Category Archives: securities

How new and amended S.E.C. rules can that affect YOUR capital raising in Georgia?

The Securities and Exchange Commission (S.E.C.) did it! After months of reading articles about proposals and submitting my own public comments, the S.E.C. finally has adopted what I think are epic changes to Rules 147 and Rule 504. (See S.E.C. press release) Both of these changes are meant to provide more access to capital for entrepreneurs under the 2012 JOBS Act and the SEC’s Regulation CF.

The updates to Rule 147 will continue to be a safe harbour under Section 3(a)(11) of the Securities Act so that issuers that engage in securities offerings through intrastate offerings (“within a state only”) in reliance on state law exemptions will be protected. The new Rule 147A is similar to Rule 147 BUT….BUT it will allow offers to be accessible to out-of-state residents and for companies to be incorporated or organized out-of-state. THIS IS HUGE—no longer will issuing companies only be able able to raise money within the state they are incorporated if they are using an intrastate offering exemption.

DISCLAIMER (like any good attorney): The information contained below is a brief summary of the rules. As always, please consult a knowledgeable securities attorney before attempting any capital raising or dealing with investors. They will be able to provide you with more details about the rules. You are responsible for your own due diligence in this matter and this blog cannot be relied upon as specific legal advice.

Rule 147 Changes: No longer bound by borders!

New Rule 147A and updates to Rule 147 are meant to modernize the existing intrastate offering framework that permits companies to raise money from investors within their state without having to register and report on the federal level. As many of you know, Georgia was one of the first of 33 current states to adopt intrastate offerings which is called the Invest Georgia Exemption or “IGE”. (See blog and see rules) IGE has been successful in providing over 38 companies the opportunity to raise money from investors that reside inside of the state of Georgia, GroundFloor being one of the most famous examples.

Here are HIGHLIGHTS of the New Rule 147A and the updates to Rule 147:

  • The issuer must have its “principal place of business” in-state and satisfy at least one “doing business” requirement that would demonstrate the in-state nature of its business;
  • A new “reasonable belief” standard for issuers to rely on when determining the residence of a securities purchaser at the time of sale;
  • A requirement that issuers obtain a written representation from each purchaser regarding residency;
  • A limit on resales to persons residing within the state or territory of the offering for a period of six months from the date of the sale by the issuer to the purchaser;
  • An integration safe harbor that includes prior offers or sales of securities by the issuer made under another provision, as well as certain subsequent offers or sales of securities by the issuer occurring after the completion of the offering; and
  • Legend requirements to offerees and purchasers about the limits on resales.

In essence, what the new updates to rule 147 and new Rule 147A mean is that Georgia will be able to expand its existing intrastate offering program so that companies can raise capital from investor OUTSIDE of the State of Georgia! This is a step in the right direction towards expanding access to capital in a highly competitive fundraising market. Many times companies do not use intrastate offerings because of the limitation of investors to within a certain state—-especially when most investors officially reside in California, New York or Boston. This will open up more options for issuing companies to raise funds but also better competition amongst the states that do offer intrastate offerings. Note that the Georgia Secretary of State’s office will have to update the rules in order to take advantage of the S.E.C. rules but is a less onerous process than a legislative update (believe me…I know!)

Amendments to Rule 504 (which in effect repeal Rule 505): Say goodbye to $1MM.

The S.E.C. has 3 rules under Regulation D that exempts companies from S.E.C. registration: Rules 504, 505 and 506. Rule 504 exempts companies from registering with the S.E.C. for offers and sales of up to $1MM in a 12 month period (with some additional exemptions—see my disclaimer above). The change to Rule 504 raises the amount of capital that can be raised from $1MM to $5MM. The main distinction between a Rule 504 exemption and Rule 505 exemption was the amount of capital that could be raised. Under Rule 505, there were similar requirements under Rule 504 but a company could raise up to $5MM. Since the S.E.C. allows raising under Rule 504 up to to the same level and Rule 505, Rule 505 is unnecessary and useless and therefore is being repealed.

