Reg A and Reg CF: Funding Portals and Broker Dealers and Online Investment Websites, Oh My!

Part Four of a Six Part Series Comparing Regulation A and Regulation Crowdfunding

See Part One Here, Part Two Here, and Part Three Here.

Once again, my AI image generator does its best to illustrate the title of this article. I’m fairly sure funding portals and broker-dealers are not really fighting to the death in an ancient Roman arena, and even if they are – the funding portal would probably have two swords like the broker-dealer, and not try to “gladiate” with one sword and one sword handle. And what the hell is a “funding poltal” anyway?

The two equity crowdfunding provisions of the JOBS Act, Regulation A and Regulation Crowdfunding (Reg CF) are very similar laws but also very different. While both opened the door to new capital formation for private companies — particularly allowing anyone to invest in these companies and not just wealthy people — the way these securities offerings are actually executed is very different and subject to hundreds of pages of SEC rules. One of the biggest differences is where a company may hold these offerings online. That is the subject of this new article in my series breaking down the similarities and differences of the two groundbreaking equity crowdfunding laws.

Can I hold the offering on my own website?

For Reg A — yes you can. For Reg CF, no you cannot.

Regulation A does not specify where the securities offering that can raise up to $75M may reside online. As a result, a company may hold the offering on their own website if they want. Or, they may host it on a website they do not own. Or, they could hold the offering on both at the same time. Reg A gives a company plenty of choices when it comes to where the offering is found online.

Not so with Reg CF. With Reg CF, your company may raise up to $5M but it must only reside online on an “intermediary” website. This means either a broker-dealer owned website, or a new entity that came into existence with Regulation Crowdfunding called a funding portal. A funding portal is a FINRA and SEC regulated entity that may only host Reg CF offerings. A funding portal is much like a mini-broker dealer — but with significant restrictions as to what it can do to help market your offering. You cannot hold a Reg A or any other kind of securities offering on a funding portal… they are exclusively for Reg CF offerings.

Why would I host a Reg A offering on my own website?

Let’s talk about Reg A where you can host the offering on your own website. If your company already has a large engaged customer base, social media audience, fan base or other large group of people who love what you do, then holding a Reg A offering on your own website is often a great idea. Or, if you have a large marketing budget to send huge numbers of people to your offering page, why not send them to your own website rather than somewhere else? You will still need software to process the investments, and in most cases you will need a broker-dealer behind the scenes to make the offering legal and compliant in some of the 50 states. But hosting the offering on your own website brings about many advantages.

First, you have complete control of the design and content on your own site. This keeps your branding consistent and the look and feel of your Reg A offering can be the same as the look and feel you already established for your company.

Second, you control the traffic. You are directing potential investors to come to your site, and not to a third party site. Think of it this way — a majority of the people your company drives to the Reg A offering page will not invest. They may watch your video and read about your company, but statistics show that only a small percentage will actually pull the trigger and become investors. On the other hand, every one of those non-investors now knows more about your company and your brand. They may well become customers, clients, social media followers, and fans. They can buy your product online or use your services perhaps, even if they don’t invest. If they were sent to a third party site and decided to not invest, they would then need to leave that site, find your company site, and then make a buying decision to have the same potnetial economic effect as if you just sent them to your site to begin with.

Third, you control the data. This is the most important one, and the fact that many third-party sites that host offerings do not tell you. When you host the offering on your own site, you have access to all of the data from the traffic you send there. When you are on someone else’s site, you may not have access to any of that data.

The most obvious benefit to this for experienced e-commerce folks is the ability to re-market to traffic. Through the use of pixels, Google Tag Manager, cookies and other well-known marketing methods, someone who came to your website may be remarketed to — but if they are sent to someone else’s site you may not have complete control over this. Think about how you look at that new pair of shoes online, and then for the next week all you see are those shoes in your social media feed, in ads alongside websites you visit, and even in emails. That could be your company reminding someone who is a hot or warm lead — they were interested enough to visit your Reg A offering page once — to take a second look and to get them over the investment finish line. Or, even if they do not invest, they can be marketed to as customers of your products and services.

The second most important benefit, and one somewhat related to the retargeting I mentioned above, is the ability to market to “abandons” or those who not only got to your offering page, but started to invest then dropped out for some reason. In my experience from being involved with a lot of Reg A and Reg CF offerings, at least 25% of people who start the investment process typically abandon the investment for one reason or another. If you are hosting the offering on your own site with software giving you transparency — you now have the ability to directly market to those folks who abandoned. Email marketing, text messages, phone calls — you know who these people are and you have their email address and phone number. Closing these hot leads can means hundreds of thousands of dollars, or even millions of dollars, in many cases. But if you are on someone else’s website, and they do not provide you with information about who abandoned the investment application, you left a lot of people who were interested in vesting and a lot of their money sitting on the table.

Should I use a funding portal for my Reg CF offering, or a broker-dealer?

Given that you have no choice with Reg CF and must hold the offering on someone else’s website, you have a choice to make. Do you want to hold it on a funding portal alongside dozens of other companies trying to raise capital from the same audience, or do you want to use a specialized broker-dealer that sets up a webpage they control for you that looks as much as possible like your company website?

This is a complicated question with no one-size-fits-all answer. But you have to pick one or the other because Reg CF requires you to only have the offering hosted in one place — unlike Reg A where you could have the offering simultaneously hosted in several places.

Let’s look at the factors that help determine whether your Reg CF offering is better off on a funding portal or a broker-dealer website.

Fees

Look at the fees charged by funding portals and broker-dealers in detail. As a general rule, broker-dealers will charge lower fees than a funding portal — but that is not always the case when you factor in all fees.

The “success fee” meaning the percentage of every dollar you raise that is paid to the funding portal or broker-dealer can range dramatically. Some funding portals charge upwards of 7% for this fee, while some broker-dealers charge far less. Some funding portals also charge an equity fee, where they get paid an additional fee of your company’s equity based on how much money you raise. Broker-dealers may also charge this equity fee for Reg CF.

That fee is only a piece of the puzzle to consider. The other three fees to be aware of are (a) any up-front fees (b) payment processing fees and (c) escrow fees.

Many funding portals and broker dealers charge up-front fees — even though they may defer those until your first closing. These fees can cover due diligence, setting up offering pages, and much more. It is not unusual to see this fee in the $5,000+ range. Make sure you factor this fee in when making a decision.

