Real Crowdfinance Finally Becomes Legal … Soon

After 24 months of comment, review and consideration the Securities and Exchange Commission finally adopted the final rules relating to equity crowdfunding on October 30, 2015, by a 3-1 vote. My hopeful prediction that we were a “solid six months away…from crowdfunding becoming legal” was certainly optimistic. The long anticipated enactment adopts an exemption from securities registration for Internet based securities offerings. This will allow businesses to raise up to $1 million every 12 months in capital from regular ‘ol non-accredited investors … aka the “crowd”. These crowdfunding rules comprise the last major set of rules called for in Congress’ April 5, 2012, legislation. They are the rules for Title III of the JOBS Act.

The rules take effect 180 days after publication in the Federal Register – so we are looking at legal crowdfunding in May 2016.

In my October 23, 2013 post, SEC Proposes Crowdfunding Rules, I highlighted a few points of interest from the behemoth rules proposal totaling 585 pages. The final rules are even more complex in their 686 pages of analysis and rules. So to spare you the agony of a complete recap, I again take a 1,000 foot view instead of an in-depth analysis of the final crowdfunding rules.

  • Companies’ ability to advertise crowdfunding offering. An issuer can only advertise by directing potential investors to the funding portal. There is still no open season for social media.
  • Cancellation period. Investors may cancel their commitment up to 48 hours prior to the deadline identified in the offering materials.
  • Individual investment limitations and net worth calculations. The final rules clarify that the investment limit reflects the aggregate amount an investor may invest in all Regulation Crowdfunding offerings for a 12 month period from any issuer. A “lesser of” approach to determining which category applies to an investor’s maximum contribution based on net worth or annual income is adopted. As an example, an individual with a $50,000 salary and net worth of $105,000 can contribute up to $2,500 in a given 12 month period (or 5% of their annual salary, as it is less than their total net worth), as opposed to under the proposed rules where that investor could have contributed up to $10,500. An individual with an annual income of $150,000 and total net worth of $80,000 can only contribute up to $4,000 under the final rules, as opposed to $15,000 under the proposed rules.
  • Implementation of “Funding Portals”. Funding portals are seen as the “gatekeepers” that help to provide investor protection, according to SEC Commissioner Aguilar. FINRA published applicable rules for intermediaries prior to the SEC vote and was only waiting for the Commission to implement the crowdfunding rules. Unlike broker dealers, the funding portals cannot offer investment advice. The final rules generally remain the same as proposed here, except that the definition of “platform” was modified slightly to be more technical. Platform means “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities.” The instruction that intermediaries can also engage in back office or other administrative functions was added to the final rules.
  • Audits are “out” for the most part. SEC Chair Mary Jo White stated in her opening statement that in considering comment letters, the final rules exempt first time issuers from having an audit requirement when raising money through equity based crowdfunding to reduce overall costs. If you read my 2013 post, you’ll know the proposed requirement that businesses raising in excess of $500,000 must prepare audited financial statements was disappointing. Others echoed this concern. The final rules only require first-time crowdfunding issuers submit reviewed financial statements when raising between $500,000 and $1,000,000. Additionally, Chair White said “issuers conducting smaller offerings would not be required to file tax returns, as proposed, but rather would be required to disclose specific information from the returns, which should address privacy concerns.” So an issuer won’t have to publicly disclose their entire tax return, but will need to disclose certain relevant information.
  • On-going audit requirement is also “out”. Most importantly, we were also successful in getting the SEC to avoid imposing an on-going reporting requirement that also required for issuers to undergo an audit in perpetuity. Annual reports simply need to be certified by an officer of the issuer.
  • Specific disclosures are mandated. The broad requirement regarding disclosure of any material information necessary to make the statements made was adopted as well as a requirement for disclosure of payments to an intermediary (disclosed as a dollar amount or percentage), location of the issuer’s website that has the issuer’s annual report and date of report availability, whether the issuer or any predecessor has failed to comply with ongoing reporting requirements under the crowdfunding rules. Financial disclosure requirements and contents vary depending on the size of the offering.
  • Intermediaries’ are able to hold financial interest. The final rules allow an intermediary to be compensated with a financial interest in issuers that conduct an offering on the intermediary’s funding portal, as long as it is disclosed to investors. The intermediary can only be compensated with the same type of security being offered to crowdfunding investors. This means no preferential treatment for the funding portal!
  • Ability to simultaneously conduct multiple offerings. The SEC provided clarification to conducting simultaneous offers pursuant to different exemptions and allows businesses to raise money via crowdfunding without that offering impacting a company’s ability to also pursue other forms of exempt capital raises (as long as it complies with requirements for each applicable exemption). In short, this isn’t an “either/or” proposition. Issuers can crowdfund and also raise money the old fashioned way.