Other Information to Note:

I know that you are as EXCITED as I am about these new and updated rule changes—but remember that there is a “holding period” by which S.E.C. rules must be published in the Federal Register before the rules become effective so that the public has adequate notice. Updates to Rule 147 and new rule 147A will become effective 150 days after publication in the Federal Register and updates to Rule 504 will become effective 60 days after publication. Rule 505 will be repealed and become effective 180 days after publication in the Federal Register.

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private capital (including crowdfunding) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcoming speaking engagements and request me to speak to your organization. I have been elected to the Georgia House of Representatives (East DeKalb/South Gwinnett) since 2011 and I serve on the committees of Juvenile Justice, Interstate Cooperation, Judiciary Non-Civil and as the ranking Democrat on the Small Business and Job Creation Committee.

You may be interested in my non-profit organization as well to EDUCATE and EMPOWER minorities called Minority Access to Capital, Inc. Please visit our website to learn about events and sign up for our enewsletter.

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.

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IGE (Invest Georgia Exemption): How Georgia is leading the crowd in crowdfunding

I’ll admit. The state where I was born and raised has been no. 1 in a lot of bad things over the years—transportation issues, traffic problems, education failure. But I am proud to say that Georgia is one of the top states if not THE top state to do business and that makes this Georgia peach proud. (Source)

Luckily I have the opportunity to serve in the Georgia legislature and create and push for policies that I believe will help Georgia continue to lead other states with respect to business friendliness. One of my projects leading up to the 2017 legislative session is to examine our private investment policy in Georgia and provide recommendations to stakeholders to strengthen our flow of private capital through the State.

One of the important measures that Georgia took the lead on was its intrastate crowdfunding exemption. The Invest Georgia Exemption, or IGE (2011), is an exemption to the 1933 federal Securities Act that allows Georgia to create its own regulations around intrastate crowdfunding (not interstate–that’s across state lines).Georgia was one of the FIRST states to pass this intrastate exemption and now there are 31 other states that have passed similar regulations to make it easier to raise capital within a state.

After taking a look at the states across the country, Georgia really is leading the states in intrastate offerings because of its raised cap, notice only 2 page filing requirement, a higher than normal cap on investment amounts and the fact that crowdfunding portals are not required in order to raise capital.

 

 

 Here is the gist of the IGE regulations: (Legal Disclaimer: Please consult the full regulations of IGE before proceeding.)

  1. Issuer has to be a for profit entity formed under the laws of Georgia and registered with the Secretary of State (so no partnerships or sole proprietorships);
  2. The maximum amount an issuer can raise is $5MM (up from $1MM as of the Fall of 2015);
  3. The issuer cannot accept any more than $10,000 from a single purchaser UNLESS purchaser is an “accredited investor” as defined under Rule 501 of the S.E.C. (that rule may be changing soon under federal law so watch for that legislation);
  4. All funds must be deposited into a bank authorized to do business in Georgia;
  5. Upon or before either of 2 triggering events, the issuer must file a notice with the Commissioner in writing or electronic form with specific information; and
  6. This exemption cannot be used with any other exemption under the Rules or Act EXCEPT for officers or sales to certain people.

That’s it. To date, Georgia has had 38 companies apply for the IGE Exemption.

Compare the raise cap and investor cap of Georgia with other states:(Data provided by GA House of Representatives Research Office)

