Overview of Rule 506(c) and 506(b) Offerings

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What are the real differences between Rule 506(c) and 506(b) Offerings?
The chart below covers a few of the differences between 506(b) and 506(c) offerings. Please note that this is not legal advice. You should consult with your own attorney before conducting a 506(b) or 506(c) offering. Securities regulations (and interpretations regarding such regulations) are subject to change.

 

506(b) Offering 506(c) Offering
Communications with Investors Companies may not advertise their security offering. Generally, companies may approach potential investors if there is a substantive, pre-existing relationship. General advertising permitted. Companies may advertise via social media, email, or offline. No substantive, pre-existing relationship with potential investors required.
Eligible investors Accredited investors and up to 35 non-accredited investors who meet sophistication requirements. Only accredited investors.
Accreditation Process Self-certification via a questionnaire is the general standard.

 Companies must take reasonable steps to verify accredited investor status. Self-certification via a questionnaire is not permissible. The SEC issued examples of reasonable steps for verification.
Offering size No limit on offering size. No limit on offering size.
Disclosure Companies must decide on what information to provide to accredited investors, but that information must not violate antifraud prohibitions. If non-accredited investors are included, companies must provide those investors with disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make that information available to non-accredited investors as well. Companies must be available to answer questions from potential investors. Companies must decide on what information to provide to accredited investors, but that information must not violate antifraud prohibitions. Companies must be available to answer questions from potential investors.
Filing Requirements Companies must file a Form D. Companies must file a Form D.
Intermediaries Not required. If used, the intermediary must be a registered broker-dealer or exempt from broker-dealer registration. Not required. If used, the intermediary must be a registered broker-dealer or exempt from broker-dealer registration.

Rule 506 of Regulation D – Fast Facts

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Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(a)(2) of the Securities Act. Companies depending on the Rule 506 exemption can raise a boundless amount of cash. There are actually two distinct exemptions that fall under Rule 506.

Under Rule 506(b), a company can be assured it is inside the Section 4(a)(2) exemption by satisfying the accompanying standards:

The company cannot utilize general solicitation or advertising to market the securities;

  • The company may offer its securities to a boundless number of “accredited financial specialists” and up to 35 different purchases. Not at all like Rule 505, all non-accredited speculators, either alone or with a purchaser representative, must be sophisticated—that is, they should have sufficient information and experience in financial and business matters to make them capable of evaluating the benefits and dangers of the prospective venture;
  • Companies must decide what information to provide for accredited speculators, inasmuch as it doesn’t violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited financial specialists disclosure documents that are generally the same as those utilized as a part of enlisted offerings. On the off chance that a company gives information to accredited financial specialists, it must make this information available to non-accredited speculators as well;
  • The company must be available to answer questions by prospective purchasers; and
  • Financial statement necessities are the same as for Rule 505.

Under Rule 506(c), a company can broadly solicit and generally advertise the offering, but still be considered to be undertaking a private offering inside Section 4(a)(2) if:

  • The investors in the offering are all accredited financial specialists; and
  • The company has taken reasonable strides to confirm that its speculators are accredited financial specialists, which could include looking into documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

Purchasers of securities offered pursuant to Rule 506 receive “restricted” securities, meaning that the securities cannot be sold for at least a year without enlisting them.

Companies depending on the Rule 506 exemption don’t have to enlist their offering of securities with the SEC, but they should document what is known as a “Structure D” electronically with the SEC after they first offer their securities. Structure D is a brief notice that includes the names and addresses of the company’s promoters, executive officers and directors, and a few details about the offering, but contains minimal other information about the company. On the off chance that you are considering putting resources into a Regulation D offering, you ought to obtain a copy of the company’s Form D available from the EDGAR database.

You ought to always check with your state securities regulator to check whether it has more information about the company and the general population behind it. Be certain to ask whether your state regulator has cleared the offering available to be purchased in your state.