Payment processing fees are a whole different world, and can be very difficult to understand in some cases. When someone invests using a credit card, debit card or an ACH bank-to-bank transfer, there are companies in the middle of that process that charge to move the money around — these are the payment processors. Credit card fees can be 4% or more, which means, as a company, you are really only getting 96% of what you raise if you have to pay this processing fee. Keep in mind, you may be able to pass that fee along to investors — but how many of us cannot stand seeing that we as consumers are paying an extra charge when we buy concert tickets for example. You will lose some investors when they get to check out in the investment process and see that their $500 investment is really a $520 investment to get $500 worth of stock.

Make sure you get detailed payment processing fees from the funding portal or broker-dealer, including what fees you are charged if someone cancels their investment or attempts a chargeback. When you add up payment processing and the funding portal success fee, you are often at 10% or more of every dollar you raise going to pay for these services. Factor all of this in to your final decision as to where to host the Reg CF offering, and whether to pass some of those fees along to investors.

Escrow fees are the last piece of the puzzle. Reg CF offerings require a “qualified third party” — typically an escrow account — to hold funds from investors until they are disbursed to your company when you hold a closing. These escrow accounts come with additional fees — and those fees need to be factored into your hosting decision. Opening the escrow account alone can be a $1000+ charge, and breaking escrow to hold a closing typically also has a fee associated with it. Wiring your funds to you also has a fee attached. These fees can add up, especially if you hold multiple closings during your offering.

Data Transparency

I mentioned this earlier but this is something you absolutely need to know before you go with either a funding portal or a broker-dealer. Ask them what data you get from the investors you are sending to their website using your marketing dollars. Ask them if you get this data in real time through a dashboard. Most importantly, ask them what data you get when someone starts to invest, but abandons the process.

As I publish this article, major players in the funding portal industry still refuse to share any abandon data with companies using their services. So that 25%+ of people you paid to send to the funding portal who abandon the investment process — you will never even know they existed because some funding portals will not share any of that data with you — and they make some specious claims as to why they cannot share data with you that you have every right to possess. Sure, the funding portals know who those people are. The funding portal has their contact information. You paid for that investor to go to the funding portal and you do not even get the benefit of trying to close that investor. But you can be assured that those people you paid for are being marketed to by the funding portal for other companies raising capital on their site. At this time, you have a far better chance at transparency of this data with a broker dealer like Cultivate Capital (whose parent company I own part of, for full transparency) that specializes in Reg A and Reg CF offerings, and who gives you access to all of the available data rather than hiding it from you like some funding portals will do.

Target Amount. Another factor to keep in mind when choosing a funding portal or broker-dealer involves your “target” amount that Reg CF requires. Every Regulation Crowdfunding offering must set a target amount that must be raised in order to hold a first closing and get your new capital into your company bank account. Most of the bigger funding portals are now requiring that you raise the first $50,000 or more yourself before your company’s Reg CF offering is even shown to the funding portal’s investor base. This makes it difficult for a small company trying to raise capital on a tight budget, as you will not have access to this money to use for marketing the offering or otherwise until that target threshold is met.

Broker-dealers tend to allow you to set your target amount at a lower number to hold your first closing. They tend to not be as restrictive on how often you can hold a closing and get your money after the first closing when the target amount has been met.

What Other Rules Do They Impose? Both funding portals and broker-dealers may impose additional rules to how your offering can be structured. You need to find out up front what those rules are, as they may not fit within how you want your company’s investor base to look. For example, some funding portals will try to push you into using a SAFE, preferred equity, or some other structure that you are may not be comfortable with. A SAFE, in particular, can be confusing to new investors who may love your company already, but do not understand what they receive when they invest in an “agreement for future equity” versus a straightforward “here are your shares of stock in our company!” Ask about these requirements up front before you decide — and remember — when you are going to your customers, fans, social media followers and the like — the more difficult it is for them to understand their potential investment, the more likely they will not invest.

Audiences. This is one area that is very tricky and I can tell you without question based on my experience that many companies get sucked into picking a funding portal because of the number of “investors” on the funding portal. But beware of thinking that a funding portal with a large number of users means your offering will get funded by those people.

Let me use the exact words of one of the biggest funding portals to prove to you that the grand majority of investors in your offering will not come from the huge database of possible investors that the funding portal so highly touts as the reason to pick them.

“Do you have a strong community of friends, supporters, fans, or customers? Remember, about 67% of a typical (Reg CF offering) comes from the founder and team’s community, and the other 33% comes from our community. The first $50,000 comes entirely from your network, so it’s crucial to have the support of your community for a successful… round.”

While this funding portal says 33% comes from their “investors” my experience industry-wide is that it is almost always closer to 5–10% in most cases, and that 90–95% of investors come from the company raising capital and their marketing efforts.

Think about it logically. All of those investors on the funding portal got there because some company raising capital sent them there to invest in that particular company. Let’s say three of those companies whose investors are now part of the funding portal’s database were selling (a) glow-in-the-dark talking condoms (b) a moonshot flying car in the very early stages of development and (c) a cutting edge tech device that made clipping your toenails easier. Your company is a successful pizza restaurant chain that want to raise capital to expand and open new locations. Do you think there is any overlap in interest for your company and the condom, flying car or toenail clipper investors? No, there isn’t.

But once you send thousands of your pizza-loving customers and fans to the funding portal and they invest — the number of investors on the funding portal goes up again! And now your pizza fans and customers who became your investors are now getting marketed to constantly by the funding portal who is trying to sell your investors stock in companies that make glow-in-the-dark talking condoms, flying cars and hi-tech toenail clippers.

Broker-dealers may or may not do the same thing, so this is a question to ask before you make your final decision. But whatever you do, weigh the value of +/- 5–10% of the money you ultimately raise in a Reg CF offering coming from the funding portal’s “millions of investors” versus the 25% or more of investors you sent to the funding portal that abandon the investment process, but the funding portal never gives you any of their data to remarket to.

Making a decision about where to host your Reg A or Reg CF offering is more complicated than most think. It’s easy to get sucked in by the hype of big audiences of possible investors and to think this is a short cut to funding your company. It’s also easy to simply look at fees and to go with the lowest success fee. Consider all of the options, the money, the data, and everything else above before making a decision as to where your investors will see your equity crowdfunding offering.