  • Alabama- $1MM; $5k per investor
  • Arizona– $1MM or $2.5MM if GAAP financial statements are audited and presented; $10k per investor [Only 1 company has filed for exemption]
  • Colorado– $1MM; Unlimited [No companies have filed for exemption.]
  • DC- $500k or $1MM if GAAP used; For “natural persons”: $10k per investor if the investor’s gross incoem is less than $100k; $25k per investor if the investor’s gross incoemi s $100k-$200k; for non natural persons, $0 unless gross net worth is greater than $1MM
  • Florida– $1MM; The lesser of $2k or 5% of investor’s annual net worth per investor per year if the investor’s annual gross income or net worth is less than $100k or the lesser of $100k or 10% of the investor’s annual net worth per investor per year if the investor’s annual gross income or net wroth is over $100k
  • Idaho- $2MM; The lesser of $2,500 or 10% of the investor’s net wroth per investor exlcuding home auto and furnishings. [Idaho has issued orders authorizing crowdfunding in 5 instances.]
  • Illinois- $2MM or $4MM is the insurer provides independently reviewed and officer certified financial documents; $5k per investor per offering
  • Iowa- $1MM; $5k per investor per offering, treating relatives and people in the same household as one investor
  • Indiana-  $1MM or $2MM if GAAP used; $5k per investor
  • Kansas– $1MM; $10k per investor
  • Kentucky- $1MM or $2MM is GAAP used; $10k per investor
  • Maine- $1MM; $5k per investor
  • Maryland– $100k, $100 per investor
  • Massachusetts- $1MM or $2MM if the insurer provides independently reviewed and officer certified financial documents
  • Michigan– $1M or $2MM if the insurer provides independently reviewed and officer certified financial documents
  • Minnesota- $2MM or $5MM is GAAP used with periodic increases beginning in 2018
  • Mississippi- $1M; limited to qualified purchasers are defined in Code and none of the company’s officers and directors can purchase more than 15% of offering; notwithstanding, the limit is the greater of $50k or 10% of investors’ annual income or net worth if an “accredited investor” under Rule 501 of the S.E.C. OR the greater of $5,000 or 5% of the investor’s annual income or net worth is the investor is NOT an “accredited investor”
  • Montana– $1MM; $10k per investor
  • Nebraska- $1M or $2MM if GAAP used; $5k per investor
  • New Jersey- $1MM; $5k per investor, per offering
  • New Mexico– $2.5MM with no aggregate cap; $10k per investor per offering
  • Oregon- $250k; $2,500 per investor
  • South Carolina– Unlimited; Unlimited
  • Tennessee- $1MM; $10k per investor
  • Texas- $1MM; $5k per investor
  • Vermont- $1MM or $2MM if the insurer provides independently reviewed and officer certified financial documents; $10k per investor
  • Virginia- $2M; $10k per investor
  • Washington- $1M; the greater of $2k or 5% of the investors annual net worth per investor per year if the investor’s annual gross income or net worth is less than $100l or the lesser of $100k or 10% of investor’s annual net worth per investor per year if the investor’s annual gross income or net worth is over $100k
  • West Virginia- $1MM or $2MM if the insurer provides independently reviewed and officer certified financial documents; $10k per investor
  • Wisconsin- $1M or $2MM if the insurer provides independently reviewed and officer certified financial documents; $10k per investor (Cap may not apply if investor qualified as a Certified Investor under Wis. Stat. Section 551.102(4m).)
  • Wyoming-$1MM or $2MM if the insurer provides independently reviewed and officer certified financial documents; $5k per investor

 

My Thoughts: I like that South Carolina, whom many would argue is our biggest rival with respect to business competition, has an unlimited raise cap so companies are not restricted to how much money they can raise. However, as many states have done, I would suggest making sure that GAAP are used and that the financial statements are independent reviewed and audited before taking the cap off IGE. The cap on investor contributions should remain the same under IGE and not go to the complicated percentage scale so many states use based on income and/or net worth. Let’s keep it simple.

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. I also serve as the ranking Democrat on the Georgia House Small Business Development and Job Creation Committee. View past and upcoming speaking engagements and request me to speak to your organization.

NEW SERVICE OFFERING: Legal Opinions! You have an issue, we have an answer. For more information, click HERE for a sample legal opinion memo.

You may be interested in my non-profit organization as well to EDUCATE and EMPOWER minorities:

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.

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If you have a gift to offer the world, it doesn’t need to be nicely wrapped. Just do it!

Many of you have seen or heard my rants on Facebook, Twitter, Instagram,YouTube or anywhere else that I think I have an audience. And the rant is typically the same—-WHERE ARE ALL THE MINORITIES (WOMEN AND RACIAL MINORITIES) WHEN INVESTORS AND OTHERS ARE DISCUSSING PRIVATE CAPITAL? Many times, I look to my left—and my right—-and I am the only woman or person of color in the room or at the table (and if I am having a really depressing week—I’m the only one of for both). And this doesn’t make sense given the Business FAQs about Georgia (Georgia is #1 in the growth of women owned businesses and metro Atlanta is #1 in the US for black owned businesses) and the amount of private capital being infused into Georgia (see below).

So I decided to develop a personal and professional pledge—the DK Pledge I call it—-as a constant reminder to myself why I must continue to break down the walls of access, education and communication between minority businesses and the world of private capital.

