Tuesday, January 24, 2017

Startling Increase in Regulation A Offerings Validates Crowdfunding Reforms and Technology

By:  Jim Verdonik

Jim Verdonik is an attorney with Ward and Smith, P.A. in Raleigh and the Author of Crowdfunding: A Legal Guide to Investment & Platform Regulation. 

Reach Jim at jfv@wardandsmith.com
(This article is based on an article appearing in Triangle Business Journal on February 3, 2017)

In 2012 America began a bold experiment to determine whether:
  • Less is more.
  • Addition by subtraction works.
    The experiment tested whether reducing government regulation would produce better economic results.  The eliminated regulations were securities law prohibitions against businesses using the Internet, Social Media and other technology to talk with investors.
    Breaking the Money Gate Keeping Monopoly – Capitalism without Capital Does not Work
    The JOBS Act of 2012 re-wrote most of the old regulations about how most American businesses raise capital, because: 
  • Capitalism doesn't work without capital
  • How can you raise capital if you can't talk with investors?
    The JOBS Act's remedy is what I call the "Seven Fingers of the Crowdfunding Fist" that American businesses are using to pound down the doors that lock up capital in traditional financial institutions – commercial banks, investment banks, venture capital, private equity and mutual funds.  Securities laws restricting communications gave these gatekeepers a monopoly on deciding where ordinary Americans invest.  Crowdfunding gives ordinary Americans tools to decide: 
  • Where to invest their money
  • Whether gatekeepers should continue to make decisions
    Seven Fingers of Crowdfunding Fist
    The tools people are using to directly invest their money in private companies include:
  • Two types of Rule 506 offerings
  • Two types of Regulation A offerings
  • Two types of State Crowdfunding offerings
  • Section 4 (a) (6) Regulation Crowdfunding offerings
    All these rules permit using the Internet and other means to talk directly with potential investors rather than going through institutional gatekeepers.
    Of course, people have been Internet shopping for more than two decades, including for big ticket items like cars and houses.  Securities laws prevented Americans doing the same when shopping for investment opportunities.  
    Startling Regulation A Initial Results
    This new freedom raised the question, will Americans invest online?  Or is investing inherently different from shopping?
    The SEC's November 2016 report definitively answers this question with statistics about the first 16 months after the SEC amended Regulation A.
Before the JOBS Act, Regulation A was like a bridge to nowhere - during the two previous decades, America averaged only five Regulation A offerings per year.  Now the SEC reports that during its first 16 month after amending Regulation A:
  • 147 Regulation A offerings were filed seeking to raise $2.6 Billion
  • 81 offerings were approved by the SEC seeking to raise $1.5 Billion
  • $190 Million was reported raised (this understates the actual amount raised, because issuers are only required to report sales after their offering terminates)
  • $18 Million was the average offering maximum size
  • 60% of approved offerings were for Tier 2 offerings
  • Two thirds of issuers had no revenue and only 20% were profitable
  • The median offering took 78 days to complete the SEC's review process
  • Most offerings were best efforts and self-underwritten by issuers who had previously raised capital in private offerings.  That means that American businesses were not using traditional
The bottom line is that American investors are walking through the capital raising door that Crowdfunding opened and are taking charge of where their money is going.

Reasons Why Regulation A is Popular 
So, why is amended Regulation A becoming so popular?

Issuers like Regulation A, because issuers:

  • Can test the market before filing documents with the SEC
  • Can sell to both accredited and unaccredited investors
  • Can use Social media and other advertising to sell their offering instead of paying large investment banker fees
  • Can raise up to $50 million each rolling 12-month period
  • Make continuous offerings over long time periods by updating disclosures instead of starting a new offering every year
  •  Can provide liquidity to existing shareholders by letting shareholders sell in the offering
  • Can avoid becoming a full SEC reporting company, because Regulation A incudes exemptions from Section 12 (g) public registration requirements (issuers in Tier 2 offerings do have to file semi-annual reports with the SEC)
  • Can reduce pressure from investors to sell the business before maximum value is achieved, because issuers can provide liquidity to investors, by facilitating private trading markets, because shares sold in the Regulation A offering are not "restricted securities"

  • Monday, December 19, 2016

    Breaking Fake News: How Trump Obtained the Power to Explode Liberal Heads

    By: Jim Verdonik

    First, a little History.
    Let's review the facts that nobody disputes.  Every American is entitled to their own opinions, not to your own facts - at least until Twitter and Facebook.

    Origins of Twitter and Facebook

    We learned long ago that Twitter and Facebook were invented by the KGB during the last days of the Soviet Union as part of one last effort to crush American democracy with waves of Fake News, with the extra bonus of substantially decreasing learning useful skills and work productivity.

    After the Soviet Union  fell apart, young Vladimir Putin found the idea for Twitter and Facebook scribbled in the margins of a script while auditioning for the part of Darth Vader in the Russian version of Star Wars.  The Russian version is a lot like the American Star Wars, except that it tells the story of a noble father who is betrayed by a pair of twins who have incest with one another against their noble father's wishes.

    Seizing upon the opportunity he stumbled upon in the margins of his script, young Putin turned down the part in Russian Star Wars and worked tirelessly revive the Twitter and Facebook ideas to wreck revenge on Ronald Reagan's evil empire that destroyed the peace loving workers paradise called the Union of Soviet Socialist Republics.  The evil Reagan had personally torn down the wall erected to protect the USSR's workers.  Tear down that wall indeed.

