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From Crowdfunding to ICOs: Tips for Creatively (and Legally ) Financing Your Business Brian Edstrom David Duccini Shareholder & Attorney, Founder & CEO, Avisen Legal, P.A. Silicon Prairie Portal and Exchange, LLC TCSW Wednesday,
TCSW – Wednesday, October 10, 2018
Shareholder & Attorney, Avisen Legal, P.A.
Founder & CEO, Silicon Prairie Portal and Exchange, LLC
Utilizing the Internet to raise money from a “crowd” of investors to support your project. Typically, money is only collected if a stated minimum target is reached.
*Though you could be accused of fraud if you promise, say, a copy of your product in exchange for a contribution and then don’t deliver on that promise
Three Initial Questions: 1. What do you give to or promise people in exchange for a financial contribution? 2. Are you engaged in a securities offering? 3. If you are engaged in a securities offering:
More on questions 2 & 3 later...
To conduct a lawful Securities Crowdfunding offering, you MUST:
1. Conduct the offering through a registered portal (some exceptions apply) 2. Prepare a disclosure document and other required information to provide to investors 3. Comply with applicable geographical restrictions 4. Comply with applicable limits regarding the total $$ raised through the offering 5. Comply with applicable limits regarding $$ raised from individual investors 6. Comply with applicable restrictions on advertisements Failure to meet the above, and other, requirements will expose you to civil, administrative, and (in a worst case scenario) criminal liability
– Raised $1.7 billion(!) via two offerings in 2018
become an alternative to credit cards
Source: https://www.sec.gov/news
Source: https://www.sec.gov/news/speech/speech-clayton-012218 Source: Comments in a 2/6/2018 US Senate hearing
Source: https://www.finra.org/sites/default/files/2018-regulatory-and-examination-priorities-letter.pdf
Source: http://www.nasaa.org/44073/nasaa-reminds-investors-approach-cryptocurrencies-initial-coin-
Source: https://mn.gov/commerce/media/news/?id=81448
Four Initial Questions:
1. What does the coin/token really represent? I.e., what do investors hope to get by purchasing the coin? 1. Is the coin a security? 2. If the coin is not a security, why not? (This better be good…) 3. If you are engaged in a securities offering:
Now to the boring part…
Securities Act: The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof),
relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. *Tip: When in doubt, assume it’s a security.
Federal Exemptions State (MN) Exemptions Rule 506(b) of Regulation D+ [federal preemption applies] + Rule 506(c) of Regulation D+ [federal preemption applies] + Rule 504 of Regulation D+ SCOR (Minn. Stat. 80A.50(b))* Regulation A Tier 2* [federal preemption applies] Regulation A Tier 1* Must register with state(s)* Regulation Crowdfunding (Reg CF) + [federal preemption applies] Section 3(a)(11) and Rule 147A MNvest (Minn. Stat. 80A.461) +
+ Requires a notice filing
* This “exemption” is actually a simplified registration requirement. This chart identifies common exemptions from federal securities law requirements, and state (Minnesota) exemptions/requirements commonly paired with those federal exemptions.
Unlimited (Rule 506(b) or (c)) $50 million (Reg A Tier 2) $20 million (Reg A Tier 1) $5 million (Rule 504/SCOR) $2 million (MNVest) $1 million (Reg CF)
A metaphor: Don't celebrate your sea salt for being "formed by the primal sea more than 250 million years ago" without also disclosing it expires next year.
Source: https://i.redd.it/3ent6tkrz4c01.jpg
“A University of Minnesota professor is hoping to raise money to research the parasite that's devastating Minnesota's moose population. [… ] While researchers also plan to apply for research grants, Wolf said the $6,000 funding goal at the university's crowdfunding site is a good way for members of the public to help the research
Common Exemption Options
Question Regulation CF MNvest Rule 504/ SCOR + Reg A Tier 1 Reg A Tier 2 Rule 506(b) Rule 506(c) How much money do you need? Up to $1 million allowed Up to $2 million allowed Up to $5 million allowed Up to $20 million allowed Up to $50 million allowed Unlimited amount allowed Unlimited amount allowed Do you want non- accredited investors? Non-accredited allowed, but investment limits apply Non-accredited allowed, but investment limits apply Non-accredited allowed, subject to state law requirements Non-accredited allowed Non-accredited allowed, but investment limits apply Up to 35 non- accredited allowed, so long as they are “sophisticated” Non-accredited not allowed Do you want to advertise? * Only limited advertising allowed Only limited advertising allowed Advertising allowed, but only in states where registered Advertising allowed Advertising allowed Advertising not allowed Advertising allowed Do you want to raise money from investors in multiple states? Sales permitted in all states Sales permitted in MN only Sales permitted in all states where state law requirements are also met Sales permitted in
where the offering is qualified Sales permitted in all states Sales permitted in all states Sales permitted in all states How important is it to you to minimize legal & accounting fees? ** Highest Costs Medium Costs Medium Costs Highest Costs Highest Costs Lowest Costs Lowest Costs This chart contains limited information only and is not provided as legal advice. This chart does not address “bad actor” restrictions, integration issues, anti-fraud provisions, regulations applicable to finders, agents, broker-dealers or investment advisers, reporting requirements, or other regulations that may apply to a company conducting a securities offering. Companies planning to engage in equity crowdfunding should consult an attorney and an accountant before commencing the offering.