But the pledge was not enough. You see, I am a woman of action—I’ve been raised that if I don’t like something, I don’t complain, I do something about it (which is probably why I was elected to the GA House of Representatives at age 27 but I digress). So I decided to start a non-profit with the FOCUS on “Educating and empowering minorities, especially women and racial minorities, on how to access private capital to grow their companies and create generational wealth.”I started with a small interest group in January and now we have a 8 member Board of Directors, approved by-laws, registration with the Secretary of State, and as of April 1, 2016 we are now a 501(c)(3) under the IRS Code with tax exempt status!—Just in time for our April 28th meeting which I hope you will join us in attending!

Now I wish that I could say that I did this alone but I didn’t. I had help as we all need rather we want to admit it or not. Say hello to my fabulous Board Members who believe in my vision and have supported this effort:

 

Carleton Moten

Board Member

VP of Finance

Maurice Jackson

Vice Chair of Board

VP of Programs

 

 

Rod Echols

Board Member

VP of Technology

 

Shannon Weaver

Board Member

VP of Sponsorships

 

Sylvester Ford

Board Member

VP of Membership

 

Dar’shun Kendrick

Founder/Board Chair

 

 

And a SPECIAL shout out to the tax attorney that helped us to get it all done—Mr. Keith Miles.

You can contact any of the above mentioned Executive Board Members by downloading this CONTACT LIST and letting us know if you’d like to be involved with our organization. Here are other ways to connect with us as well:

So…if you are a finance professional out there, minority or not, are you ready to help us in our mission to empower and educate minority entrepreneurs on how to obtain a piece of the almost $2 Trillion in private capital that has been invested over the last 10 years? If so, contact me and let me know.

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcoming speaking engagements and request me to speak to your organization.

NEW SERVICE OFFERING: Legal Opinions! You have an issue, we have an answer. For more information, click HERE for a sample legal opinion memo.

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.

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The Future of Private Investing in Georgia: Fitting All the Pieces Together

Last week, on March 31st, I was honored to chair my first ad hoc committee meeting of the Georgia House of Representatives, where I have served since 2011. As a member of the minority party, you can imagine how many times I get the opportunity to chair a meeting but this is a space where I am not only comfortable, but possess a particular expertise in this subject matter: private capital. This is what I do….help companies with the legal compliance and agreements needed for successful capital raises and keep the S.E.C. and state governments off their back.

This ad hoc committee came out of an idea I had the last few days of the 2016 Georgia legislative session in which I saw the need to have a series of public hearings to discuss private investing in Georgia and how to make it easier to invest in Georgia. My first thoughts were just to update the existing Georgia securities code, which have not been updated since 2008 since there are various federal laws and regulations that have been passed in recent months. But then  I decided that since I am going to open the Georgia securities code, I may as well take testimony and hear some innovative ways to move private capital into Georgia (and away from neighboring states but shhhh…don’t tell them I said that.) You see…it all works together…the securities code…the regulations from the Securities and Exchange Commission…rules and regulations from the GA Secretary of State..the state budget. Everything works together and we didn’t need any missing pieces to this puzzle of encouraging capital investments in Georgia. So I wanted to make sure that didn’t happen….and I’m on a one woman mission to make sure that doesn’t happen as you can see from my upcoming speaking schedule.

Being the stubborn lawyer-legislator that I am, I decided to approach the Chair of the Small Business Development and Job Creation committee Chairman Bubber Epps where I serve as the ranking Democrat on that committee. I also approached the Chair of the Economic Development & Tourism committee Chairman Ron Stephens. These seemed like the most logical committees to ask to go down this complex road of capital investments in Georgia and luckily, they both agreed that it was a good idea and agreed to let me chair the meeting since this is the type of work I do for my “day job”. So an ad hoc committee was appointed from these two committees that included the brightest minds in the Georgia House: Reps. Stacey Evans, Buzz Brockway, Steve Tarvin, Al Williamsmyself, and Chairmen Ron Stephens and Bubber Epps.

The Gwinnett Chamber of Commerce hosted the first public hearing of this ad hoc committee. I choose the Gwinnett Chamber because I not only represent South Gwinnett but the Gwinnett Chamber has been an innovative organization committed to developing the whole entrepreneur (see flyer to left). I’m happy they were able to partner with us for this important topic.