#regulationA, #RegA. #RegCF, #regulationcrowdfunding, #equitycrowdfunding, #crowdfunding, #RegAPlus, #funding, #capitalraise, #fintech, #JOBSAct, #capitalraise, #smallbusiness, #smallbusinesstips, #securities, #securitieslaw, #equity, #StartupLife, #startups

Coming next week: Part 5 of the 6 part series: Specific Offering Structures and Liquidity. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A vs. Reg CF: Which JOBS Act Equity Crowdfunding Regulation Is Right For You?

When the JOBS Act was passed into law in 2012, small businesses in United States were given the opportunity to finally be able to tap into the crowd – everyday people – to raise capital even if the company was a startup, early stage or otherwise not going to be able to attract private equity or venture capital money. After 80 years, the heart of the American economy, small businesses, could finally raise capital from anyone, not just wealthy or well-connected individuals or institutions, and still remain a private company.

Over the past few years, two provisions of the JOBS Act have allowed small businesses (and some large businesses!) to raise billions of dollars from investors that for decades would not have been allowed to invest. Regulation A (also called Reg A or Reg A+) and Regulation Crowdfunding, or Reg CF as many call it, changed the landscape for small businesses that needed money to grow. While most people decide which of these provisions to use based on the amount of money they are trying to raise (Reg A allows an offering of up to $75M in one year while Reg CF is limited to $5M per year) there are many factors to be considered by a company seeking capital that go far beyond the simple question of “How much do I need to raise?”

 As a securities attorney who has handled many of both types of offerings, and as a crowdfunding consultant who has helped direct the marketing and other non-legal facets of both Reg A and Reg CF offerings, I have some insights that most do not have. In this new series of articles, I’ll share many of the things companies need to consider when they choose which regulatory exemption from SEC registration to use in order to raise capital from the crowd.

 I’m going to break this down into several articles that I will post over the next few weeks to save you from having to read the War and Peace version of how to democratize capital raising all at one time!

 Also, note that Reg A involves two tiers: not-so-coincidentally named Tier I and Tier II.  because Tier I has limited use for most companies raising capital and is rarely used compared to Tier II.

 This week: The Basics.

 Who can raise capital?

 For both Reg A and Reg CF, only a company (usually a corporation or an LLC) can raise capital. Individuals cannot raise funds with either Reg A or Reg CF.

 Regulation A is only available only to companies organized in and with their principal place of business in the United States or Canada.

 Regulation CF requires the company raising funds to be organized under the laws of a state or territory of the United States or the District of Columbia. There is no “principal place of business requirement” for Reg CF which opens the door to foreign companies using the law with some restructuring.

 Who can invest in a Reg A or Reg CF offering?

 Anyone, regardless of their level of income or net worth, may invest in a Reg A or Reg CF offering. This includes anyone in other countries, as long as it is legal in their jurisdiction to invest and assuming there is no ban in the United States on that person or anyone from their country investing.

 Are their limits on how much someone can invest in a Reg A or Reg CF offering?

 There are no limits on the amount any person or entity may invest in either type of offering, if the investor is “accredited.” An accredited investor is defined in 17 CFR § 230.501(a) and there are many criteria that allow one to meet the definition, but the most common two categories are (a) any natural person whose individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000 (not including the person's primary residence not included as an asset and indebtedness that is secured by the person's primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, not included as a liability or (b) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

 For an investor who is not accredited, they may still invest in a Reg A or Reg CF offering. In both cases, the amount one may invest is limited. In the case of Reg CF, it is further limited by the amount that person has invested in other Reg CF offerings in the past 12 months.

 I’d explain the formulas behind the limitations here, but it would only confuse you and make you ask yourself why these two provisions of the JOBS Act that basically allow companies to do the same thing to not have the same formula to determine how much money a non-accredited investors is allowed to invest. The good news is that this calculation is done behind the scenes through software that makes it fairly easy for an investor to determine how much they are legally allowed to invest. The other good news is that Congress didn’t put the burden on companies using Reg A or Reg CF to check the math or verify the numbers an investor uses. Unless the company is aware the investor is not “accredited” the company is allowed by law to rely on the investor’s representations.

How much capital can a company raise?

 In any one year period, a company may raise up to $5M with Reg CF.

 In any one year period, a company using Reg A may raise up to $75M with Tier II of Regulation A, and up to $20M with Tier I. This is commonly misconstrued to mean any company raising between $1-$20M must use Tier I, which is not true. A company may raise from $1-$20M with Tier I, and from $1-$75M with Tier II.

 I’m not going to get into the details of Reg A Tier I versus Reg A Tier II in this article for one simple reason: the use of Reg A Tier I is very limited for most companies. The reason for this in a nutshell comes down to one major factor: Reg A Tier II allows a company to raise capital anywhere in the U.S. without having to comply with every state’s Blue Sky laws while Tier I is the opposite and requires the issuer to comply with those laws in every state where investors will be solicited. Compliance with state by state Blue Sky laws is extremely expensive and could easily double or triple the cost of getting a Reg A Tier I offering live. Imagine having to have your offering circulars to raise capital undergo review by each state’s securities regulators, instead of just the SEC. Imagine the legal bills of trying to come up with filings in each state that are the same, and every time one of 50 state regulators or the SEC tells you to change one random paragraph, then having to go to all the other states again to make sure that they are happy with the change one regulator 2,000 miles away required. Imagine watching your bank account get drained as you pay even more attorneys’ fees.

 Suffice to say, Reg A Tier I is an often excellent choice to raise capital if you plan to only target residents on one state (an example would be a local restaurant who wants to open more locations in the same city), it is not a great choice for a company trying to reach investors across the fruited plain.

 How much does it cost to raise capital?

 For a company that is already formed, typically it costs approximately $15,000-$25,000 in out of pocket expenses to get a Reg CF offering live. The costs after the offering is live typically involve mostly marketing expenses, which can vary dramatically from case to case.

 For a company that is already formed, typically it costs approximately $50,000-$75,000 in out of pocket expenses to get a Reg A offering live. Just like Reg CF, the costs once the offering is live typically involve marketing expenses which can vary dramatically.

These numbers are general guidelines, and the cost could be far lower, or much higher, depending on all of the circumstances.