    After years of rejection, young Putin obtained continued funding for his Twitter and Facebook project from the Clinton Foundation - also an opponent of the evil Reagan Empire.   Young Putin sealed his deal with  Bill and Hillary by convincing them the best way to crush the vast right wing conspiracy the Reagan empire had launched against the Clintons was to give all people of the galaxy a way to communicate news without using conservative media channels like CNN, CBS, NBC, NYTs and Wash Post, who were persecuting the Clintons over trivial events.
    Using the Winklevoss twins as intermediaries, Putin delivered detailed plans for Twitter and Facebook to the stooges he let profit from them as the nominal "founders" of Twitter and Facebook so that they could destroy America, which they cheerfully set about doing.  This explained one of Silicon Valley's great mysteries - how did a bunch of goof balls like Zuckerberg and Twitter's nominal founders actually invent anything?  Have you seen these people?
    Evidence of this early connection between the Clintons and Putin were found in the 33 thousand emails that Putin helped Hillary Clinton erase. Of course, all that is old news that was proven long ago by researching the archives of the Kazakhstan Intelligence Agency (KIA).

    The Saga Continues

    Here's our latest exclusive news flash from the KIA archives recently unearthed at a secret location on Mars (the Red Planet) to update the story.
    When Donald Trump Tweets a secret combination of 140 characters, it causes the heads of American liberals who see the Tweets to explode.
    This weaponized combination of  precisely 140 characters was originally created by Putin to sell to the Clinton Foundation for use in its fight against Bernie Sanders.  Liberals were giving the Clinton Foundation unexpected trouble in Dem primaries and had to be crushed so that Hillary could reclaim her rightful place as Queen of the Davos Empire.  Before buying this weapon, the crafty Clinton Foundation required a demonstration.  Putin set his new weapon on stun and started responding to Tweets Bernie was sure to see.  Stun doesn't cause anyone's head to explode.  It only reorients the speech functions so that only Caucasians can understand what you are saying.  Following this demonstration, Bernie won all the white states in the Dem primaries, but no states with large numbers of minority voters, because Putin's Twitter weapon caused Bernie speeches to be unintelligible to minority voters.
    This destruction of Bernie's ability to communicate with minority voters went largely unnoticed because most white voters couldn't understand what Bernie was saying either. They just liked the way Bernie yelled.  The 2016 election unearthed a fundamental and often misunderstood racial difference.  Black people apparently like to know what you are saying when you yell at them.   White people don't seem to care what you are saying as long as they like the way you yell.  This would later play a crucial role in the General Election, where more Midwesterners liked the way Trump yelled than how Hillary yelled.  Who knew?
    After Putin guaranteed Hillary's victory in the Dem primaries by disabling Bernie's minority speech communications functions, she realized that she no longer needed Putin, because Hillary no longer had a reason to blow up the brains of liberals.  Liberals got a temporary reprieve.  Hillary wasn't worried about Trump, who had his own naturally occurring speech problems in communicating with many types of voters.  So, Hillary and Huma made their fatal mistake and backed out of the deal with Putin.  Instead, they used the money they were supposed to pay Putin to implement their now famous "CRI Strategy" (as professional political pundits (PPPs) called it):
    • California - advertise in the key battleground state of California to obtain as many popular votes as possible (poor Hillary had always wanted to be popular)
    • Rest - Look rested by having many spa weekends while that stupid Trump guy wasted his time yelling to large crowds of people who couldn't understand what he was saying but liked the way he yelled.
    • Indicted - try not to be indicted by renting jets for Bill to chase the Attorney General around the country
    While Hillary Clinton implemented her CRI strategy flawlessly, Putin plotted to show the world that you shouldn't screw with malicious dictators who had turned down the role of Darth Vader.  And so it came to pass that Putin vowed he would destroy Aleppo before Christmas and empower Trump to destroy liberals, which he did with such relish that even Stalin himself would be proud.
    On Election Day, Putin traded his weaponized combination of 140 characters to Donald Trump in exchange for discounts on greens fees at Trump resorts around the world and free passes to all Pentagon meetings.
    The results have been terrifying.

    Since Election Day, Trump has been merciless - more than 5 million liberals' heads have exploded (including all Hillary's electors in the Electoral College so Trump became the first President to achieve a unanimous Electoral College victory, after which Trump proclaimed "Those other 44 were such losers.")   By Inauguration  Day, Trump will truthfully claim that he actually won the most popular votes of Americans who are still alive on Inauguration Day.  Breitbart announced plans to commemorate all future Inaugurations with a special Trump Truth Day edition, which it will call Pravda (also part of Trump's contract with Putin).

    President Obama's Fake News News Conference

    In response to these new developments, President Obama issued these statements today at his last White House press conference:
    "I urge all liberals to immediately disconnect from Social Media.  Your lives depend on it.  Even if you only once thought about voting for a Democrat, terminate your Social Media account immediately.  I certainly wish Michelle had.  I miss her terribly.  Don't let this happen to you and your families."