2016 Top 10 Investing Hot Spots

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The national housing market keeps on warming up, with U.S. home deals hitting a nine-year high in May and home costs taking off 4.7 percent year-over-year around the same time. Add to that $636.7 billion in greatly required new development (once more, on a national level) up 5 percent in May over April, and it’s anything but difficult to see why the “talking heads” on TV are energetically bragging that great times are here for lodging once more. As a general rule, be that as it may, as each astute financial specialist knows, lodging is not national. It’s local, best case scenario, and by and large a neighborhood issue that is profoundly impacted by the individual speculator’s capacities and picked contributing technique.

When you dissect the U.S. “hot lodging market,” you discover a considerable measure of alarming particulars in the points of interest. For instance, that $636.7 billion measurement flooding the wireless transmissions nowadays really is exceptionally deceptive in light of the fact that it incorporates all development, including open works and power plants. Actually, the main real lodging giver to that number was multifamily lodging, not new-home development in the single-family-living arrangement segment.

Believe Realty’s “Main 10 Real Estate Markets and Industry Perspectives” is another kind of hot rundown, calculating in the concealed patterns, the unnoticed demographic movements and the essential fine print that most media outlets either neglect to consider or purposely disregard. This rundown variables in neighborhood monetary patterns, work shifts, speculator action, purchasing and offering demographics and applicable enactment and strategy on state and national levels. These 10 markets speak to significant chance to the speculators who get to be included in them in a successful path as of right now as indicated by our examination.

Atlanta, Georgia

Atlanta, Georgia, falled behind the national lodging recuperation and, as a wonderful result, keeps on encountering conventional gratefulness for purchase and-holds in overabundance of national midpoints. (The Atlanta Board of Realtors pegged metro-zone thankfulness at 6.7 percent in May.) Although nearby stock is fixing, especially with regards to single-family “starter homes,” Atlanta still offers various passage focuses for financial specialists, whether they wish to alter and-flip, buy turnkey rentals or put resources into bigger undertakings. With a developing employments market construct decidedly in light of sought after segments like IT, amusement and assembling, the city—which RealtyTrac as of late named the most moderate in the nation—is exceptionally appealing to Millennial laborers wishing to buy their own homes while as yet living in an alluring, reasonable metro range.

Austin, Texas

In spite of as of late being named the “most exaggerated lodging market in the country” (alongside San Antonio) by Forbes magazine, Austin, Texas, has a stunning capacity to take this kind of licking and keep right on blasting. Austin not just encountered a generally light effect from the Great Recession, because of a huge deluge of IT-related employments that hints at no abating, yet the number of inhabitants in IT laborers in the range is managing the city’s development in spite of potential “weaknesses” in numerous Texas markets on account of moderately low oil costs. IT occupations are an extraordinary indication of strength in any neighborhood economy since they pay well, are dependable and have a tendency to make huge quantities of different employments therefore. In Austin, more than six out of each 10 new occupations are in the data innovation part. By correlation, the national normal is just shy of three out of each 10. Current middle home costs in the region have gone up 21 percent since 2012, yet they are still to a great degree reasonable in respect to numerous IT-overwhelming California urban areas, making various tech representatives genuinely consider moving “back East”— no less than a little route—keeping in mind the end goal to discover more moderate, more worthy lodging and driving circumstances. With a business sector that meets the customary norms for “exaggerated,” a financial specialist ought to dependably have different “quick activity” exit alternatives accessible or a system for holding that includes income, paying little mind to appreciation. Right now, Austin still is alluring for these speculators.

Dallas, Texas

Dallas, Texas, is another Lone Star showcase that is making a few people anxious. Worries about Dallas are making openings in the land contributing part that already had been shut just because of an excess of action and rivalry. In the course of the most recent 12 months, costs in the range have risen 9.3 percent, well in front of national increases, and Dallas is in a matter of seconds second just to Denver, Colorado, in home appreciation. Albeit falling oil costs are a noteworthy component in Dallas lodging patterns, different livelihood open doors and professional business charge and authoritative approaches make it likely that open doors for financial specialists to get required in this business sector, especially on the off chance that they wish to possess rentals or multifamily properties, will stay accessible for whatever is left of the year. Because of Dallas’ prominent on the contributing scene, singular financial specialists may think that its hard to “break in” to the business sector at first. Working with a prepared or associated neighborhood nearness might be a decent approach to viably vet arrangements and keep close tabs on business sector and monetary movements.

