid Hoffman, reprinted from Crowdfund Beat 

In San Francisco, Teresa Goines is breaking down deeply entrenched cycles of poverty and crime, one bowl of peanut butter stew at a time. Old Skool Café, the 1940’s supperclub she started, gives jobs to at-risk and former gang youth. When banks turned her down, 41 people she’d never met crowdfunded a $5000 loan, putting their faith and money in Teresa, a former corrections officer with no restaurant experience in a city where most new restaurants fail. Their bet paid off. She repaid her loan in full. Each year, 25 troubled young people, most who have tangled with the law, get their lives back on track. Today, Teresa has an even bigger dream of opening Old Skool Cafes across the nation and revitalizing communities everywhere.

As high-tech investors, both of us value high-impact, fast-growth companies that attract massive global user bases. Companies like these can scale quickly, create thousands of jobs, and help the U.S. improve its export economy at a time when its share of global economic output is falling. We also recognize that most businesses are small. In fact, out of the roughly 27 million businesses in the U.S., 21 million are sole proprietorships. Of the remaining 5.9 million businesses, 4.6 million have nine or fewer employees.

Clearly small businesses are a crucial component of the American economy. Yet when people like Teresa Goines try to create new businesses and jobs, banks shy away. According to Biz2Credit, an online service devoted to small business funding, big banks reject roughly 8 out of 10 loan applicants, and small banks reject 5 out of 10. Some estimates suggest that investment in small businesses has dropped as much as 44 percent since the Great Recession in 2008. That’s tens of billions of dollars that fueled the economy and helped our communities thrive – gone, completely eviscerated. Meanwhile, 21 million people are underemployed or unemployed. Globally, it’s far worse, with half the planet’s population living on less than $2 a day.

While talent is universal, opportunity is not – even in the land of opportunity. The greatest threat to our long-term prosperity goes far beyond the financial crisis and the health of a few banks on Wall Street that have been deemed “too big to fail.” The real threat we face is a global opportunity crisis. In both the developing and the developed world, billions of people don’t have access to jobs and capital.

That’s why we serve on the board at Kiva, the pioneer crowdfunding platform where citizen lenders invest small sums in micro-entrepreneurs all over the world. Nearly 1.3 million borrowers like Teresa Goines, living in 76 countries, including the U.S., have received more than half a billion dollars in loans. 99% of these loans have been repaid in full, flying in the face of traditional banking assumptions about credit and trust.

More important, Kiva is no longer unique. Today, an exploding crowdfunding sector is making billions of dollars of capital accessible to upstarts and entrepreneurs. Over 700 crowdfunding marketplaces, led by the likes of IndieGogo, Kickstarter, and Lending Club, are democratizing access to capital, fueling entrepreneurship and innovation, and profoundly changing the face of philanthropy at unprecedented scale and impact.

Citizens Lenders Democratizing Access to Capital

One of the best ways to fuel widespread prosperity is by helping Main Street invest in itself. Crowdfunding relies on the wisdom of crowds to identify fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.

Call it the emergence of a “world’s bank” – a system built by and for the people, delivering credit in America and across the globe in a radically decentralized, highly scalable, and crucially equitable way.

The World Bank funds institutions. The world’s bank funds people. For decades, the World Bank has existed as a top-down mechanism to spur economic growth in developing nations. In contrast, the world’s bank picks up with a nimble, bottoms-up model that is far more attuned to on-the-ground needs of micro-entrepreneurs and their communities worldwide.

The motivations for citizen-lenders run the gamut from altruistic to creative to financial. Kickstarter and IndieGogo funders typically get some type of reward in return for their capital. Kiva lenders are paid back by micro-entrepreneurs, albeit with no interest. Services like Lending Club offer lenders a way to earn interest on personal loans.

In the same way that citizen journalists have shaken up Old Media, citizen lenders may upend Old Banking. Already, Lending Club has made $4 billion in personal loans in the U.S. alone. Kickstarter lenders have applied over $1 billion to more than 60,000 projects in just five years. More than 60 projects obtained at least $1 million in funding, and one attracted over $10 million. There are over 1 million Kiva lenders residing in 196 countries. Finally, a new change in federal regulations has opened the market for equity crowdfunding, further empowering innovative entrepreneurs via marketplaces like AngelList and CrowdFunder.

Still, it’s easy to underestimate the impact of crowdfunding. To dismiss these purpose-driven marketplaces as a simplistic way for do-gooders to easily support pet causes, yet incapable of driving massive structural change that can improve prosperity for all, not just a select few. The opposite is true.

The Surprising Sophistication of Crowdfunding Platforms

Crowdfunding can easily go where traditional banks cannot. Take Erastus Kimani, a 73 year old schoolteacher turned entrepreneur, who lives in a remote part of Kenya without indoor plumbing, much less indoor banking. Erastus attracted lenders from all over the world. They crowdfunded $1700 which allowed him to triple the production of his ceramic stove liner business. Using just his mobile phone, Erastus applied for, received, and paid back his loans in full. He did it all without bank officers, ATMs, or even a computer.