    "This is not Fake News.  I repeat.  This is not Fake News."
    "By the way, this is a good example of how you know something is not Fake News.  You see how I clearly told everyone that this is not Fake News.  I hope all Americans unite behind my last Executive Order that requires all news to clearly state whether or not it is Fake News.  If you see news that does not clearly state that it is Not Fake News, then you know that it is Fake News.  But if you see a statement that it is Not Fake News, you can rely on it not being Fake News.  Of course, news that is clearly labeled Not Fake News might be truthful or it might be false, but it would not Fake News," because of its clear label.
    "This brings our attention to an important distinction, which my new Executive Order covers in great detail.   Not all untruthful news is Fake News and not everything that is false is Fake News.  Some very truthful facts can be Fake News.  I know that this may sound contradictory to average Americans who lack advanced degrees in linguistics and law from the right universities, but the websites of the newly created US Department of Fake News and the US Department of Not Fake News explain it in detail, as well as the 312 exceptions."
    "I expect this new regulation and agency will resolve the Fake News problem forever.  And by forever, I mean even after Global Warming causes America to vanish beneath the waves."

    Closing All Social Media Companies and Economic Transition

    "Of course, we can no longer allow Facebook, Twitter and other Social Media companies to continue to operate now that intelligence agencies have confirmed that they can be weaponized.  So, I have ordered the US Department of Fake News to close down all Social Media companies.  Or did I send the order to the US Department of Not Fake News?  For some reason, I can  never remember which is which."
    "President Elect Trump and I fully recognize the economic disruption this is likely to cause Social Media workers - especially in regions of high concentrations like California and New York City.  Their skill sets don't appear to be easily transferable to other industries. This is why I have been working closely with the Trump transition team to develop a transition program for unemployed Social Media workers.  Buses will be arriving at major High Concentration Social Media Worker Zones (HCSMWZs) to transport unemployed workers to relocation centers where they will be housed and receive training in useful skills.  Because of the nationwide shortage of affordable housing, the only available spaces are located in closed coal mines.  Retired coal miners have volunteered to teach relocated Social Medial workers new useful skills right in the new homes.  Skills taught will include blasting, digging and hauling followed by more blasting, digging and hauling.  Other courses will include how to cough without causing a landslide and keeping your canary alive."
    "Graduates of the training program will be given priority in applying for jobs when President Elect Trump re-opens the coal mines.  Of course, they will work under the supervision of the more experienced miners, but working lives are short in the mines due to black lung and other diseases.  So, we expect lots of opportunities for people to be promoted from assistant miners to actual certified miners" to pursue the remainders of their short careers.
    "Because I have spent so much time on this relocation and training project, President Elect Trump has designated it the Shafted by Obama Project.  Of course, I know some people are saying that many coal mines are in vast open holes without shafts.  We have that covered.  These vast open mines will be called ObamaPits.  Shafted by Obama and Obama Pits will replace Obamacare as my primary legacy."  

    "In conclusion, I want to say that I and President-Elect Trump are working together most cordially to ensure a smooth and peaceful transition of power despite the recent disclosures so that all Americans get what they deserve.

    The Hillary Campaign

    "I want to make it perfectly clear that I don't blame President-Elect Trump for the campaign or for the millions of recent post-campaign deaths.  You can't make an omelet without breaking a few eggs.  Besides, once President Trump is sworn in, he will have access to the records of my own Social Media project."
    "To be truthful, we tried to make conservative heads explode many times.  We invested Billions of Government research dollars.  We hid the expenditures in a Boeing Air Force One contract that the President Elect has criticized.   Although we came close several times and managed to drive many conservatives bonkers with Social Media messages, we never succeeded in finding the Holy Grail - actual head explosions."
    "For these reasons, I have a lot of admiration for both Vlad Putin and President-Elect Trump.  Its like they say in sports, you really can't understand the achievements of great athletes, unless you have played their game.  Having played the same game, I can best appreciate their accomplishments."
    "To be fair, Hillary had first shot at this new technology and instead she decided to blow all her campaign money on her misguided CRI strategy. CRI might have worked in a primary or two in 2008, but I warned Hillary that you can't go to the CRI well too often.  How many spa treatments could that old body of hers stand anyway?"  

    "Hillary's campaign was flawed in other ways.  I mean, I really tried to convince people who voted for me twice that they would be racists if they didn't vote for Hillary.  But not voting for an old white woman making you a racist just doesn't make much sense does it?  I hard a hard time convincing people."
    "And the Attorney General was constantly complaining to me about Bill Clinton chasing her around the country stalking her in airports.  The Attorney General still suffers nightmares from the chase, which we can now disclose lasted over six months.  It cost the tax payers more than $2 Billion in aviation fuel to delay that meeting.  You can't blame the Attorney General for getting caught that one time just to end the stalking nightmare.  Can you?  Confidentially, the Attorney General confided in me that she enjoyed Bill kissing her cheek so much that she made him kiss both cheeks.  I won't tell you which cheeks.  I'll leave the rest to your imagination."

    "Looking back, I now conclude that it was a grave mistake on Hillary's part to double cross an enterprising guy like Vladimir, who is personally responsible for creating two of America's biggest tech companies, and that President-Elect Trump bears no responsibility whatsoever.  I'm sure President-Elect Trump  won't back out of any deals he makes with Vladimir, who I must say was horribly mistreated by the Clinton Foundation.  Personally, I and my daughters will feel much safer having a friend of Vladimir (FOV) running the State Department.   The First Family never slept easy while Hillary was in charge of Foggy Bottom.  For you yokels across the country, that's what us DC insiders call the State Department.  Its supposed to be amusing in a sophisticated kind of way that I'm not sure even I understand."

