The countdown is on! In just a little over a week, Regulation Crowdfunding, which implements Title III of the JOBS Act and opens up investment crowdfunding to all investors, will go live. In CrowdCheck’s experience, there are going to be a lot of companies not ready for launch on that date. So we’ve put together a list of things that you’ll need in order to start raising money under Reg CF.
• Let’s start with the most basic issue: Have you organized your company? You can’t issue securities (shares or bonds) in something that doesn’t yet exist, and a properly organized corporate structure will protect you from liability. Plus, if you don’t have a company, there are no company financial statements that can be reviewed by an accountant. So organize your company: we think a Delaware C corp is the way to go, although other alternatives are possible.
• Have you decided what type of securities you are selling? Common stock? Preferred stock? Convertible notes? If you are a recently-formed C corp and you want to sell preferred stock that you haven’t created yet, it’s possible to leave the legal paperwork till later in the offering, when you know you are going to have enough money to pay the legal fees for that process. But be sure that your disclosure (the stuff you write to attract investors, which gets posted on the intermediary’s site and filed with the Securities and Exchange Commission) explains that that is what you are doing.
• Have you chosen your intermediary? That’s the online funding platform, which can be a broker-dealer or a crowdfunding portal, a new type of regulated entity. Most intermediaries have an onboarding process that might include checking out whether you are legitimate, and whether you meet the platform’s requirements (some take all sorts of companies; some focus on specific types of company or particular locations). That onboarding process may take a few days.
• Have you set a valuation? If you are selling common stock or preferred stock, the price you ask for it and the amount of stock you are offering will imply a particular valuation for your company. The intermediary might help you establish a valuation, but you’re going to have to be prepared to defend that number to potential investors through the comment process that all intermediaries will have to provide.
• Has your board or manager authorized the offering? If you are a C corp, your board of directors will likely need to authorize the offering of securities. Check your bylaws for the rules. If your company is an LLC, the manager may need to take some action, like notifying members. Check your operating agreement.
• Have you written the required disclosure? Bear in mind that there are two places where all the information about the offering has to go: the intermediary’s website and the Form C that you file with the SEC. All the information required by Rule 201 of Regulation CF has to go in both places, and at the time of filing it has to be the same. You can’t have anything on the intermediary’s website that isn’t included in the Form C, and vice versa. (Eventually you may add updated information to the intermediary’s site; you won’t have to file an amended Form C unless that new information reflects a “material” change.) If you don’t understand what SEC requirements like “beneficial ownership” or “description of financial condition” mean, companies like CrowdCheck can help you make sure that you comply with disclosure requirements.
• Have you made your video and included a transcript in your Form C? Many intermediaries require you to produce a video. You can’t file videos on the SEC’s EDGAR system, so you’ll need to add a transcript to the Form C.
• Have you engaged an accountant and got your financial statements reviewed? Don’t think that because a CPA helped file your taxes that your financials were “reviewed”—this is an entirely different process. If you don’t have a set of financial statements that include a letter from an accountant that is headed something like “Independent Accountant’s Review Report,” you are probably not compliant. Make sure the financial statements are not too old: right now they will have to cover the two-year period to December 31, 2015 (or a shorter period if you haven’t existed that long).
• Have you got your SEC CIK codes? There are the codes that the SEC uses to identify companies (and people) that file disclosures. The process only takes a day or two, but you can’t file a Form C without getting the codes. Part of the process involves getting “Form ID” notarized. It’s becoming increasingly difficult to get things notarized. Many banks will only perform this service for their own clients, and some notaries will run a mile when you say you want something notarized for the SEC, so make sure you find a notary that will provide this service for you and with respect to this particular form!
• Have you engaged a transfer agent? You are required to have a reliable way of keeping track of your investors. A stock transfer agent that is registered with the SEC is the best way to go here, and there are several reputable stock transfer agents who have very reasonable rates. Many intermediaries are setting up standardized arrangements with transfer agents.
• Do you have a bank account in the company’s name? If your fundraise is successful, the money collected from investors and held in escrow will be released to you. Do you have a place to put it? That is, a bank account in your company’s name. Putting money that’s supposed to go to the company into your personal bank account is likely to get you sued, and the escrow agent probably wouldn’t release it to you anyway.
• Have you made sure that everyone in your company knows the rules about publicity? The SEC views all discussions of securities offerings as being offers of securities themselves. Offers of securities (which cannot be made till May 16th in any case) can only be made in two ways:
– On the intermediary’s website, and
– Through VERY limited notices, which include no more than a statement that an offering is being made, a description of the terms of the offering and a brief description of the company’s business. These notices must direct the reader to the intermediary’s site.
Remember that selling securities, even through crowdfunding, is highly regulated. While the SEC isn’t going to be playing “gotcha” for innocent foot faults, it is going to be monitoring this market closely. Make sure you know what you are doing or hire advisers who do.
Sara Hanks is a securities lawyer and cofounder and CEO of CrowdCheck, an Alexandria, VA-based firm that provides due diligence, disclosure and compliance services for online capital formation.