What legal documents do I have to prepare?

In order to start raising capital with a Reg CF offering, a company must file a document called Form C with the SEC which contains certain required legal disclosures, risks factors, company information, information about the securities you are selling, financial statements and more. Note that some funding portals – who are a sort of mini-broker-dealer – will offer to draft and file the Form C for you to save money. Before taking this extremely risky chance, consider the risks of allowing non-lawyers to draft legal documents for you that investors will be relying upon. Your company, and perhaps the principals and directors of your company, will be on the hook for whatever is contained in that Form C filing.  There are potential criminal penalties for those whose names are signed to these documents if they are not prepared correctly. Securities laws are complicated and paying a seasoned securities lawyer with Reg CF experience to draft and file this important document for you is something most prudent companies do.

 In order to start raising capital with a Reg A offering, a company must file a document called Form 1-A with the SEC. Typically, this is a far more extensive document than Reg CF’s Form C, even though it contains much of the same basic disclosure requirements. In reality, Form 1-A is basically a shorter form of a prospectus used by companies that hold an IPO. Form 1-A undergoes a review process with the SEC and must be “qualified” before you can go live and start raising capital.

 What financial and accounting requirements must I meet to file my proposed offering with the SEC?
This can get complicated, so I’ll give you the basics which apply in most situations.

Reg A is simple. With Tier II, all offerings must include up to two years of financial statements audited by an independent CPA. If your company is less than two years old, you must have audited financial statements from inception to the present.

 Reg CF is a bit more complex, and what financial statements must be included in your SEC filing depends on how much you plan to raise, and whether this is your company’s first Reg CF offering or not and whether the date of the offering is more or less than 120 days after the end of your company’s prior fiscal year.

 The basic rules are:

 If you are planning to raise less than $124,000, you may disclose internally created financial statements for the past two fiscal years certified as accurate by your management.

 If you are planning to raise between $124,000 and $618,000, you must disclose independent CPA reviewed financial statements for the past two fiscal years.

If you two are planning to raise between $618,000 and $1,235,000 and this is the first time your company has used Reg CF, you must disclose independent CPA reviewed financial statements for the past two fiscal years. If you have previously used Reg CF, you must disclose independent CPA audited financial statements for the past two fiscal years.

 If you two are planning to more than $1,235,000, you must disclose independent CPA audited financial statements for the past two fiscal years.

 Also, for Reg CF, if your company has audited financial statements available for the relevant time period, you must disclose those.

 After you start raising capital, are there any ongoing filings to make with the SEC?

 For both Reg A and Reg CF, there are ongoing reporting requirements. While none of these are as expensive or burdensome as those required of fully registered public companies, they are very important to remain compliant with federal securities laws. The main reports to be filed are discussed below, although other reports may be required.

 Reg CF only has one major ongoing SEC reporting requirement. An issuer that sold securities in a Regulation CF offering is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year and must post the report the company’s website. The annual report requires similar financial information to what is required in the Form C offering statement that is initially filed to start a Reg CF offering, but the financial statements do not need to be audited or reviewed by an independent CPA. This filing requirement ends when one of five events occurs:
(1) the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);

(2) the issuer has filed at least one annual report and has fewer than 300 holders of record;

(3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;

(4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or

(5) the issuer liquidates or dissolves in accordance with state law.

 At that point, the issuer may file notice on Form C-TR reporting that it will no longer provide annual reports.

 For Reg A, Tier II, there are more reports to file to remain compliant. Similar to Reg CF’s annual report on Form C-AR, Reg A issuers file an annual report on Form 1-K within 120 calendar days of the issuer’s fiscal year end. Form 1-K requires two years of audited financial statements. It also requires an update of information from the issuer to information previously filed. It also requires disclosures relating to the issuer’s business operations for the prior three fiscal years (or, if in existence for less than three years, since inception) as well as related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors, including certain executive compensation information, management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

And requires an update of information from the issuer requires issuers to update information previously filed and to provide disclosures relating to the issuer’s business operations for the prior three fiscal years (or, if in existence for less than three years, since inception) as well as related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors, including certain executive compensation information, management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

Additionally, Reg A Tier II requires a semiannual report to be filed on Form 1-SA within 90 calendar days after the end of the first six months of the issuer’s fiscal year. Form 1-SA requires issuers to provide disclosure primarily relating to the issuer’s interim financial statements and management’s discussion and analysis of the issuer’s liquidity, capital resources, and results of operations.

Reg A also requires an issuer to file a “current report” on Form 1-U within four business days of the occurrence of one (or more) of the following events: fundamental changes; bankruptcy or receivership; material modification to the rights of securityholders; changes in the issuer’s certifying accountant; non-reliance on previous financial statements or a related audit report or completed interim review; changes in control of the issuer; departure of the principal executive officer, principal financial officer, or principal accounting officer; and unregistered sales of 10% or more of outstanding equity securities.

 How fast can I get an offering live?

 This is a hard question to answer because there are so many variables. One variable – how long it takes your company to get its financial statements done - almost always takes longer than expected and without those statements, you cannot file with the SEC under Reg CF or Reg A.

Some companies do not have their books in order, or their books are not to GAAP (Generally Accepted Accounting Principles) so there can be delays getting the basic financial statement requirement complete which holds up the entire process.

 But realistically, I tell my law firm clients that it is about a 3 month process to get a Reg CF offering live from the time I am hired, and a 4-6 month process to get a Reg A offering live. That being said, there are times I have been able to get an offering live on a shorter timeline, and times it took longer than those estimates.

 Coming next week: Part 2 of the 6 part series: How Does a Company Receive The Capital It Raises? Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Everything you wanted to know about crypto offerings but were afraid to ask

With Securities and Exchange Commission Chair Jay Clayton making the public announcement last July he believes every ICO he’s seen is a security, every company in the cryptocurrency, blockchain and token world was put on notice that raising capital by selling coins or tokens was entering a different phase in the United States. As a result, securities lawyers like myself, have been flooded with calls and requests for our services.

