Sara Hanks
@sarahanks
Chief Executive Officer and Managing Partner
CrowdCheck, Inc. & CrowdCheck Law LLP
Washington, DC
Attorney with over 30 years of experience in the corporate and securities field
Do you agree with ChatGPT about the definition of net worth for non-accredited investors?
Here's my exchange with ChatGPT:
For purposes of calculating the amount a non-accredited investor may invest under Regulation Crowdfunding as governed by the 2012 Jumpstart Our Business Startups Act, net worth is used as a measure. For this purpose specifically, is the value of the investors' home and the associated mortgage (if any) included in the calculation? What sources could you suggest for confirming the answer?
Under Regulation Crowdfunding, which was established by Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012, there are specific rules governing the amount non-accredited investors can invest. These rules take into account the investor's annual income and net worth to determine the investment limits.
When calculating net worth for the purposes of Regulation Crowdfunding, certain exclusions apply, similar to the rules for accredited investors defined by the SEC. Specifically:
Value of the Primary Residence: When calculating net worth, the value of the primary residence is not included. This is in line with the SEC's amendments to the net worth standard for accredited investors, which took effect after the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Mortgage and Other Debt Associated with the Primary Residence: While the value of the primary residence is excluded from the net worth calculation, debt secured by the residence up to its fair market value is also not included. However, if the mortgage or other debt secured by the residence exceeds the fair market value of the home, that excess amount must be considered as a liability in the net worth calculation.
For confirming these details and staying updated with any changes to the regulations, I recommend consulting the following sources:
The U.S. Securities and Exchange Commission (SEC) Website: The SEC's official website provides comprehensive information on Regulation Crowdfunding, including investor eligibility, investment limits, and how to calculate net worth.
Financial Industry Regulatory Authority (FINRA): FINRA oversees broker-dealers and funding portals involved in Regulation Crowdfunding. Their website offers guidance and educational resources related to crowdfunding and investor education.
Legal and Financial Advisors: Consulting with professionals who specialize in securities law and investment can provide personalized advice and ensure compliance with the current regulations.
SEC's Regulation Crowdfunding Rules: Reviewing the actual text of the rules (available on the SEC's website) can provide the most direct and detailed understanding of the requirements.
These sources should offer authoritative and up-to-date information regarding investment limits under Regulation Crowdfunding and how to calculate net worth for these purposes.
Not bad!
Form C-AR (Annual Report) filing requirement deadlines
A question on Form C-AR (Annual Report) filing requirements.
Let's say an issuer launches an offering in November 2023, and closes in January 2024. Assume that same issuer has a fiscal year-end of 12/31.
Are they required to file a Form C-AR in April 2024, or April 2025?
Essentially, does the "...no later than 120 days after the end of the fiscal year covered by the report" come in based on the year the offering first went live or the year the offering was closed?
If it's based on when they "sold securities", does that happen at the time an issuer makes a commitment and wires money, or when the offering closes and subscription docs are signed and dated?
C-AR in April 2024 if any sales were made in this offering. Even if sales weren't made until the day before the C-AR was due! I have a funny story about that one.
SEC Staff say that (in contrast to the way sales are treated in Reg D and PIPE transactions) the "sale" is when the obligation to pay is binding on the investor and they can't withdraw their investment.
Yes you can do a Reg D offering concurrently with a Reg CF offering. However, you'd want to make the Reg D a 506(c), which permits general solicitation, because while concurrent offerings under Reg CF and 506(b) are theoretically possible, it can get very complicated, especially because in the CF you are going to have to disclose the existence of the Reg D offering (and vice versa).
The SEC has been relatively lenient with crowdfunding issuers (as opposed to crowdfunding intermediaries), possibly so as not to stifle this emerging industry, so as yet there is not really a "most common" way to get in trouble.
They have brought a series of actions against companies raising under Regulation A for failures to comply with the very technical requirements relating to how Reg A offerings are modified, extended or expanded. They have also brought actions against Reg A issuers for misleading statements.
However, I am not aware of Reg CF issuers getting into the same sort of trouble, even though I have seen significant violations of the various ways they can get into trouble (companies not eligible to use Reg CF, companies failing to extend or expand offerings in compliance with Reg CF, companies making misleading statements, companies violating the Reg CF communications rules). I have heard anecdotally of the SEC warning issuers that they should get advice from a securities lawyer, though.
Completely different process for the two sorts of offering.
In a Reg CF offering, the Form C is filed with the SEC and the moment it shows up on the EDGAR system, the issuer can start accepting investment commitments on the intermediary's site. The SEC does not review or sign off in any way. That doesn't mean they (and other regulators) aren't looking, though!
In a Reg A offering, the SEC must review and "qualify" the offering before it goes live. (We don't use the term "approve"; the SEC never approves or blesses offerings.) If it's a Tier 1 Reg A offering, the states that the offer will be made into also have to sign off.
In both cases, you can "test the waters" before filing or qualification, but any materials you use to test the waters need to be filed with the SEC.
Thanks!
Yes, you can solicit as to what terms people might find attractive, including valuation. I would generally include a disclaimer of some kind saying that just because something has been suggested it doesn't mean that will be reflected in the deal terms if you eventually make an offering.
Sara
Form C-TR question on timing of filing.
Assume CF issuer has less than $10M in assets and filed its first Form C-AR after the offering. At that time the issuer did had not engaged a registered transfer agent and had more than 300 holders of record of the CF securities at the time of the first filing.
If issuer subsequently engages a registered transfer agent to reduce the holders of record of the CF securities to less than 300, is this an event that triggers the 5 business day filing period for Form C-TR? Or must the issuer file a new Form C-AR for this year and then use that at the 5 business day trigger date (assuming that the transfer agent is in place)?
CF says: "An issuer eligible to terminate its obligation to file annual reports with the Commission pursuant to § 227.202(b) must file with the Commission, within five business days from the date on which the issuer becomes eligible to terminate its reporting obligation,"
I think that as soon as you no longer have 300 holders of record that the issuer becomes eligible to terminate its reporting obligation but cannot find a lot of clarity on this point.
Answering a question with a question: how would engaging a transfer agent reduce the number of holders of record?
It's not really a test that you pass or fail. The Howey test is just one of the tests used in securities law to determine whether an instrument being offered is a security or not. There are other tests that can also be used, such as the Reves test. Which should be applied depends, as the SEC says, on the facts and circumstances.
If an instrument meets the various elements of the Howey test, it will be treated as a security. I guess that might be said to be "failing" Howey.
A platform can set parameters for the type of company and offering it will accept. And then it can (indeed, must) deny access if it believes there is potential for fraud or if the issuer has not complied with the regs. Put those together and most platforms have the ability to filter out the types of companies and offerings they don't want to host.
Nothing in the rules prevents it although platforms could impose their own contractual requirements (eg, if you use our platform for TTW you have to use us for the actual offering).
BTW, the SEC were not actually expecting that TTW would happen on platforms! They thought TTW would be on social media or on issuers' own sites.