    "Every time we cordially talk about the transition, I congratulate President-Elect Trump on how he jumped in and seized the opportunity that Hillary missed.  The results are impressive.  He has blown up more heads using less money than anyone since Stalin.  Now, Stalin was a guy who never wasted a bullet.  I studied Stalin at Columbia.  He was a big hero of many of my professors.  But I digress. Enough about the good old days of Stalin.  I guess I'm just an old Professor who will slowly fade away - as long as I stay away from Social Media."

    "Of course,  when President-Elect Trump and I discuss the transition, we don't communicate by Tweeting, although President-Elect Trump always suggests using Twitter.   For some reason, President-Elect Trump never worried that the Russians might find out what we were talking about.  After today's important revelations I understand why.  The old President Obama would have been perturbed, but after working  with President-Elect Trump these past few weeks I'm just thankful to be alive." 

    Questions from Reporters
    When pressed for further details by reporters from Breitbart, President Obama indicated:

    "First, I want to congratulate Breitbart for having the only remaining reporters in America whose heads have not exploded.  That was smart recruiting given recent events."
    "Could you Breitbart guys do me a favor.? A lot of endangered liberals don't read Breitbart.  Can you pass this story on to Huff Post, Mother Jones and the NYTs?  They still seem to be running stories even though all their reporters died weeks ago.  Wonder how they do that?  It could really save a lot of liberal lives."
    "I was expecting a detailed report about this from the CIA who had embedded a secret agent in the KIA (Code Name A. Weiner), but apparently one of Agent Weiner's body parts exploded while he was texting important images vital to our national security.  We still haven't verified which of Agent Weiner's body parts exploded, but CIA says it probably not his head."
    "Director Comey has the FBI's crack Keystone team investigating whether Agent Weiner's last messages contain the report I was expecting or other classified material.  I am looking forward to receiving that briefing soon.  CIA reports always contain interesting information.  I recommend them to President-Elect Trump, but he seems to think they will make his head explode.  Really Donald, you can trust the CIA.  Really."
    "While we wait for the report, I request the country to observe a moment of silence for dedicated Agent Weiner, who died in the line of duty doing the job he loved so much."  

    President Obama Joins Alt White Movement

    "On a personal note, this very important joint transition work effort has evolved into a much closer personal relationship with President Elect Trump and his family than I ever imagined possible.  President-Elect Trump has invited me to join his new Alt-White team.  He says he'll even admit I was born in Hawaii, if I become Alt White."
    "He says my love of golf was my inner Alt-White personality crying for attention all these years.  I'm not sure I agree with that, but I am half white - it was never a political advantage to play that up so I went with the one drop theory so I could be the first black President.   I really do love golf.   I never really grew up in the "hood," but I imagine it was difficult to find a good foursome in the "hood." Not sure if I could even find the "hood."  It was historically important to be the first black president, but being the first black former President doesn't sound as important."  
    "I never thought about becoming Alt White before (in fact I never even knew Alt White was a "thing"), but 2016 was a year of strange events - like President Trump, no way I saw that one coming.  Also, Michelle would have killed me if I became Alt White, but that's no longer a problem."
    "And, of course, I find President-Elect Trump can be very persuasive when he's not yelling crazy things to 20 thousand supporters.  Let's face it, the man is on the biggest roll since Hitler almost conquered Stalingrad.  But most persuasive is that President-Elect Trump explained what Alt White is and strangely I think its a bit of genius once you get past the misconceptions."

    "My first misconception was that this must be something Michael Bannon cooked up.  President-Elect Trump, however, explained that he and Henry Louis Gates, Jr. really invented the Alt White concept.  Henry had a TV reality show where he did DNA tests and historical research to document that most people don't really know much about their ancestors and most of what they think they know is wrong.  Lots of white people running around thinking they're Irish or Scotch when their really French and part black.  Elizabeth Warren even claimed to be Native American.  Where did Senator Pocahontas get that from?"
    "President-Elect Trump bumped into Henry at a Reality TV Stars convention and they started talking about how they could combine their two shows.  When they realized that wouldn't work, they came up with the idea of a political movement based the concept that everything most people think about ethnicity and race is wrong and that there was no way to fix it without starting over completely.  Take President-Elect Trump for example.  He's actually kind of orange, not white.  And Michael Bannon is really kind of red like many Irish.  There are tens of millions of white people who aren't really very white.  There are also lots of brownies like me who are called black."
    "When they realized that all these mislabeled people constituted a new majority, they formed the Alt-White movement to create a new and different kind of rainbow coalition.  Soon millions of people started coming out of the Alt White closet.  They filled stadiums and arenas."
    "President-Elect Trump  explained that he won 29% of the Latino vote despite him saying a lot of bad things, because these people were really Alt White.  So, they didn't think he was talking about them.  Even 8% of blacks apparently identified with the Alt White movement."
    "I realized that millions of people were joining the Alt White movement, because of branding.  I have my differences with President-Elect Trump, but he is a branding genius.  Alt White starts out without all the baggage of other groups.  Its new brand and lots of people want a new brand for themselves and their families.  If you're white, you don't want to be banded a racist.  If you're black you don't want to branded a criminal.  If you're a Latino immigrant, you don't want to be branded Mexican (especially if you're really from another country)."
    "That's when I realized the real reason Hillary lost the election.  Hillary based her campaign on old identity politics that said white people don't matter anymore because they are dying out and other groups had no alternative but to vote for Hillary.  So Hillary looked silly running around the country putting on those different accents she uses for audiences of different ethnic groups.  Hillary didn't recognize that the Alt White group is the fastest growing demographic group."
    "That's when I knew that the strategy of waiting around for white people to die off wasn't a good political strategy.  I see no reason to sink with that ship.  So, President-Elect Trump will be first Alt White President, but Barack Obama is going to be the first Alt White former President." 