So, the adopted final rules show some victories for us while also keeping certain less practical requirements in place (like the requirement that businesses publish their financial statement on their company website).

All in all, will issuers and investors flock to crowdfunding with all these complex rules? Probably not. But we can be optimistic that a handful of brave issuers will successfully prove that equity crowdfunding is an important part of not only a company capital structure, but also of a successful strategy to connect with the company’s customers.

* A special thanks to Amanda Salvione for her assistance. One person should never have to read 686 pages of anything from the SEC alone.

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Reg A+ is here!!! But is it crowdfunding?

There has been a potentially game-changing development in the world of crowdfunding. The SEC, while unable for a host of reasons to approve rules governing Title III of the JOBS Act (which permits true crowdfunding), did approve the final rules for Title IV. When the SEC trotted out the proposed rules, all the interest groups – including state securities administrators – came out in full force. I am happy to report that the crowdfunding community won the day, in no small part to relentlessly educating the SEC staff that championed this change.

There is a seldom used exemption that allows for sales of securities called “Regulation A”. In recent years, less than 20 offerings a year were being conducted using this Regulation A. To try to jumpstart use of that exemption, Congress wrote legislation to legalize an enhanced Regulation A.

In the new rules, the SEC divides the new Regulation A into two tiers. Tier One is a basic rehash of the old unused exemption, which gives power to each individual state to approve or disapprove of an offering.

Tier Two is colloquially referred to as “Reg A+”. And it really provides a great opportunity for companies to begin raising money online. Reg A+ eliminates the various state securities agencies from reviewing the offering at all.

The highlights:

• A company can raise up to $50 million.
• The SEC has to approve the offering.
• The company, while raising money, has semi-annual reporting requirements.
• The company is required to have audited financial statements.
• Under certain circumstances, the company may exceed the 2,000 shareholder limitation without triggering public company reporting requirements.

• AND MOST IMPORTANTLY: these offerings are NOT limited to only accredited (rich) investors. Any non-accredited investor (basically 93% of the public) can invest, provided that they are not investing in excess of 10% of the greater of their net worth or annual income.

The last part is the game-changer. Already being referred to as the “Mini-IPO”, companies will now be able to connect with all their customers and have those customers become something special – owners.

Of course, the cost of compliance for a Reg A+ offering eliminates little start-ups and mom-and-pops. But for companies that were previously unable to raise money online (because of earlier limitations on general solicitation and the current prohibition on raising money for a private company from non-accredited investors online), this is going to open up major doors. Yes – the audit requirements and the fact that a lawyer will need to be involved makes the transaction cost prohibitive for a restaurant that wants to build a back patio, but for the restaurant that wants to expand by opening up five new locations? Reg A+ is perfect!

The dirty secret is that the SEC was also trying to eliminate the use of reverse-merger transactions to get a company public. In the recent past, the easiest way for a company to become publicly traded was to merge into a defunct public shell, avoiding the usual barriers to going public. The result is that a publicly traded Jiffy Lube chain that went out of business in North Carolina was all of a sudden a mining operation in Southern Arizona without much regulatory oversight. By bringing down compliance costs from a real IPO, the Reg A+ offering will give a company a path to becoming publicly traded without the need to resort to that common shenanigan.

These rules will become effective at the beginning of June. It will be interested to see if the SEC takes its responsibility to efficiently turn around these potential offerings seriously. If so, you can expect that this Fall will be full of excitement in the world of online investing. Smart consumer facing companies will take this opportunity to transform their customers into owners.


Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Salvation is through Redemption

One of the biggest challenges facing the equity crowdfunding world is the question about how a secondary market is going to work. After all, at some point, investors must have the option of selling an ownership interest. That liquidity is necessary whether an investor owns stock in either Exxon or the car dealership down the street. We take it for granted as investors that we can always sell our publicly traded simply by logging onto Ameritrade. However, for a private company (those that are in every neighborhood in America) there is a relatively illiquid market. If you are the majority owner of a private company, you can hire a business broker to hook you up with a buyer. But if you are a minority owner, you usually have very few choices.

One of the challenges of with crowdfunding is that each individual owner may have a life circumstance that makes them want (or need) to sell their stock. Although there are some legal rules (with likely more to come) that bear on when and how someone can SecondMarket.comsell their stock, one thing is certain: people are going to need to a market in order to sell. Companies like SecondMarket are putting together the pieces to let third parties bid for private company shares.

But prior to the development of these secondary markets (which are going to require further regulation in the crowdfunded economy), it is critically important that the issuing company put policies in place to allow investors the right of “redemption”. That means that the company agrees to repurchase the shares at a pre-arranged price, adjusted by a periodic appraisal.

It is a critical feature for an investor. And redemption rights allow the company to truly get the benefit of having the crowd. There’s nothing worse than having an owner who is angry at you – especially if the reason is that they are stuck with their shares.

Cricca’s term sheet always includes a redemption right. Our companies have an annual redemption policy, which allows an investor to get on a list, and then have their shares repurchased by the company at a preset price.

Investors will learn to demand this right. Companies that ignore the right of redemption do so at their own peril.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Cricca Concierge

In the world of publicly traded stock, there are companies that are known as “transfer agents”. Their purpose is to facilitate transfer of stock ownership from one shareholder to another. It is really record-keeping process, and every non-bank transfer agent must be registered with the SEC. These registration criccarequirements are meant to keep out fly-by-night operations which may disappear with important records of who owns a company.

Investor relations firms also occupy the post-investment space. Rather than acting merely as a conduit for the transfer of securities, investor relations firm focus on communicating with investors. The communication can be something as simple as sending a proxy forms, or something as complex is putting together annual reports are other items for investors.

Crowdfunding is different. With respect to our clients, we’re talking about consumer-facing businesses, which have thousands of customers. These are the companies that successfully raise money using crowdfunding. As a result of those efforts, they all of a sudden have hundreds of shareholders. The fact is that these relatively small companies now have an extra operational hurdle. Plus they still need to activate these new owners as part of their marketing strategy. Even more than during the funding campaign itself, the period post-crowdfunding creates both traps and opportunity. These crowdfunded companies can’t be relegated to choose between a company that merely acts as a transfer agent or produces annual reports.

That is why we introduced Cricca Concierge. We enhance the power of your crowd – the owners of your business – and turn them into something much more than just owners. We turn them into high-frequency, high spending, and evangelical customers. These are the type of people that you want to communicate with often, ensure that they are receiving answers to all the questions, and are encouraged to use their social networks to promote the business. These are also the same people that you want to plan special events around and provide perks that are a natural part of the business. Cricca Concierge provides exactly that service.

We also help navigate secondary markets, transfers of shares, and other things that a traditional transfer agent would do. We also work with you to produce annual reports for your new owners. We do this all through one of the funding portal partners or through a branded website that is only accessible to your owners. We also have live support, both online chat, email and live person via Skype or telephone. Depending on the type of business you have, this type of concierge service is necessary for you to get the true “bang for your buck” that crowdfunding promises.

Our services are primarily directed toward the companies after we’ve helped them raise money, but we also accept a select number of companies that have been crowdfunded without our help. Do not hesitate to contact us regarding your specific needs. Our services are both powerful and flexible.