I was interviewed by one of my favorite journalists, Tony Zerucha at Bankless Times, about how ICOs, token offerings and the like can be legally done these days and you can (and should) read the entire published article here. For those who want the CliffNotes version, here you go:

• Any U.S. company that wants to raise capital by selling coins, tokens or cryptocurrency, and any company that wants to access the 325 million potential investors who live in the United States, must follow securities laws at this point. With my work in the JOBS Act legal realm, I have been been talking to dozens of crypto companies. Because the grand majority will use one of two JOBS Act provisions: Regulation D, rule 506(c) (if they limit the offering to accredited investors), or Regulation A+ if they want to access the entire U.S. population, those of us who specialize in JOBS Act offerings and equity crowdfunding have become quite popular.
• I've lost count of the number of companies I have had to turn down at this point because they already have done something that is not compliant or legal. The first step is to make sure each company has not already screwed up what they want to do because they were not well informed as to how they should proceed. I ask some pretty simple questions to start, and you would be surprised at how few companies have the right answers.
• I start with the basics. I ask every company to explain to me in a sentence why they need a token and how blockchain is integral to their business. If I had a Bitcoin for every company that came to me with a concept that used the term “blockchain” or “token” without even knowing what it meant or how it was going to be used, I’d be a Bitcoin billionaire. Or maybe a Bitcoin millionaire, depending on the fluctuating exchange rates.
• You would be amazed at how many people cannot answer this question in one hour, much less one sentence. Some businesses do not need a blockchain, or a token. For example, I do a pretty good job of running a law firm without a blockchain. A pilot does not need a coin to fly an airplane. A chef does not need a utility token to cook a perfect steak. I realize that blockchain technology is revolutionary in many ways for many things. But, you can’t just throw the term “blockchain” into every business model. If a company is not able to explain in simple terms why they need blockchain in their business, they probably don’t need blockchain, and probably should not be doing a coin offering.
• I hate it when I hear, “Kendall, our pre-sale is next week. Would you take a look at our white paper and be sure we are okay?” If they are already online soliciting for their sale, there is a good chance they’ve already violated a law or two. And if they already have anything scheduled in terms of a sale, it’s probably too late for any securities lawyer to help unless they are willing to pump the brakes.
• I also hear this one a lot: “We’re okay because we’ve hired” followed by ‘a top ‘ICO’ ‘Blockchain’ or ‘Crypto’ consultant on our Board of Advisors.”  I ask these companies if their advisor is a securities attorney who has experience with the JOBS Act and securities token offerings, and then I look at my iPhone to see if the call has been disconnected because there is always dead silence. Ninety-five per cent of these “crypto experts” have absolutely no idea how to do a securities law-compliant token offering in the United States, and many charged these companies a lot of money to give them bad advice.
• I received a ton of emails, most of them spam, over the past few years with the newest hottest ICO offers, and I saw the news about the crazy amount of money being raised. I think most securities lawyers saw these ICOs raising millions with no disclosures, no investor protections, no financial statements and no real information revealed other than hype and the repeated use of the term “blockchain.” Not only were these obviously sales of securities, many of them were just blatant scams that couldn’t pass a sniff test in allergy season. No, I can’t say that seeing the SEC jump in and state regulators filing enforcement actions and class action suits being filed was at all surprising.
• A company needs to assume that what they are selling is a security, because the SEC is certainly going to assume that. You can’t call something a “utility token” and assume you can get away with not following securities laws. It does not matter what you call it, if it cannot pass the Howey Test, or if you are selling it with the idea that the purchaser may be buying something that will increase in value over time, you should treat it like a security. There are well defined exemptions that allow U.S. companies to sell securities without registering, so follow those laws in your token sale, and the capital raise portion should be legal.
• To me, Reg A+ is the holy grail for token security offerings. Everyone can invest, not just rich people. The tokens sold can immediately be listed on an Alternative Trading System (ATS) and are liquid and tradable. I love that the SEC must qualify a Reg A+ offering before it can be sold. This means if you have any problems in your offering, there is a likelihood it is going to be flagged by someone at the SEC before you start selling, rather than after when something goes wrong like with Reg D or Reg S. It is not cheap to do, but nowhere near as expensive as an S-1 and full registration with the SEC. You will have ongoing reporting requirements and a company is limited to raising $50 million per year. While most companies would be thrilled with raising $50 million per year, this limitation would prevent some companies from using Reg A+ if their capital needs are higher. That said, a Reg A+ raise can be done in conjunction with a Reg D offering, if it’s structured correctly, to raise more that the limit.
• The big questions are: What happens after someone purchases the token or coin? Can they sell it outside of an ATS? How? Can they use it as a currency? Can they use it as a utility token? There is a huge amount of uncertainty as to how the courts and regulators are going to treat security coins and tokens after they are in the hand of investors. This is one reason why I like Reg A+ so much. As soon as the offering closes, the Reg A+ securities tokens may be listed on a secondary trading platform and be bought or sold. This immediate liquidity is a huge selling point. There are rules and restrictions that limits sales under Reg D and Reg S, so this is not possible with either of those exemptions.
• My experience is that the SEC is very open to this new method of raising capital, as long as you follow securities laws and protect investors. The SEC is well aware that if they shut down all crypto offerings, another country will become the leader in this area, and billions of dollars of capital will flow out of the U.S. They do not want this to happen, so they are working with securities lawyers and their counterparts at the CFTC, Department of Treasury, FinCen and others to try to find solutions. Yes, you have a target on your back if you do a crypto offering. But, as long as you have a justifiable legal basis in securities law for what you plan to do, the chances are the SEC is not going to stand in your way.

As I said in the interview, the days are gone of some random millennial plagiarizing a white paper found on Google while their tech geek buddy sets up a website to promote and accept Bitcoin for an ICO followed by millions of dollars magically appearing, unless those people want to risk going to jail or being sued.

Anyone who wants to do this right in the U.S. is going to need experienced securities counsel. They are very likely going to need a licensed broker-dealer. They are going to need a secondary trading platform. They are probably going to need accountants and maybe auditors. Doing this right is not going to be cheap. But, then again, getting sued or arrested and having your business shut down is far more expensive than simply doing this legally and compliantly from the beginning.

Read the entire interview here, to learn more:

Do You Need A Broker-Dealer For Regulation A?

In my role helping companies raise up to $50 million in new capital using equity crowdfunding, I am frequently asked if a company that wishes to pursue a Regulation A+ capital raise must hire a broker-dealer for the offering. I have written an in-depth article about this on Medium, which you can read here (if you like to read stuff lawyers write and enjoy footnotes and long-winded legal analysis). On the other hand, if you want the simple Cliff Notes version, keep reading below!