And so we met last week at the beautiful building in Duluth that houses the Gwinnett Chamber of Commerce and the public hearing lasted about 1.5 hours as we discussed everything from intrastate crowdfunding, updating the Georgia securities code, investments through the university system, etc. The room was filled with those that were interested in private capital, those that had invested their own private capital into businesses, those seeking private capital and those that regulate (the Secretary of State’s Securities Division) and legislative private capital (members of the committee).

The Gwinnett Post wrote a brief overview of the hearing in this article that was posted a day later. Below are some specific highlights/bullet points from the hearing and you can also view the YouTube video I uploaded to my YouTube channel (feel free to subscribe to my channel.)

  • From Noula Zaharis, the Secretary of State’s Securities Division: Georgia has some of the most “reasonable” fees in the nation, has one of the simplest processes for intrastate crowdfunding (a 2 page form), and in October of 2015, raised the Invest Georgia Exemption from $1MM to $5MM.
  • From Dan King, Member of Gwinnett Tech Angels, an affiliate of Atlanta Tech Angels: One possible reason why only 2% of the angel investor tax credit is being used is because of the number of companies that qualify and take advantage of the tax credit for its investors, for example a $1MM raise is the cap for company qualification; the average deal for a company depends on many factors but can range anywhere between $1-$1.5MM (in response to my question about the Invest Georgia Fund which is scheduled to be allocated $100M up to FY 2018 but currently only has $10MM in funding)
  • From Heather Maxfield with Technology Association of Georgia: The SBIR Program (Congressional Fund) is matched in other states and Georgia should seriously consider doing the same.
  • From Delray Wannemacher of First Look Equities: His company is looking for qualifies companies; portals are required for federal crowdfunding but not for IGE.

If you are interested in this subject matter and want to be on the list for our next public hearing, please email me atdkendrick@kendrickforgeorgia.com, SUBJECT: Private Investing in Georgia. Stay tuned as we come up with GREAT opportunities to invest in Georgia!

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. View past and upcomingspeaking engagements and request me to speak to your organization.

You may be interested in my non-profit organization as well to EDUCATE and EMPOWER minorities:

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our 1 hour consultation.

Follow us on social media:  

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Intro to Private Capital: Join me!

(Pictured above: Live participants in the Minority Access to Capital, Inc. Feb. 24th meeting)

I had such a WONDERFUL time speaking with investors and entrepreneurs about private capital—which is a vital subject for entrepreneurs but can often be complicated. Below are the details from my presentation! I hope you see you all at our March 10th meeting which will be a continuation of this topic.

Text of Presentation: Intro to Private Capital by Dar’shun Kendrick (2.24.16)

  1. INTRO TO PRIVATE CAPITAL Prepared Specifically For: Minority ATC (Access to Capital) February 24, 2016 Dar’shun Kendrick, Esq./MBA Kendrick Law Practice, LLC
  2. The Numbers • $17.B in angel investing in 2009 to 57,255 businesses • $4B inVC funding in 1982  Almost $300B in 2007 • $1.6T in private equity overall from 2000-2009 • Quarter before last saw MOST private equity investment in a quarter since early 2000s
  3. What is private capital? • Hedge funds • Venture Capital • Leveraged Buy outs • Angel investors • F & F • Convertible notes
  4. What is NOT private capital? • Rewards based crowdfunding • Grants • Publicly held companies • Traditional loans
  5. The Securities Act of 1933 vs. 1934 1933 • Created out of Great Depression • Established the SEC (Securities and Exchange Commission)- http://www.sec.gov • Regulates initial offerings 1934 • Regulates on going reporting requirements • Has fraud provisions that apply to 1933 Act, i.e. initial offerings
  6. 2 Options when selling “securities” Register (IPOs, stock exchanges, etc.) OR Find an exemption (Either to “securities” or transaction) *Some issuers cannot use an exemption
  7. Parties Involved in an Exemption • The almighty S.E.C. • Broker-Dealers (Investment Act of 1940) • Investors (institutional, angels,VCs, family and friends, family offices) • Issuer (Company raising funds) • FinancialTeam: Lawyers, accountants, business consultants, etc.
  8. What does DK do? Issuer > Broker-Dealer > Investors > DK > Issuers/Investors AND Issuers/SEC
  9. Ways to Raise $$Through an Exemption • Mini-IPO (Regulation A+) of $20- $50MM • Regulation D (3 rules) • Equity based crowdfunding
  10. So can you just start raising money (in exchange for equity) from investors, including family and friends?
  11. PIECE OF ADVICE Hire a knowledgeable securities attorney.
  12. Pitfalls • Corporate form set up has to be specific and in a certain order • “Time triggers” for solicitation • Agreements that you will need to have to investors (limit on the secondary market, unregistered security disclaimer, risk disclaimer, PPM, etc.) • Financials required to be provided to investors • Founder protections to be discussed (Dilution and bad math caused a company who thought they owned 66% of a company to go down to less than 10%) • M & A strategy needed for an exemption that allows for “general advertising” under a Reg. D exemption • State “blue sky laws” requirements • REMINDER: The S.E.C. can recommend CRIMINAL PROSECUTION to the Department of Justice, like the I.R.S.
  13. Thank you! Dar’shun Kendrick, Esq./MBA Kendrick Law Practice http://www.kendricklaw.net (678) 739-8109 Find us on social media.