Denver, Colorado

At present, Denver, Colorado, brags the best gratefulness in the nation (10.6 percent in the most recent 12 months) however thankfulness alone is presumably the most exceedingly bad thing whereupon to base your land contributing system. Denver is obviously a “hot” business sector, be that as it may, thanks in vast part to its fascination in various age gatherings and demographics who are occupied with purchasing at retail esteem with expectations of costs keeping on rising, exceedingly positioned government funded schools, focused wellbeing insights and a fortunate open travel framework. Likewise, we’d be delinquent to forget the “pot market” in the territory, however numerous investigators and neighborhood speculators caution that weed alone won’t support Denver’s development as more ranges of the nation turn out to be progressively tolerating of its therapeutic and recreational employments. Land putting resources into Denver is extraordinary in case you’re as of now in, however this is another real metro zone that could be hard to break into. Be that as it may, the business area in Denver is pulling in a lot of global movement without further ado and is less aggressive than the private side, making it a possibly fascinating play for financial specialists inspired by multifamily, retail or office space.

Detroit, Michigan

At the nadir of the lodging crash, most investigators were more agonized over whether there would be a Detroit lodging business sector to rank by mid-2016 than they were about putting it on a hot business sector rundown of any sort. In any case, with home costs up 127 percent from their most reduced point amid the accident and still 38 percent beneath pinnacle values, Detroit’s lodging market has space to develop and is making more than one hot rundown nowadays. In the event that you like paying money or getting imaginative with financing, Detroit is a decent place to consider, as one in each two exchanges is still all-trade out the range. The downtown range of the city is thriving, thanks in huge part to greatly astute, key development with respect to vast managers in the territory like Quicken Loans, which was as of late named the “Best Place to Work in IT” for 2016 by industry pioneers. Speculators wanting to get in on the activity in Detroit should be extremely cautious to know about stock “stopping up,” since a significant part of the bothered stock is blighted to the point that it can’t be spared and may not be the arrangement that it seems, by all accounts, to be on paper or on the web. Offering this issue as a powerful influence for your technique, be that as it may, and keeping your examination and due perseverance current ought to keep your interests free.

Kansas City, Missouri

Specialists anticipated a hot year for lodging in Kansas City, Missouri, toward the end of a year ago, thus far, they haven’t been demonstrated off-base. Home costs are up more than 5 percent year-over-year (as of the end of Q2 2016) after a sound 5.6 thankfulness rate for all of 2015. Interest for lodging is still substantial, with 38 percent less homes available as of now than there were a year ago. In any case, lodging remains generally reasonable with middle home costs in the territory floating simply over $130,000 and the metro region making “best” records regarding bearableness all over because of low unemployment, high reasonableness, a rundown of built up bosses that are continually developing and an entrepreneurial/start-up-accommodating business group is hard to match. With rental rates and home estimations both encountering general positive patterns since 2012, financial specialists will have their decision of land putting systems in the zone. In any case, observe: developing licenses are 29 percent in the locale over a year ago, as per the Home Builders Association of Greater Kansas, so there are designers plainly hoping to fill (and potentially surge) the stock void. While not all licenses ever get utilized, the pace at which the city is issuing those grants is much quicker than going before years, and more allows have as of now been issued in 2016 than were issued for the length of 2009, 2010 or 2011. Notwithstanding, with a business sector preferably suited to innovative financing and more routine money streaming rental alternatives, Kansas City unquestionably measures up as a current hot business sector.

