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What is the difference between a Rule 506(b) offering and a Rule 506(c) offering?
The difference between a Rule 506(b) offering and a Rule 506(c) offering under Regulation D of the U.S. Securities and Exchange Commission (SEC) follows:
1. Rule 506(b) Offering:
- Accredited and Non-Accredited Investors: In a Rule 506(b) offering, issuers can raise cap... moreThe difference between a Rule 506(b) offering and a Rule 506(c) offering under Regulation D of the U.S. Securities and Exchange Commission (SEC) follows:
1. Rule 506(b) Offering:
- Accredited and Non-Accredited Investors: In a Rule 506(b) offering, issuers can raise capital from both accredited and non-accredited investors. However, if non-accredited investors are included, the issuer must meet certain disclosure requirements, and there are limitations on the number of non-accredited investors that can participate.
- No General Solicitation: Issuers are not allowed to engage in general solicitation or advertising to attract investors. The offering is typically limited to a pre-existing network of investors.
- Self-Certification: Investors can self-certify their accredited investor status, and the issuer does not have the same obligation to verify the accredited status of investors as required in Rule 506(c).2. Rule 506(c) Offering:
- Accredited Investors Only: In a Rule 506(c) offering, issuers are allowed to solicit and advertise the offering to the general public. However, they can only accept investments from accredited investors.
- Verification of Accredited Status: Unlike Rule 506(b), Rule 506(c) requires the issuer to take reasonable steps to verify that investors are accredited. This verification process adds an extra layer of due diligence.
- No Limit on Offering Amount: There is no specific limit on the amount of capital that can be raised in a Rule 506(c) offering.In summary, the key differences between Rule 506(b) and Rule 506(c) offerings lie in their approach to investor eligibility, solicitation methods, and the verification of accredited investor status. Rule 506(b) allows for a broader pool of investors but restricts advertising, while Rule 506(c) permits general solicitation but limits investors to accredited individuals or entities.
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What are the most common ways that crowdfunding issuers can get in trouble with the SEC?
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 R... more
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.
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Does the SEC provide any guidance on how to prepare the Form C for a Reg CF crowdfunding raise?
The U.S. Securities and Exchange Commission (SEC) provides guidance and instructions for preparing Form C for Regulation Crowdfunding (Reg CF) offerings. Form C is the disclosure document that must be filed with the SEC and provided to potential investors in a Reg CF crowdfunding campaign.
The SEC's... more
The U.S. Securities and Exchange Commission (SEC) provides guidance and instructions for preparing Form C for Regulation Crowdfunding (Reg CF) offerings. Form C is the disclosure document that must be filed with the SEC and provided to potential investors in a Reg CF crowdfunding campaign.
The SEC's official website is the primary source for the most up-to-date information and guidance on preparing Form C and complying with Reg CF requirements. The guidance typically includes information on the following aspects:
1. Form C Content: The SEC provides detailed instructions on what information needs to be included in Form C. This includes information about the company, its management, its financial condition, the terms of the offering, and other relevant details.
2. Financial Statements: The guidance outlines the financial statement requirements for the offering. Depending on the amount being raised, companies might need to provide financial statements reviewed or audited by an independent accountant.
3. Risk Factors: Companies are required to disclose the risks associated with their business and the investment. The SEC guidance may provide recommendations on how to identify and present these risks.
4. Business Description: Form C should include a description of the company's business operations, products, services, and any other relevant information to help potential investors understand the nature of the business.
5. Use of Proceeds: The company needs to explain how it intends to use the funds raised through the crowdfunding campaign.
6. Target Offering Amount and Deadline: Information about the minimum and maximum amount the company is looking to raise, as well as the deadline for the campaign.
7. Compensation to Intermediaries: If the company is using a crowdfunding platform or intermediary to facilitate the offering, it should disclose the compensation arrangements.
8. Information about Directors and Officers: Details about the company's directors, officers, and owners, including their backgrounds and involvement in other businesses.
9. Ownership and Capital Structure: Information about the company's ownership structure, including the types of securities being offered and the rights associated with them.
10. Ongoing Reporting: Companies are required to provide updates to investors and the SEC after the offering is completed. The guidance may provide information on these ongoing reporting obligations.
It's important to note that the SEC's guidance may evolve over time, and it's essential to refer to the latest resources available on the SEC's official website or consult legal and financial professionals who specialize in securities regulations for the most current and accurate information.
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Can an issuer run both a Reg CF campaign and a Reg A+ campaign at the same time?
Yes, an issuer can run both a Regulation Crowdfunding (Reg CF) campaign and a Regulation A+ (Reg A+) campaign at the same time, as long as they comply with the requirements of both regulations.