*Here is an audio version of the above presentation. The first 30 minutes is MATC business meeting.**

I hope you can join me March 10th for continuation of this topic.

If you CANNOT make our March 10th meeting, set your calendar for March 24th and sign up for our enewsletter here.

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University.

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our famous 10 point Business Legal Consultation for 1 hour.

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New Regulation Crowdfunding Rules: What You Should Know Before March 2016

On Oct. 30th, 2015, the S.E.C. (Securities & Exchange Commission) FINALLY adopted final rules of crowdfunding. I say FINALLY with emphasis because the S.E.C. has been tasked with finalizing these rules ever since the JOBS Act Section III passed in April of 2012. These rules will permit companies to offer and sell securities through #crowdfunding. (To view the full press release from the S.E.C.,click here) Crowdfunding is a way by which companies can use the internet “crowd” to raise funds. These final rules permit individuals to invest in securities based crowdfunding. These crowdfunding transactions are subject to certain investment limits.

Disclaimer: We are NOT responsible for your reliance on this blog. Please review the full rules and related material before you raise capital via crowdfunding or otherwise. Sources: 1- The full S.E.C. press release. 2- Thefinal crowdfunding rules in their entirety.

 

The rules also do the following to protect the public:

  1.  Limit the amount of money a company can raise using the crowdfunding exemption
  2. Impose disclosure requirements on issuers for certain information
  3. Create a regulatory framework for broker-dealers and
  4. Dictate the manner and mode of funding portals for facilitation.

 

NOTE: The new crowdfunding rules and forms will not be effective until March 16, 2016. However, forms enabling funding portals will be effective Jan. 29, 2016.The Commission also proposed intrastate offering amendments.They also proposed amendments to Rule 504.Neither of these proposals will be discussed in this chat.

TOPIC I: GENERAL OVERVIEW OF RULES

Generally speaking, the recommended rules would: 1- Permit a company to raise a max. of $1M in 12 months.2- Permit individual investors to invest a certain amount. The amount is based on if their annual income or net worth is under $100k. 3- During the 12 month period, the max sold to any individual investor may not exceed $100k. Visit our slideshare account for a more detailed explanation.

TOPIC II: INELIGIBLE COMPANIES

Certain companies would not be eligible to use the exemption under the Rules. This includes non-U.S. companies, Exchange Act reporting companies,certain investment companies, companies that have failed to report during 2 years prior and companies with no specific business plan. Disclaimer: Review the full rulesfor more detailed explanations.

TOPIC III: RESTRICTION ON RESALE

There is still a restriction on sale for one year.TOPIC IV: INTERMEDIARY NEEDED TO RAISE FUNDS. In addition, all transactions relying on the new rules would need an intermediary. The intermediary could be a broker-dealer or funding portal. The funding portal would have to register with the S.E.C. and the funding portal would also need to be a member of FINRA.

A company would be required to only use 1 platform at a time. There are responsibilities on the funding portal as well.