Nashville, Tennessee

Despite the fact that Nashville tenants are supposedly attempting to “make the jump” to homeownership nowadays, the city is hot for financial specialists in turnkey investment properties and multifamily lodging. Solid year-over-year livelihood and pay development (3.7 percent and 1.8 percent, separately) make it improbable that inhabitants will take off at any point in the near future, so both lodging and rental markets are solid in this metro region. For the individuals who can stand to purchase, the business sector is extraordinary, as they’ll make back the initial investment contrasted with nearby tenants’ expenses in around a year and five months. Numerous purchasers obviously see the benefit of owning, with home deal

Invest in Self-Storage Real Estate

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Invest in Self-Storage Real Estate
Self-storage is an individual asset class. It typically provides comparatively high yields and has also proven to be fairly recession proof due to its lower declines and default ratios verses other asset classes. Self-storage REITs have been a strong sector in recent years providing high dividends along with increasing stock prices. The self-storage industry is considered by many stock analysts to be “recession proof” based off of the sectors performance during the last economic recession. This article outlines the self-storage asset class, discussed recent changes and thoughts on how to use this information to make informed investment decisions.

According to the research, there are over 54,000 storage facilities across the U.S. with 2014 – 2016 estimated revenues as follows:
2014 (estimate): $29.8 billion
2015 (estimate): $31.6 billion
2016 (forecast): $32.7 billion

Self-storage can be categorized as one of three resource classes (the other two being inns and senior lodging) that are basically working organizations joined to land. This clearly puts more accentuation on the aptitudes of the administrator and, on account of self-storage, it has deciphered into considerable opportunity to get better in operational efficiencies. In its initial years, the industry was to a great extent been commanded by mother and-pop administrators and, even today, is still very divided. As self-storage picked up footing, extensive marked chains, for example, Public Storage, CubeSmart and StorQuest, entered the business sector and raised business hones, nature of land and working effectiveness.

Today self-storage is less of the well-kept mystery it once was because of developing institutional possession and open reporting necessities of those substances. Traded on an open market self-storage REITs have been one of the top performing divisions as of late with a decent reputation of conveying profits and stock appreciation. Truth be told, the industry has been considered by Wall Street investigators to be “subsidence safe” in light of its execution amid the last financial retreat.

In this article, we will give a benefit class outline, highlight late changes being used, talk about low-least alternatives for putting resources into self-storage, and finish up with considerations on how financial specialists can utilize this data to settle on educated speculation choices.

Resource Class Overview

Self-storage offices change in size, quality and development. A few properties have been planned and manufactured particularly for self-storage, while others have been changed over from an earlier utilize, for example, a stockroom, auto dealership or empty huge box retail. Properties can be one-story with drive-up access and additionally multi-story that offer access through lifts and inside corridors. Storage properties rent units, regularly in various size designs, on a month-to-month or transient premise.

Drive Up/Outdoor Bay: The original of self-storage activities were solely this write, which highlight columns of storage structures with open air move up entryways that are gotten to by vehicle. They offer negligible security other than locks and on-premises camcorders, and are constantly one story in tallness. In return, they are normally the minimum costly to lease.

Atmosphere controlled: Facilities that offer atmosphere controlled and moistness controlled space in all or some portion of properties have turned out to be progressively mainstream over the previous decade. Individuals would prefer not to store things just to come back to attire or furniture that is smelly and rotten or reports that have been decimated by buildup, and they will pay a premium to ensure their possessions.

Claim to fame storage: Properties can oblige strength storage needs inside all or part of an office, for example, water crafts, autos, reports, wine and workmanship.

Blended use: Storage-offices may help pay by joining an assortment of different uses, for example, including retail or office space for lease. Properties likewise may work reciprocal organizations at the same property, for example, truck-rentals or a pack-and-ship establishment.

Request Drivers

Populace development: Self-storage offices are a goal property, implying that it is not a drive stop where offices require a prominent area. Be that as it may, clients additionally like comfort. Since populace development is a sensible driver of storage interest, self-storage engineers are taking a gander at land all the more deliberately and finding nearer to their client bases as they attempt to defeat their opposition. Storage wells in thickly populated ranges, and in addition showcases that are encountering populace and occupation development.

American consumerism: People purchase a great deal of stuff and have a characteristic hesitance to toss anything out. Rural carports top off rapidly with an assortment of memorabilia and toys from skateboards and skis to vessels and snowmobiles.