    Alt White Privilege

    "I also wouldn't mind a little Alt-White privilege after eight years of hard work in the Alt-White House."
    "After an appropriate mourning period for Michelle of two weeks, Melania began introducing me to some really hot Slovenian women and President-Elect Trump has been giving me dating tips.  I must say that these women are much younger than I'm used to, but I'm beginning to understand why President-Elect Trump is always saying that "Even a great wine becomes undrinkable, if you wait too long."  There's a lot of wisdom in that."
    "In return for dating advice, I'm advising President-Elect Trump about where China is and how to tell one Chinese leader from another.  Its the least one Alt-White brother can do for another Alt-White brother."
    "I do value President Elect Trump advice about women.  You know President-Elect Trump has something going for him with the ladies when he says and does all these terrible things and still 53% of white women voted for him.  He must be tweeting some really powerful hormones."
    "This soon to be ex-president doesn't intend to lead the quiet social lives most of my predecessors led.  I mean, has Jimmy Carter ever had any fun in his whole life?"
    "I  considered becoming Bill's wing man, but frankly, President-Elect Trump has better taste in women than Bill.  Have you seen Bill's women? Following the advice of President-Elect Trump, I've changed by campaign slogan from Hope and Change to: I've got it and the ladies want it."
    "So, I'll be happy serve as President-Elect Trumph's new wingman now that Billy Bush has retired."
    "And now I'm flying off to Ljubljana, Slovenia, on my last trip as President on Air Force One.   I'm meeting Vlad Putin there (who I have to say has also given me great dating advice, although I think I'll skip the shirtless public appearances)."
    "People just don't appreciate all the little nice things Vlad does for people while he's so busy crushing rebellions around the world.  Hillary never liked Vlad.  Said he was a bad influence on Bill.  I've always wondered if it wasn't the other way around.  But Michelle and I always appreciated Vlad's anniversary cards and little notes when you last expect them.  Here's a recent selfie of Vlad posing at the top of the Aleppo Citadel with a Latin inscription: "Veni, vidi vici."  You have to know Vlad really well to fully appreciate the sentiment."
    "Of course, Vlad and President-Elect Trump go way back together. Did  know that Vlad introduced Donald and Melania?   I didn't know that even though I've read hundreds of CIA and FBI profiles of both President-Elect Trump and Vlad (strictly for business reasons).  That's the thing about the CIA and the FBI.  They may know what a target had for breakfast, but they sometimes miss the human side of the story.  That reminds me that they always say doing those morning TV interview shows is easy, because they ask softball questions, but imagine if they had asked Donald who introduced Melania to him?  Campaign sparks would have flown.   And you know Donald wouldn't lie about it.  He's not that kind of guy.  Reporters just weren't focused on the right questions. The behind the scenes story is even funnier.  You know the Russians have a long history of using women to get American business people drunk and turn them into double agents.  Well, the joke was on Vlad, because Donald doesn't drink.  So, Melania failed in her mission.  Kind of sloppy of Vlad not to know that Trump doesn't drink.  Well, everyone makes mistakes."  
    "Anyway, while President Elect Trump is working hard in Trump Tower completing his transition team, Vlad and I are going to bring back a whole plane full of tall blond women (Friends of Melania or FOMs as I like to call them) who have special talents that warrant one last special mass issuance of green cards.  The FOMs, Vlad and I are really going to test the limits of Air Force One on that flight home.  President-Elect Trump said go for it.  See what the old bird can really do."

    Wednesday, August 3, 2016

    FAQS About North Carolina Crowdfunding Law (NC PACES Act) and SEC Rule 147

    By: Jim Verdonik


    I'm an attorney with Ward and Smith PA.   You can reach me at  JFV@WardandSmith.com
    Check me out at www.YouTube.com/eLearnSuccess
    I write a column about business and law for American Business Journals http://www.bizjournals.com/triangle/search?q=%22Jim+Verdonik%22&%20title=

    You can purchase my book Crowdfunding Opportunities and Challenges at

    I recently provided advice to the State of North Carolina about enacting a state Crowdfunding law.

    Here are some FAQs that summarize the resulting North Carolina Crowdfunding statute (a/k/a the NC PACES Act) that was enacted in July 2016.

    Proposed changes to SEC Rule 147 , which are important to allow more businesses to use state Crowdfunding laws, are also summarized below.