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Why Equity Crowdfunding is NOT a Terrible Idea

Jeff Wald wrote a piece that was published in Entrepreneur earlier today. The article is called “Why Equity Crowdfunding is a Terrible Idea“. He argues that the process for raising capital is “time tested” and the current methods assist startup companies that help build our society. He also suggests that there is a great deal of value contributed to these startups by venture capitalists, and by implication, argues that the “crowd” is unable to add the same type of value. Jeff is no stranger to the crowdsourcing market. He runs, a web-based platform for managing labor resources including consultants and freelancers. And while workmarketyou can argue that the crowd is actually able to contribute a much greater amount of value to a startup then a venture capitalist, Jeff has a point. The current structure produces relative stability in the unstable world of startups.

But here is where Jeff (and many are wrong). Crowdfunding isn’t about raising money for startups at all. Let’s face it, if the average venture fund makes ten investments, they would be thrilled to death with one great success and two small winners. An amateur investor doesn’t want that sort of thrill ride; they want predictable returns and the feeling of “investment” that only comes from being an owner. And that’s why crowdfunding is such a huge opportunity for profitable, local companies that benefit from the unique marketing (and corresponding revenue boost) that comes with the crowd.

And it is also the same reason why crowdfunding is a huge opportunity for investors. Instead of being locked into owning the tiniest fraction of a huge multinational conglomerate, the investor gets to become part owners in a local business, and maybe even make an actual impact on the bottom line. They get to brag to their friends and family that they are owners of local businesses that are part of the fabric of their community. And best of all, they get dividend checks that can exceed the paltry returns afforded by some types of alternative investments.

So Jeff gets it half right. Crowdfunding is a lousy tool for startups. But for businesses looking to transform their customers into loyal owners? It doesn’t get any better.

Jonathan Frutkin Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Destination: Atlanta

On October 1, we’re going to announce the opening of our first field office. It is located in Atlanta, Georgia. The reason for Atlanta is quite simple: Cricca is going to be working on implementing the strategies that we’ve written and spoken about for the past six months. As you know, we believe that the best opportunity for crowdfunding comes from local profitable consumer-facing businesses that see this as an opportunity to truly engage with their customers. While others think that crowdfunding is just about raising capital, we believe that it is about much more than that. Crowdfunding is the single most effective marketing strategy of all time.So why Atlanta? The answer is that two states The new Georgia Peachhave taken the lead on establishing intrastate crowdfunding exemptions – Kansas and Georgia. This means that you can already do intrastate crowdfunding in Georgia! In fact, you’ve been able to do it since late 2011. So why haven’t any successful campaigns happened yet?

The answer is simply that there is not enough awareness about crowdfunding yet – and the wrong sort of companies have attempted to raise money. As you can imagine, the companies that have been most attracted to crowdfunding are startup companies, often with no actual product and usually with no customers.

There is nascent equity crowdfunding infrastructure in Georgia. There are two great companies looking to establish themselves as the go-to crowdfunding portal in Georgia, SterlingFunder and Spark Market. We are excited about both the companies, and although we will only be partnering with one of them for our first pod of offerings, they both have great teams in place.

The challenge with raising money from crowdfunding, occurs when there is no crowd. A crowd is really the most essential portion of a crowdfunding campaign. So, why do we think were different? Well, put simply, we Downtown Atlantaonly work with profitable companies -businesses that have already been established. We only work with companies like restaurants, car washes, dry cleaners, landscaping companies, clothing boutiques and other businesses that you use every single day. These local successful companies have a built-in advantage – established customer bases. These customers will now have an opportunity to invest and become owners.

So if we are right, 2014 will see the emergence of some successful campaigns in Georgia. We look forward to being part of those campaigns. So if you are in Georgia, definitely drop us a line! We are interested and excited about learning about our new city. Our offices are located in Midtown Atlanta, and we are thrilled to be able to work with our Atlanta partners to cement Georgia as a leader in this exciting world of equity crowdfunding!

Jonathan Frutkin
Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Officially the Best Review Ever

Although most people in the emerging crowdfunding space have said nice things about my book, Scott McIntrye (@Scot_McIntyre) really went out of his way. Thanks Scott for the nice words.

Scott McIntyre’s copy of “Equity Crowdfunding”

Transforming Customers into Loyal Owners

Jonathan, thank you again for your considerable work in this volume, and for the kind gesture of sending it to me at your expense.