Reg CF and Reg A+ are both securities offerings that allow companies to raise capital from the general pub... more
Yes, an issuer can run both a Regulation Crowdfunding (Reg CF) campaign and a Regulation A+ (Reg A+) campaign at the same time, as long as they comply with the requirements of both regulations.
Reg CF and Reg A+ are both securities offerings that allow companies to raise capital from the general public. However, there are some key differences between the two regulations, such as the amount of money that can be raised, the disclosure requirements, and the eligibility criteria for issuers.
Under Reg CF, issuers can raise up to $5 million in a 12-month period, and they must file certain disclosures with the SEC and provide ongoing updates to investors. Reg A+, on the other hand, allows issuers to raise up to $75 million in a 12-month period, and they must file an offering statement with the SEC and provide ongoing reports to investors.
Issuers must ensure that they comply with the requirements of both regulations, which may involve preparing separate disclosures and reports for each offering. They must also consider how the two offerings may impact each other, such as how investors in one offering may perceive the risks and opportunities of the other offering.
Overall, running both a Reg CF campaign and a Reg A+ campaign at the same time requires careful planning and compliance with regulatory requirements.
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It is tax season. Does the US give any tax relief for investing in startups?
Yes - the US offers tax relief for investing in startups through various provisions in the tax code, including Sections 1202, 1244, and 1045.
Section 1202 - Qualified Small Business Stock (QSBS): Investors in qualified small businesses can exclude up to 100% of their capital gains from federal... more
Yes - the US offers tax relief for investing in startups through various provisions in the tax code, including Sections 1202, 1244, and 1045.
Section 1202 - Qualified Small Business Stock (QSBS): Investors in qualified small businesses can exclude up to 100% of their capital gains from federal income tax if they hold the stock for more than five years, subject to certain limits and conditions.
Section 1244 - Small Business Stock Loss Deduction: Investors in certain small businesses can claim an ordinary loss deduction on their income tax return if the investment becomes worthless. This allows the loss to offset other income, with an annual deduction limit of $50,000 for single filers and $100,000 for married couples filing jointly.
Section 1045 - Rollover of Gains from Small Business Stock: Investors in qualified small businesses can defer capital gains tax on the sale of their QSBS if they reinvest the proceeds into another QSBS within 60 days. This rollover provision allows investors to maintain their tax-advantaged status while continuing to invest in the startup ecosystem.
For a more detailed explanation of these tax relief provisions, check out my article on Three Ways the US Gives Tax Relief to Startup Investors.Also, for a more detailed guide that discusses other tax considerations for startup investors, you can check out my article Navigating Startup Investing Taxes - the Comprehensive Guide for Investors.
Please note that none of this should be construed as tax advice and is for informational purposes only - always consult a tax professional.
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How much can a non-accredited investor invest in crowdfunding? Are the rules changing on this?
The limitation on how much a nonaccredited investor can invest during a 12-month period depends on his or her net worth and annual income:
• The greater of $2,500, or 5 percent of the greater of the investor’s annual income or net worth, if either the investor’s annual in... more
The limitation on how much a nonaccredited investor can invest during a 12-month period depends on his or her net worth and annual income:
• The greater of $2,500, or 5 percent of the greater of the investor’s annual income or net worth, if either the investor’s annual income or net worth is less than $124,000; or
• Ten percent of the greater of the investor’s annual income or net worth, not to exceed an amount sold of $124,000, if both the investor’s annual income and net worth are equal to or more than $124,000.
There are no current plans to change these rules, although the dollar amounts may increase from time to time. Under Securities Act Section 4A(h), the Commission is required to adjust the dollar amounts in Section 4(a)(6) “not less frequently than once every five years, by notice published in the Federal Register, to reflect any change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.”
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What is required to become a crowdfunding Funding Portal under the JOBS Act?
To become a crowdfunding funding portal under the JOBS Act, an entity must register with the Securities and Exchange Commission (SEC) as a "funding portal" and comply with certain regulatory requirements. Here are some of the key requirements:
1: Registration: The entity must register with the SEC a... more
To become a crowdfunding funding portal under the JOBS Act, an entity must register with the Securities and Exchange Commission (SEC) as a "funding portal" and comply with certain regulatory requirements. Here are some of the key requirements:
1: Registration: The entity must register with the SEC as a funding portal by filing Form Funding Portal and must become a member of a national securities association (currently FINRA - the only game in town). Form Funding Portal requires information from the funding portal applicant, including information about the funding portal's business, principals, control relationships, and employees. See: https://www.sec.gov/tm/divisionsmarketregtmcompliancefpregistrationguidehtm
2: Restrictions on Activities: Funding portals are limited in the types of activities they can engage in. For example, they are prohibited from offering investment advice, soliciting transactions, or handling investor funds or securities. They may provide limited communication channels for issuers to communicate with potential investors, but all communication must be conducted through the portal and must be accessible to all investors. IMHO, some restrictions may be tighter than they should be given the capabilities of harnessing the crowd with technology.