    FAQs About NC PACES ACT of 2016
    North Carolina Crowdfunding
    What is the name of North Carolina's Crowdfunding  law?
    The North Carolina Providing Access to Capital for Entrepreneurs and Small Business Act a/k/a the NC PACES Act.
    What does North Carolina's Crowdfunding law  do?
    This law amends Section G.S. 78A-17 to add a new exemption from the registration requirements of GS 78A-24 for any offer or sale of securities that meets the requirements of G. S. 78A-17.1. 
    Subject to complying with these conditions, you can raise up to $2 million during any rolling 12-month period.
    Can I advertise or conduct a general solicitation to sell securities?
    Yes.  This exemption does not prohibit advertising or conducting a general solicitation within North Carolina.
    All advertising and solicitation must comply with normal disclosure rules.  In addition, offers must be limited to North Carolina residents and only North Carolina residents can purchase securities in the offering.
    Is there a limit on how many offers I can make or how many people can buy securities?
    No, there are no limits on the number of offers or purchasers within North Carolina.
    Can I sell securities to non-accredited investors?
    Yes, but non-accredited investors cannot invest more than $5,000 during any rolling 12-month period.
    Section 78A-17.1 (a) (4)
    Is there a limit on how much accredited investors can invest?
    No, accredited investors are not subject to any individual dollar maximum.
    Section 78A-17.1 (a) (4)
    Can I or someone else form an LLC or other entity to purchase securities in my business and use this exemption to sell securities of the LLC?
    No, although such investor syndicates have become a common way to conduct Rule 506 (c) offerings, the North Carolina statute does not allow such syndicates to use this Crowdfunding exemption, because they are private investment companies, unless rules to be issued by the Securities Division permit such investor syndicates.
    Permitting such investor syndicates is one of the primary things we can do to improve this law.
    Section 78A-17.1(a) (6)
    How much money can I raise without providing GAAP audited or reviewed financial statements?
    You can raise up to $1 million during any rolling 12-month period without providing GAAP audited or reviewed financial statements, if you do not already have such financial statements.
    However, disclosure rules would require you to provide investors with GAAP compliant financial statements, whether they are audited or not, if the information is material.  Consult your lawyer about whether GAAP compliant financial statements are material to your business.
    Section 78A-17.1 (a) (3) a
    How much money can I raise, if you provide GAAP audited or reviewed financial statements for most recent fiscal year?
    You can raise up to $2 million during any rolling 12-month period if you provide GAAP audited or reviewed financial statements for most recent fiscal yea
    Section 78A-17.1 (a) (3) b
    Can you also raise additional capital above these maximums from company insiders under this exemption?
    Yes, amounts sold to Controlling Persons of the issuer (officers, directors, partners and holders of 10% of any class of securities) do not count toward either the $1 million or the $2 million maximums discussed above.  Sales to other insiders would count toward the maximum, unless you have another exemption for such insider sales.
    Section 78A-17.1 (d)
    Can I raise more money during the same 12-month period by conducting an offering using another offering exemption?
    Yes, under some circumstances you can conduct multiple offerings using other Federal or state exemptions.
    Each offering must fully comply with the all conditions of one or more offering exemptions.  That means you would not have an exemption for all the sales in the offering if some offers or sales comply only with this exemption and other offers or sales only comply with different exemptions.  This would make it difficult to conduct a contemporaneous offering in North Carolina using an exemption from registration that prohibits general solicitations.
    However, depending on rules issued by the Securities Division, you may be able to raise more money during the same 12-month period (i) in an offering conducted in North Carolina before the offering and (ii) in any offering conducted outside North Carolina, whether before during or after the offering that uses the North Carolina Crowdfunding exemption.
    What constitutes the same offering or a different offering is a complex legal and factual issue.  Consult your lawyer before trying to raise money in two offerings
    Section 78A-17.1 (d)
    Is there any restriction on who can purchase securities in the offering?
    You must obtain evidence from all purchasers that they are residents of North Carolina.
    If you want to accept more than $5,000 from any investor during any rolling 12-month period, you must obtain evidence that the purchaser is an accredited investor.
    Section 78A-17.1 (a) (9) a
    Do I have to report information about my business to anyone after the offering?
    Yes.  You must provide quarterly reports to investors and the Securities Division until the securities are no longer outstanding.  For this reason, many state crowdfunding issuers sell debt securities or revenue share interests that terminate after a period of time.
    Quarterly reports can be posted on a Website.  Quarterly reports must contain executive compensation and an analysis of the issuer's business operations and financial condition, but full financial statements are not required, unless later rules to be issued by the Securities Division require them.
    Section 78A-17.1 (c)
    Can I take money directly from investors?
    No.  All investor money must be deposited into an escrow account.
    Escrow agents must report the receipt of funds to the Securities Division and issuers must provide quarterly reports to investors.
    The escrow agent must a bank or other depositary institution located in North Carolina or that is approved by the Securities Division.
    Section 78A-17.1(a) (10)
    Is there a minimum amount you must raise to hold a closing?
    The statute does not specify a minimum, but the issuer must disclose a minimum to investors and a date after which investors can withdraw funds from escrow if the issuer fails to meet the minimum.  The issuer must file with the Securities Division a copy of an escrow agreement that requires the escrow agent to hold all funds until the minimum is met and that allows investors to withdraw if the minimum is not met before the date disclosed to investors.
    Section 78A-17.1 (a) (5) c
    Do I have to offer or sell through an Internet Website?
    No.  Use of an Internet Website is optional.  You can advertise or solicit any way you want and you can deal directly with investors, but the money must the held in escrow as described above.  Federal rules about making offers outside the state and the laws of other states may limit your advertising and solicitation activities.
    Websites that specialize in Crowdfunding offerings are likely to be useful in handling closing logistics even if you solicit investors through other means.
    For example, such websites will ensure legal compliance by arranging for an escrow agent to accept ad hold investor money and collecting information about investors required to comply with the law, such as residency and whether or not they are accredited investors.
    Section 78A-17.1 (a) (9)
    If I choose to use an Internet Website, can I choose any Website?
    Only Websites that are owned by an entity that is organized under NC law or authorized to do business in North Carolina can conduct offerings.  The Website operator must register with the Securities Division, unless the Website is exempt under Section 78A-17.1 (a) (11)
    Website operators must maintain offering records and provide access to the Securities Division.
    Section 78A-17.1 (a) (12)
    Can I pay a commission to people to sell securities in the offering?
    Both Federal and state law (G.S. 78A-36) require people who sell securities for compensation to register. 
    Officers and directors of issuers are exempt from registration, if they do not directly or indirectly receive commissions or other compensation for offering and selling securities.
    You should consult with your attorney about who you can compensate and the nature of the compensation.
    Section 78A-17.1 (a)
    Who can use this exemption from registration?
    Issuers must be a business entity formed under NC law and/or registered with the NC Secretary of State.
    This means an entity organized in NC or in Delaware or other state can use the exemption if it is qualified to do business in NC, subject to complying with Section 3 (a) (11 or SEC Rule 147 discussed below.
    Businesses that have a Covered Person who has committed Bad Actor violations under Federal law cannot use the exemption, unless the Securities Division grants a waiver.
    Companies that cannot use the exemption include (i) public reporting companies (ii) investment companies, and (iii) companies that are not investment companies because of Section 3 (c) of the Investment Company Act.
    Unfortunately, this provision about exempt investment companies excludes the use of single purpose vehicles (SPVs) and investor syndicates that are widely used in SEC Rule 506 offerings and that are proposed to be permitted in Section 4 (a) (6) offerings by the Fix Crowdfunding Act.  This limitation is one of the biggest drawbacks of the law.
    In addition, many businesses are excluded from using the exemption because of Section 3 (a) (11) or SEC Rule 147 as described below.
    Section 78A-17.1 (a) (1)
    Section 78A-17.1(a) (6)
    What Federal Exemptions must cover the offering?
    The NC statute requires the offering to comply with Section 3 (a) (11) and/or SEC Rule 147.
    Section 3 (a) (11) is broad but ambiguous:
    "Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory."
    Because most issuers were reluctant to risk liability on such an ambiguous exemption, the SEC issued Rule 147 to provide a safe harbor for complying with section 3 (a) (11).
    Rule 147 is very narrow, which means many businesses do not qualify to use the current version of Rule 147.  The restrictions include that the issuer must be organized in the state, must have its principal office in the state and must satisfy all three 80% tests:
    -          80% of consolidated revenue are derived from the state
    -          80% of consolidated assets are located in the state
    -          80% of offering proceeds will be used in the state
    SEC has proposed to amend Rule 147 to update it to reflect modern business practices, because today even many small businesses conduct substantial inter-state and international business.
    See the table below for comparison of existing Rule 147 to the proposed amendment.
    Section 78A-17.1(a) (2)
    Do to have to file any disclosures with the Securities Division of the NC Secretary of State?
    Yes.  At least ten (10) days before you can begin to make any offers or use any publicly available Web site in the offering, you must  file with the Securities Division a $150 filing fee, a notice of claim for the exemption and a disclosure document that includes:
    -          a description of the business
    -          names of 10% owners of any class of securities of the business
    -          names and experience of the management team and directors
    -          description of the securities being offered, including the percentage ownership and implied valuation
    -          identity of agents or others who will sell the offering (including any Web sites) and their compensation
    -          Names URLs and addresses of any Websites that will be used
    -          description of any litigation or legal proceeding involving the issuer or its management team
    Section 78A-17.1 (a) (5) a and b
    What other information should disclosure documents contain?
    Disclosure documents must include other material information consistent with normal securities disclosure practices (including risk factors) in light of the sophistication level of investors required by G. S. 78A-8 and Federal securities laws.
    Section 78A-17.1 (a) (13)
    Who has to see the disclosure document?
    Disclosure documents must be provided to offerees, purchasers and the Securities Division.
    Rules issued by the Securities Division about updating disclosure documents will be important to determining offering efficiency.  For example:
    -          Does the issuer have to file every update before disclosing updates to investors?
    -          How long do updates have to be provided before closing?
    -          What are the procedures for investors withdrawing money previously deposited in escrow after an update?