The simple answer to the title question above is that moving forward with a Regulation A+ offering without a broker-dealer attached is a dangerous move for an issuer, even though it technically can be done. However, if an issuer wants to sleep well at night and not worry that one of the 50+ state securities regulators or the SEC will come knocking on their door, then bite the bullet and hire a broker-dealer who is licensed in all 50 states and by FINRA for your Regulation A+ offering.

The big issue related to hiring a broker-dealer for most issuers is the cost. A broker-dealer will likely have up front due diligence costs, and will charge a percentage of the funds raised in the offering as a commission. This raises this important question: Will an issuer save money by not hiring a broker-dealer? 

Up front, maybe. In the long run, probably not. As illustrated below, in order to go forward on a Regulation A+ offering without a broker-dealer, an issuer may have to register as a “dealer” in many states and at the federal level, which will cost thousands in legal and filing fees. Assuming everything is done correctly and runs smoothly, registering with all of these entities could involve hefty up-front costs, and in most cases far more than the broker-dealer would have charged for due diligence. More importantly, if anything is done wrong in that registration process in any of the venues, or if any state or federal securities regulator thinks something was done wrong, then there will be huge costs to fight the enforcement actions that could arise all over the country.

Why do companies even consider taking on all of this risk by not hiring a broker-dealer?

Regulation A+ of the JOBS Act is silent as to whether an issuer must hire a broker-dealer in order to sell unregistered securities to the general public under this JOBS Act exemption. Given this silence, most legal authorities agree that the law and SEC rules related to Regulation A+ do not, on their own, require an issuer to hire a FINRA licensed broker-dealer to sell their unregistered securities.  Therefore, some issuers feel this is enough of a justification to go at it without a broker-dealer.

What these companies are missing is that the text of Regulation A+ and the SEC regulations related to the statute are not the sole consideration in this matter given that securities are being sold. Other state and federal laws and regulations that regulate who may sell securities may prevent an issuer from selling their own Regulation A+ securities without a licensed broker-dealer in some jurisdictions. The JOBS Act waiver of state Blue Sky review does not necessarily prevent the states from regulating who can sell Regulation A+ securities in their state. Because each state has its own set of laws related to who is allowed to sell securities, who must be registered to do so, and under what circumstances securities can be sold by that entity, there are valid concerns that a state regulator could impose significant penalties on an issuer who chooses to sell its Regulation A+ securities within that state, without a broker-dealer licensed in that state.

So, you ask, what is the worst case scenario if a company decides to try to save a few dollars, and sell their Regulation A+ securities on their own? Let me give you the scenario that would keep me awake at night, and the one that typically compels me to advise my clients to hire a broker-dealer and not go at it alone:

Let’s say the company sells its Regulation A+ securities to a little old lady in Florida, without using a broker-dealer registered in Florida. The company does not do well, or the stock is listed on an exchange and the price drops. Little old lady hires a lawyer, and wants her money back. She also contacts the state securities regulators in Florida, and tells them about this mean and awful company that took her retirement savings away from her.

The lawsuit and the state securities regulators review will probably show that the company did not comply with every aspect of Florida securities law, in particular, by not hiring a broker-dealer (which would have rendered the case moot).

Do you think a Florida jury is going to side with a company that violated state law and sold stock to the little old lady? Do you think securities regulators are going to help the little old lady, or the company that violated its state’s securities laws?

The result could be rescission of the agreement to sell the stock – meaning the little old lady gets her money back. There could also be rescission ordered for all investors in the state, meaning a huge financial problem for the issuer who has to give money back to everyone who invested, not just the little old lady. On top of that, fines and penalties could be ordered. And, to make matters worse, a court or the state regulators could extend the penalties against the officers and directors of the company personally, particularly if they were involved in selling activities themselves.

Ouch.

All avoidable by simply hiring a broker-dealer.

I’m not alone in my concerns here. Kat Cook is the Chief Compliance Officer for Keystone Capital Corporation, a FINRA licensed broker-dealer with experience in Regulation A+ arena and other areas of the rapidly emerging FinTech industry. Cook believes that this threat is very real of having to rescind all subscriptions agreements and return capital raised if a state securities regulator finds that local laws were not complied with. “Compliance with Reg A+ means that the issuer should hire a very knowledgeable JOBS Act securities attorney and retain a supporting broker-dealer to help…or prepare to give the funds raised back to the investors,” warns Cook.

If you want far more in-depth analysis and some state law citations that let you dig deep into this, click here https://medium.com/@KendallAlmerico/do-you-need-a-broker-dealer-for-regulation-a-7308535d9b19 and read my Medium article.

Kendall Almerico is an attorney based in Washington DC whose practice involves JOBS Act related securities offerings such as those involving Regulation A+ or Regulation CF. This article should not be considered as legal advice, and the opinions expresses in the article are personal opinions of Mr. Almerico and should not be relied upon by anyone as legal advice. Other lawyers may have different opinions. The topics covered in this article are very complex, and any company considering using Regulation A+ or selling securities in any manner should seek the advice of competent and experienced legal counsel before making any decisions related to the matters set out in this article.

BrewDog plc Gives Original Investors a 2,765% Return: Equity crowdfunding has a poster child.

Originally Published at Entrepreneur.com on May 10, 2017

BrewDog plc, the irreverent Scottish craft brewery that has built a successful international business through many rounds of equity crowdfunding involving 50,000+ online investors, recently announced that a U.S. private equity company has acquired approximately 22 percent of the company in a $264 million transaction. This minority investment values BrewDog at $1.24 billion.

BrewDog's Lineup of Craft Beer

Most importantly, this transaction allows BrewDog's “equity punks” -- the name for its shareholders who invested in the company through crowdfunding -- to sell a portion of their stock to the private equity firm, providing some liquidity to these investors. By doing so, BrewDog has offered a substantive response to critics of equity crowdfunding who wonder how small investors will benefit from these types of offerings.

Keep in mind, BrewDog is still a private U.K. company. Their shares are not publicly traded on any exchange, which also gives some liquidity for their early crowdfunding investors, despite the company remaining private. For those who invest in private companies, whether through crowdfunding or otherwise, we all know returns on private company investments before the company becomes public are few and far between.