Move: Self-storage gets an additional support popular from individuals who are on the move that may require an impermanent or significantly more term storage elective. For instance, self-storage in part profit by the retreat as individuals that were dislodged from their homes or migrated to new occupations made interest for storage. Numerous storage offices target areas close loft properties where there has a tendency to be a greater requirement for storage and a consistent rhythmic movement of individuals. Understudies and individuals from the military are both appealing target demographics.

Changes being used

The self storage industry has seen considerable change both as far as how areas are produced and utilized and also how they are worked. The accompanying are few of the highlights:

Area: previously, self-storage properties were situated on the fringe of a metro or concealed in the back of a modern park. Over the previous decade, self-storage properties have moved into urban focuses to be nearer to their clients. That movement has been pushed by the new pattern of urbanization as demographics, for example, Millenials and Empty Nesters are moving to urban areas just to find that their new urban homes neglect to offer adequate space to store their rigging. Storage offices are taking after the housetops.

Outline: Competition is one of the drivers that have lifted configuration guidelines. As storage administrators have pushed harder for retail stores that get them nearer to clients, they are finding that they need to update their picture to both draw in clients and fulfill city building and zoning necessities in those retail stores. Fundamentally, the “no nonsense” storage properties of the past are being supplanted with another era of offices that underscore upscale outlines and notwithstanding arranging that position themselves as a more retail-accommodating kind of utilization as opposed to a property that should be shrouded away in a mechanical park or distant country region.

Innovation: Operators are grasping innovation in all parts of their business. There is developing aggressive weight to offer offices that are spotless, sheltered and secure. In light of business sector requests, offices are consolidating innovation into observation and security extending from CCTV checking to key card access. Administrators additionally are using innovation to enhance efficiencies, for example, utilizing programming to track leaseholder history and issue alarms to late payers or send programmed warnings for rent increments.

Combining the Information

As a late Forbes article “How Humdrum Self-Storage Became The Hottest Way To Invest In Real Estate” talked about, financial specialists are perceiving self-storage as a lucrative property sort known for creating strong and stable money on-money comes back with an incline working procedure. When somebody leases a unit and moves in their things, they don’t visit it consistently, which deciphers into a lower need to enlist a considerable measure of staff to oversee properties.

Self-storage likewise has lower costs connected with inhabitant turnover as there are no expensive representative charges or occupant change dollars important to market units to new clients. Additionally, the quick reusability of a storage space is unmatched amongst other resource classes. Indeed, even mechanical clients frequently arrange little redesigns, for example, revived bathrooms or enhanced stacking when marking leases, which can both moderate the opportunity to re-lease and in addition increment turn costs.

While generally shortsighted in contrast with other resource classes, one component for financial specialists to consider when measuring self-storage speculation open doors is that new, present day offices have gotten to be much more costly to work than the past era of offices. Land costs alone in urban ranges can be as much as 50 percent of an aggregate venture cost, by Self Storage Association. That higher expense is vital to consider while surveying chances to put resources into new advancements. Will an undertaking have the capacity to charge sufficiently high leases to legitimize the development costs? Then again when purchasing a current property, a higher cost might be justified in light of the fact that the development costs make a hindrance to passage for rivalry entering the business sector. The main issue is that the business is developing quickly so you can’t utilize 10 years old technique for examination when taking a gander at the current focused scene.

One relieving element to rental rate danger is that the self storage offices ordinarily depend upon lower inhabitance levels in contrast with other resource classes. For instance, the breakeven inhabitance rate to administration typical obligation sums for a self storage office is normally 40% to 45% when contrasted with 65% or more for condo, retail and office. Therefore, once conveyed and balanced out, self storage offices tend to hold esteem preferable and recuperate quicker over different resources when land markets sharp. As indicated by information reported by NAREIT, self storage had the most astounding aggregate yearly returns more than 5-, 10-, and 15-year midpoints in an examination of five distinctive property areas from 1994 to 2011.

When you set up everything together, an advantage class that is known not subsidence safe yet offer stable income and, at a full scale level, is portrayed as a becoming yet uniting market, represents a generally convincing contention for consideration in an enhanced business land portfolio.

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.