    (Proposed October 30, 2015)
    1974 RULE 147
    2015 PROPOSED RULE 147
    Relationship to Section 3 (a) (11)
    Constitutes a safe harbor for compliance with Section 3 (a) (11)[1]
    Creates a new exemption under Sections 28 of the 1933 Act and does not rely on Section 3 (a) (11).
    Limits on Amount Raised
    Issuers can raise unlimited amounts.
    No limit on amounts issuers raise, if the offering is registered in the state where the offering is made.[2]  If the offering is not registered, issuers can only use proposed Rule 147, if they comply with a state exemption from registration that (i) limits sales to $5 million in any 12-month period and (ii) limits the amount each investor can invest in such exempt offerings.[3]
    Offers must be confined to one state, which creates issues about Internet and other advertising.[4]
    Only sales must be confined to one state.  The proposed rule specifically authorizes advertising and general solicitations and leaves the issue of where offers occur to state laws,[5] but requires issuers to use legends that notify investors that sales will be to residents of the issuer's state.[6]
    Issuer Incorporation
    Requires that issuers be organized in the state where the offering is being conducted.
    Permits issuers to be organized in any state.[7]
    Principal Office or Principal Place of Business
    Requires that the issuer's principal office be in the state where the offering is being conducted, but does not define principal office.[8]
    Requires that the issuer's principal place of business be in the state where the offering is being conducted.  The principal place of business is in the state in which the "officers, partners or managers of the issuer primarily direct, control and coordinate the activities of the issuer."[9]
    Conducting Business in the State
    Requires issuers to conduct business in the state where the offering is being conducted.
    Requires issuers to conduct business in the state where the offering is being conducted, but has a more flexible definition of what constitutes doing business in the state,[10]
    Test for Conducting Business.
    Three-part test based on 80% of consolidated, revenue, assets and uses of offering proceeds.  Issuer must satisfy all three parts of the test:
    -          80% of consolidated revenue are derived from the state
    -          80% of consolidated assets are located in the state
    -          80% of offering proceeds to be used in the state
    Four-part test that adds the location of a majority of the issuer's employees to the 80% of consolidated revenue, assets and uses of offering proceeds tests.  Issuer only needs to satisfy one of the four criteria of the test.  [11]
    Ability to Change States
    Would have to reincorporate, move the principle office and change where satisfy all three 80% tests for doing business.
    Some issuers will be able to satisfy the doing business test in more than one state and could do offerings in different states if they change the location of the principle place of business.  The proposed rule would prohibit issuers who change the state where their principal place of business is located from doing a Rule 147 offering in their new state until nine months after the last sale in the Rule 147 offering conducted in their prior state.[12]
    Preempt State Registration Laws
    No special integration rule, except that offerings separated by six months will not be integrated.[13]
    Safe harbor excludes integration with (i) any prior offerings, (ii) Regulation A offerings, (iii) Regulation Crowdfunding offerings made under Section 4 (a) (6), (iv) employee benefit plans and Regulation S offerings and (v) offerings made six months after completion of the Rule 147 offering.  Also relaxes integration for certain registered offerings.[14]  Issuers can conduct contemporaneous offerings using other exemptions, if each offering complies with its own exemption.
    Investor Residence
    Requires all investors to be residents of the state where the offering is made and requires issuers to obtain written representations from investor about residency.[15]
    Issuers must have a "reasonable belief" each investor resides in the state where the offering is being made.[16]  No requirement to obtain written investor representations about residency, but reasonable belief may require more than investor representations.
    Re-sale Restriction Period for Investors
    9-month holding period for re-sales outside the state begins when the issuer completes the offering.[17]  Creates problem that investor often does not always know when the issuer completes the offering.
    9-month holding period for resales outside the state starts when the investor purchases the securities,[18] which is in the investor's knowledge and control.
    Legend Requirements
    Stop Transfer Instructions
    Disclosure of Transfer Restrictions Required