James Watt, BrewDog’s co-founder, explains: “Shares purchased in Equity for Punks I are now worth 2,765 percent of their original value. Even craft beer fans that invested in Equity for Punks IV, which closed in April 2016, have seen the value of their shares increase by 177 percent in just one year.” The deal gives BrewDog plc’s army of equity punks the opportunity to sell 15 percent of their shares (capped at 40 shares per investor) at the $1.24 billion valuation.

BrewDog Founder Martin Dickie and James Watt

This has tremendous significance to the world of equity crowdfunding. With Regulation CF, where a startup company can raise up to $1 million online, and Regulation A (the “Mini-IPO”), where a company can raise up to $50 million online from anyone in the general public, the popularity of raising capital online grows every day. Crowdfunding has become a multi-billion industry in a very short period of time. But because the JOBS Act, the law that made equity crowdfunding legal, only went into effect in 2015, success stories with an exit for investors are rare. BrewDog's success, using U.K. laws very similar to the JOBS Act, and leading to a return on investment for those who backed the company online for the past few years, bodes well for the development of equity crowdfunding under the newer U.S. laws.

This is welcome news to those in the equity crowdfunding industry. It was not long ago that the $2 billion buyout of Oculus by Facebook caused the media and many rewards crowdfunding backers to lose their minds. Oculus had run a rewards-based crowdfunding campaign on Kickstarter that raised $2,437,429 from 9,522 backers. In rewards crowdfunding, no shares in the company are sold, but rather the backers received the virtual reality hardware and software in return for a donation. When Facebook acquired Oculus for a couple of billion dollars, some backers from the Kickstarter campaign went ballistic, claiming they did not receive a return on their “investment.”

At the time, a New York Times editorial and a Bloomberg column showed that even the media failed to grasp the huge difference between rewards-based (a donation) and equity crowdfunding (an actual investment). The Bloomberg article even accused Oculus of pulling off a scam because the supporters of its Kickstarter campaign did not get a share of the profits from the buyout. One blogger was so angered that he wrote an article with one of the better headlines in the history of blogging -- “I'd Rather Stick My Head In A Whale's Blowhole Than Play Facebook's Oculus Rift.”

As I pointed out at the time, each of Oculus’ 9,500+ Kickstarter backers knew that they were not investing in the company, and that they were not getting equity when they swiped their credit cards in exchange for an early version of Oculus’ new VR headset. Had equity crowdfunding been legal in the U.S. at the time, and had Oculus run the same campaign on an equity crowdfunding website, those who invested would likely have seen phenomenal returns. However, equity crowdfunding wasn’t legal at the time.

Now, equity crowdfunding has its poster child.

BrewDog has raised tens of millions in several equity crowdfunding rounds since 2010. They have built a community of tens of thousands of people who have not only invested, but who have also become brand ambassadors and evangelists for everything BrewDog. And now, those investors will have an opportunity to not only continue to savor the perks of having invested, like free beer and online discounts, but also to see a financial reward for their equity crowdfunding investment.

BrewDog plc's headquarters and Scotland brewery

Equity crowdfunding finally has a success story that should spur on the growth of this nascent industry. BrewDog has given us an example of how investing in equity crowdfunding offerings is far different than donating to a Kickstarter or Indiegogo campaign. Investors finally have an example of how an equity crowdfunding investment can bring them a very real return.

How Will Donald Trump's Presidency Affect Crowdfunding?

Image credit: Joe Raedle | Getty Images

Originally published at Entrepreneur.com on January 10, 2017

Donald Trump will soon be inaugurated as the country’s 45th president and will potentially impact the burgeoning crowdfunding industry in a "yuge" way. Before I share my thoughts as one of the country’s top crowdfunding attorneys, let me tell you what five industry leaders believe the Trump presidency will mean for crowdfunding.

Disclaimer: This is NOT a political article. For those on the right, please don’t send me red baseball caps embroidered with “Make Crowdfunding Great Again.” For those on the left, please do not label me or the crowdfunding leaders in this article as “deplorable” or worse.

Indiegogo has been at the forefront of rewards crowdfunding since the very beginning. Indiegogo’s co-founder and Chief Business Officer, Slava Rubin, had this to say: "It's obviously impossible to know exactly how the next four years will play out since the new administration hasn't moved into the White House yet. Trump's platform included easing up on banking regulations -- which the stock market has reacted well to -- and it will be interesting to see how that translates for equity crowdfunding. The one year anniversary of Title III is coming up this May, so that will be a good time to examine what kind of progress has been made under the new administration."

RocketHub was one of the world's pioneering crowdfunding portals and has developed into a global community for entrepreneurial growth through a partnership with luxury lifestyle network ELEQT. RocketHub's CEO Ruud Smeets shared his take on the Trump presidency.

“Any abrupt change in the political landscape is a challenge and can have ripple effects throughout one's business," Smeets said. "Having a strong support 'crowd' can be a great benefit to any entrepreneur, especially in times of change. The emerging Trump presidency may create more volatility, but it also holds the promise of potentially bringing less regulation and more freedom for innovation and entrepreneurship. That would be good news for alternative funding options like crowdfunding, which still is a highly regulated market space with certain barriers to growth. It remains to be seen though how Trump’s plans on healthcare, international trade, isolationism and any attendant currency effects will affect small business ownership as a whole.”

Roy Morejon, whose firm Command Partners has been one of the most prolific and successful PR and marketing agencies in the crowdfunding space said the initial effects of a Trump presidency seem to be positive for the crowdfunding industry. Recent meetings with top technology leaders from Apple, Microsoft, Amazon, Facebook, Intel and Tesla seemed to be productive with innovation and jobs being a top priority.

"With Trump's business background, American innovation and job creation should flourish," Morejon said. "At our crowdfunding marketing agency, we're seeing a flurry of activity in the equity crowdfunding space in hopes that Trump will alleviate some of the red tape with some of the current crowdfunding regulations.”

Ruth Hedges is one of the pioneers of the JOBS Act and executive producer of the Global Crowdfunding Convention, the largest and longest running crowdfunding convention in the country. Here are her thoughts on the Trump presidency related to crowdfunding: "As America enters uncharted waters with social safety net programs and medical insurance for 20 million people threatened with destruction, we'll need to call on crowdfunding to provide help to those people who will surely suffer, because crowdfunding is not red or blue, black or white, Christian, Muslim or Jew. It is not left or right, but showcases the best of our humanity. And it demonstrates the potential to bring together people from all backgrounds and beliefs to work for our common good as Americans."