3: Investor Protection: Funding portals must take steps to protect investors, including verifying the identity of each investor and limiting the amount of money each investor can invest in a given offering. They must also provide investors with educational materials and warnings about the risks of investing in crowdfunding offerings. It's important to remind investors at every turn that investing is risky - and they can lose all of their investment. Unlike the world of crypto where FOMO is the key selling point, this is REGULATED INVESTMENT CROWDFUNDING so education, disclosures, and caution is warranted.
4: Disclosure Requirements: Funding portals must provide certain disclosures to investors, including information about the issuer, the terms of the offering, and the risks involved in investing in the offering. They must also provide ongoing updates about the issuer and the offering. When in doubt, build disclosures throughout your platform's workflow.
5: Record keeping and Reporting: Funding portals must maintain records of all transactions conducted through the portal and provide certain reports to the SEC.
Compliance with these requirements is essential for a crowdfunding funding portal to operate legally under the JOBS Act. It is important to note that these requirements may be subject to change as the SEC continues to learn from the experience of industry stakeholders and develop its regulatory framework for crowdfunding offerings.
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Can funding portals do sales and marketing activities to solicit investors on behalf of the issuers on their portal?
Unless the portal is a licensed broker-dealer, it may not offer investment advice or recommendations or solicit purchases, sales, or offers to buy the securities offered or displayed on its platform.
It may however apply objective criteria to highlight offerings on its platform where:
(i) The ... more
Unless the portal is a licensed broker-dealer, it may not offer investment advice or recommendations or solicit purchases, sales, or offers to buy the securities offered or displayed on its platform.
It may however apply objective criteria to highlight offerings on its platform where:
(i) The criteria are reasonably designed to highlight a broad selection of issuers offering securities through the funding portal’s platform, are applied consistently to all issuers and offerings and are clearly displayed on the funding portal’s platform;
(ii) The criteria may include, among other things, the type of securities being offered (for example, common stock, preferred stock or debt securities); the geographic location of the issuer; the industry or business segment of the issuer; the number or amount of investment commitments made, progress in meeting the issuer’s target offering amount or, if applicable, the maximum offering amount; and the minimum or maximum investment amount; provided that the funding portal may not highlight an issuer or offering based on the advisability of investing in the issuer or its offering; and
(iii) The funding portal does not receive special or additional compensations for highlighting one or more issuers or offerings on its platform.
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How is 506(b) related to crowdfunding?
506(b) offerings are not typically considered to be a form of crowdfunding. Crowdfunding generally refers to a method of raising funds from a large number of people, often through online platforms, in exchange for equity or other forms of compensation.
506(b) offerings, on the other hand, are privat... more
506(b) offerings are not typically considered to be a form of crowdfunding. Crowdfunding generally refers to a method of raising funds from a large number of people, often through online platforms, in exchange for equity or other forms of compensation.
506(b) offerings, on the other hand, are private placements that are typically offered to a limited number of accredited investors. While crowdfunding can also be used to raise funds from accredited investors, it often involves a much larger number of investors who may not meet the SEC's accreditation requirements.
However, it's worth noting that some online platforms have emerged that allow companies to conduct 506(b) offerings through crowdfunding-like platforms. These platforms typically provide tools and services to help companies comply with the SEC's regulations regarding private placements and may allow companies to market their offerings to a broader range of accredited investors. These types of platforms are sometimes referred to as "accredited crowdfunding" or "equity crowdfunding for accredited investors."
Overall, while there are some similarities between 506(b) offerings and crowdfunding, they are typically considered to be distinct methods of raising capital, with different regulatory requirements and target audiences.
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What is the attitude toward private market access by the author of the following statement?
The Commission should examine ways to expand their access to capital, but it should do so in a way that mitigates the risks posed by offering investors fewer or no protections.
The author of this statement has a critical attitude towards private market access. They argue that retail investors lack th... moreThe Commission should examine ways to expand their access to capital, but it should do so in a way that mitigates the risks posed by offering investors fewer or no protections.
The author of this statement has a critical attitude towards private market access. They argue that retail investors lack the bargaining power and resources to access the same investments as venture capitalists, and they caution against expanding market access without better protections for investors. They ultimately advocate for increased access to capital, but argue that it must be done in a way that reduces risk for investors. less1
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