Last we spoke, you said I should read it first before thanking you, so I did that, and am thanking you now.

Just so you know I read it thoroughly, and to show you the level of appreciation I have for it, I thought a picture would be worth a thousand thankyous. The pic attached show how many dogs sacrificed their ears to the effort. Great references I plan to use.

So, thanks again.
Great work,

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

It is All About Access

Traveling the country and meeting with business owners (and those who advise them), I ask a simple question. What does a business investor expect that is different than what a customer expects? I almost always get the same answer: discounts. Most people think that owners are expecting to get lower prices on the products they buy. That’s actually not very important to investors at all.

Owners primarily expect two things when they participate in crowdfunding campaigns. The first thing that they expect is access. That means that they’re able to talk to the manager, and business leaders, and give their feedback. They like to be included. Now obviously, that doesn’t mean that each time you want to hire or fire someone, you’re going to be contacting your crowdfunding investors. But it doesn’t hurt to let them know that their opinion matters. Surveys and other feedback loops help reinforce that the investor has access. Having owner loyalty cards is important, just like having actual physical stock certificates. People want to be recognized as owners. That is true when they walk into the business. And it is also true that that people want their ownership status displayed on their social media page and on their physical wall in their home or office.

This leads to the second thing that owners really want. Investors want to be part of something bigger. They want to be involved with their community. Just like people are interested to see themselves on the roll of people were involved in a particular nonprofit charitable fundraising campaign, these investors also want to be recognized and included in the community of people who added to a local business. This creates a huge advantage to the crowdfunded company. Not only do you have a lot of investors who are going to talk about your business, the investors are also letting you speak directly to their followers about how grateful you are to have them as part of your team. It is a double-win. The business brand gets the benefit of a larger network, and the investor’s personal brand is enhanced because of their connection to a local business in the community.

Remember the crowdfunding isn’t just about discounts. It is about access and community. Companies that embrace crowdfunding will be far ahead of their competitors, saving hundreds of thousands on old economy marketing strategies that are less and less effective – strategies like providing coupons and discounts to entice people through the doors.

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

Three Reasons Why Owners are Better Customers

Every company needs customers. Our job is to help profitable locally owned businesses take their customer base and transform those people into owners through the power of crowdfunding.

Customers are the engine that creates value to a business. First, they spend money in the business. Obviously step one toward profitability is sales! Second, customers are service and quality (and value) sensitive. These customers help business managers shape their service offering to respond to the market; successful adjustments create more and more customers. Third, customers spread good experiences through word of mouth (and social media), generating additional customers. Of course, a dissatisfied customer can also sound off to the world about a bad experience, costing the business customers in the future with a bad Yelp review or Facebook post.

However, we know three things about owners which make them so much more valuable as customers:

1)      They spend more money.

Even if an owner has a very small percentage stake in the business, they feel more comfortable buying just a little bit extra. And all those little bit extras can really add up. Do you want fries with that? Owners do.

2)      They visit more frequently.

An owner, when faced with a choice between visiting their own business and a competitor will almost invariably choose their own business even if that means waiting until later to make a purchase. Or they may deal with inconvenience, going out of their way to make a purchase. Increasing the frequency of customer visits is a key component to increased profitability.

 3)      They become evangelicals for the business.

Instead of passively sharing information about their purchasing habits as part of a conversation with their friends, owners go out of their way to preach about the great products and services provided by their company. Great Yelp reviews and glowing social media posts become commonplace.

But perhaps the most powerful part is that the occasional bad customer experience is much less likely to make it out to the public square. While a customer may want to blast the shortcomings of a failed experience, an owner wants to make sure that management fixes the problem. So while a poor sales clerk may receive extra skills training, that issue won’t make its way onto social media. And while a good review is worthwhile in this social media age, a bad review is like kryptonite. A crowd of owners protects a business when things go wrong.

Crowdfunding is about a lot more than “funding”. It is really about the crowd. And having the crowd own your business is soon going to become the key component to a successful marketing strategy.  

Jonathan Frutkin
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

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