    [1] 230 C.F. R. § 147 (a)
    [2] Proposed Rule 147(a) (1)
    [3] Proposed Rule 147(a) (2)
    [4] 230 C.F. R. § 147 (a)
    [5] Proposed Rule 147(b)
    [6] Proposed Rule 147(f)  (3)  "The proposed amendments would eliminate the current restriction on offers, while continuing to require that sales be made only to residents of the issuer's state or territory."  Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings SEC Release No 33-9973 (October 30, 2015) (80 Fed.  Reg. 69,785) between fn 10 and fn 11
    [7] Proposed Rule 147(c) (1) and Proposed Rule Amendments to Facilitate Intrastate and Regional Securities Offerings SEC Release No 33-9973 (October 30, 2015) (80 Fed.  Reg. 69,785) at fn 44
    [8] 230 C. F. R. § 147 (c) (1) (i)
    [9] Proposed Rule 147(c) (1)
    [10] Proposed Rule 147(c) (2)
    [11] Proposed Rule 147(c) (2) (iv)
    [12] Note 1 to Proposed Rule 147(c) (1)
    [13] 230 C.F. R. § 147 (a) (a) (2)
    [14] Proposed Rule 147(g)
    [15] 230 C.F. R. § 147 (f) (1) (iii)
    [16] Proposed Rule 147(d)
    [17] 230 C.F. R. § 147 (e)
    [18] Proposed Rule 147(e)
    [19] 230 C.F. R. § 147 (f) (1) (i)
    [20] Proposed Rule 147(f) (1) (i)
    [21] 230 C.F. R. § 147 (f) (1) (ii)
    [22] Proposed Rule 147(f) (1) (ii)
    [23] 147(f) (3) (230 C.F. R. § 147 (f) (3))
    [24] Proposed Rule 147(f) (3)