Craig Denlinger is one of the go-to auditors for financial reports needed to comply with equity crowdfunding laws. His firm, Artesian CPA, has provided the SEC financial filings for several companies using Regulation A+ to raise capital. Denlinger said "while it is difficult to decipher between what Trump says and what Trump intends, I anticipate that Trump will be a positive force for the crowdfunding community based on his words and actions to this point. With the incumbent SEC Chair Mary Jo White set for early retirement next month, Trump is poised to appoint a more regulation-averse head of the agency looking to scale back on barriers to innovation and job creation. Trump’s planned federal hiring freeze and quotes such as 'eliminating two regulations for every one created' or 'rank all regulations and cut those least important' further confirm this belief.”

The experts have spoken. Here is my two cents.

The “crowd” is a dynamic group that effects change one dollar at a time. With its support, Pebble Watch raised $32,000,000+ in two Kickstarter rounds, BrewDog raised more than $40,000,000 through several equity crowdfunding offerings, and countless other ideas and businesses have been afforded the opportunity to succeed. Crowdfunding brings people together in a way that is truly American because political affiliation isn't a factor in the equation. Each project or offering can be a melting pot of Democrats, Republicans and maybe even Whigs -- anyone can support a business they like regardless of gender, race or religion. Even Congress managed to find common ground to pass the JOBS Act with bipartisan support.

Because navigating the legal maze of rules and regulations is presently the biggest thing hampering equity crowdfunding, President Trump will have a positive influence on the industry if he delivers on his promise to reduce regulations. Reducing regulations will slash attorney fees and compliance costs for companies wishing to use equity crowdfunding. I truly hope the Trump administration will remove unnecessary red tape and open the door for even more democratization of the capital formation process through equity crowdfunding.

And, if the new administration wants to create a new unpaid cabinet position of “Secretary of Crowdfunding” to help them reduce the barriers to entry for small businesses, I happen to know a lawyer/writer/entrepreneur who lives in D.C. and might be available to fill that role.

Crowdfunding Survives a Crucial Legal Challenge Few Know About

Originally Published at Entrepreneur.com on June 30, 2016

Image credit: Shutterstock

Regulation A+ is the portion of the JOBS Act that allows a company to raise up to $50 million in new capital through an online “Mini-IPO.” It came roaring into the investment world a year ago with the promise of changing the way small businesses get funded. The law allows companies to economically raise funds from the “crowd” and let everyday people, not just the rich and powerful, invest in small private companies for the first time in 80 years. One of the ways Congress and the Securities and Exchange Commission (SEC) made this law affordable was by exempting companies from having to comply with state Blue Sky laws. Those are state by state securities laws that require a company to register and often undergo extensive merit review by each state’s securities regulators.

imagine the legal bills of going to the 50 different states to file extensive paperwork, have a securities regulator review and request changes, then make sure those changes were okay with 49 other state regulators who also were requesting their own changes. This would be a process that took months, cost hundreds of thousands of dollars, and effectively make Regulation A+ unusable.

Kudos for Congress and the SEC for not requiring those burdensome restrictions and creating a law the right way. But despite the seemingly universal appeal of this law, Montana and Massachusetts felt otherwise. Their securities regulators were upset that Congress and the SEC took away their ability to get paid fees from companies they could drag through expensive Blue Sky compliance. They were so upset, they filed a federal lawsuit against the SEC to have Regulation A+ nullified.

Yes, Massachusetts and Montana thought that this game-changing law, destined to help companies raise capital and grow, create new jobs and provide access to investments for the general public, was a bad idea because it did not “protect investors” in their states. "Protect investors" should be read to mean "took away the ability to change money to companies in exchange for putting the company through hell in order to sell securities in their state!"

The good news is, the justice system worked, and the SEC prevailed over the states' attempts to gut the groundbreaking law. In an opinion released June 14, 2016, the United States Court of Appeals for the DC Circuit ruled unanimously that Regulation A+ will stand and continue to provide small companies with the opportunity to raise new capital without Montana, Massachusetts, or any other state being able to force the company to comply with their expensive state Blue Sky laws.

At the heart of the state’s rejected argument was a term used in the law -- “qualified purchaser.” The JOBS Act states that certain Regulation A+ securities may only be sold to a “qualified purchaser” and that the SEC should define that term however it saw fit. The SEC, wanting to be sure that Regulation A+ would allow companies to raise capital as easily as possible, defined the term “qualified purchaser” to mean anyone who wanted to buy the securities. In other words, according to the SEC, a “qualified purchaser” was everybody, not just rich and powerful folks.

Massachusetts and Montana argued that in order to be a “qualified purchaser,” the SEC must limit the people who could purchase Regulation A+ stocks to wealthy people, or must impose some other limitation. That effectively took away the promise of this law that regular people could buy shares of the next Facebook or Google at an early stage in the company's development, when the potential for a greater return on investment would be the highest.

In an extremely well-reasoned opinion, Judge Karen LeCraft Henderson rejected the states' argument and found that Congress had given the SEC the right to define “qualified purchaser” as it saw fit, and that the SEC’s definition was legal, reasonable and in line with the intent of the JOBS Act itself. Final scoreboard: SEC Wins! Small business wins! Everyday investors win! States that wanted to ruin a great law lose!

See, the justice system does work the way it's supposed to... sometimes.

As a result, Regulation A+ lives on. Companies can still use this remarkable law to raise up to $50 million in capital. The Average Joe has a chance to invest a small amount of money in small companies at a stage that was never allowed before. Unless Massachusetts and Montana can convince the United States Supreme Court to hear an appeal, which is very unlikely, the law remains on the books.

The bad news for Massachusetts and Montana is that they can’t drag a Regulation A+ company through their Blue Sky laws and take fees from the company at a stage where the money is most needed to operate and grow. The states will have to find another way to “protect investors” in their state. One thing is for sure: Massachusetts will continue to "protect" their citizens by extracting as much money as possible from them in wonderful investments (note sarcasm) their citizens can benefit from: lottery tickets and blackjack tables.