TOPIC V: DISCLOSURE BY COMPANIES

Companies would need to file certain info with the S.E.C. and companies would also need to provide the following info to investors:

  1. The price of to the public of the securities or method;
  2. A discussion of the company’s financial condition;
  3. Financial statements of the company with review or audit or tax returns;
  4. A description of the business and the use of proceeds; and
  5. Certain related-party transactions.

If you have a comprehensive business plan, this information would be covered.

DISCLAIMERS & OTHER INFO

  • To view the full S.E.C. press release on this topic: View here.
  • To view the full final rules in their entirety: View here.

 

Remember, we are NOT responsible for your reliance on this short chat. Please review the full rules and related material and seek the advice of competent legal counsel before you raise capital via crowdfunding or otherwise.

Well there you have a general overview of the new Regulation Crowdfunding rules that were FINALLY adopted by the S.E.C.. The rules don’t become effective until March so there is still time to read through the rules and obtain legal counsel so you can start raising funds for your company if you qualify.

 

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. NOTE: I will be discussing this subject in detail during my monthly Twitter chats on December 14th at 7 pm on Twitter. Visit the News & Events section of my website for more information.

 

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our famous 10 point Business Legal Consultation for 1 hour.

 

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Private Debt vs. Private Equity: Which one is right to fund your business?

So you have made the decision that you need to raise vital private capital funds for your business to either start or grow—and you have struggled with which is best for your business, debt or equity? These 2 ways to finance your business have 2 different regulatory requirements, 2 sets of differences (good or bad), and look 2 different ways to potential investors or debtors. Figuring out with your team what is the best funding approach is vital to future progress and future fundraising efforts so it’s important to make the right decision from the beginning.

NOTE: (1) This is NOT an exclusive list of advantages and disadvantages, (2) some disadvantages can be minimized by creative legal documents, and (3) you can always do a mix of debt and equity based on your funding strategy. This short post is meant to highlight a few thoughts for the budding entrepreneur.

Private Debt

Disadvantages

  • Liability on Balance Sheet. Debt, as you probably suspected, is just that: a liability for your company and on your balance sheet. If you are seeking a future round of financing, investors may be hesitant to invest in a company that has too much liability on its books.
  • 1st Priority in Liquidation. In the case of a liquidation or merger, debt holders will be the FIRST to be paid before preferred stock holders and before common stock holders, which are usually the founders. So if you are a founder holding common stock, there are 2 layers of stakeholders that will be paid before you do.
  • Less investor incentive. For investors that are contributing debt to your company, there may be less incentive to work as hard to grow the business than if the investor was a equity holder. Remember, debt holders are first in priority to receive funds in the case of a liquidation anyway so they have less incentive to grow the business.
  • Cash drain on business. Since debt is essentially going to be a loan, it is going to be treated like every other loan. There are going to be monthly payments that the company has to make to the debt holder. For new companies that need cash to grow and re-invest in their business, this can be a severe drain of cash on a business that needs to use cash to fund or grow their business, especially new businesses.

Advantages

  • No equity in company. This is the most obvious advantage of issuing debt. When you are done paying the debt holder, you retain the same amount of equity in your business as when you first received funds from the investor. UNLESS you have a convertible note instrument that automatically converts the debt into stock at a preferred price upon the maturity date of the loan, equity is still given up but it is delayed.
  • “Easier” to obtain. Easier is a subjective word but in theory, it’s easier for a company, especially a new company, to convince some investors to part ways with their money if they offer debt instead of equity for the reasons we stated above.

Private Equity

Disadvantages

  • Giving up some ownership. Obviously giving up some portion of your company is a hard and emotional decision but one that is required if you are seeking to raise private equity funds. It’s important to note that being a part of a successful business is always preferable to owning 100% of a failing business.
  • More paperwork. Since there is a higher risk of the investors’ money with equity (since the investment is not guaranteed like debt) there is more paperwork that needs to be filed with government agencies and given to the investor when raising private equity funds. However note that “securities” is a broad term defined by the Securities & Exchange Commission (“S.E.C.”) so both debt and equity instruments will be regulated.
  • More costly. For the reasons mentioned above, raising equity funds has more transaction costs. Additionally, there are numerous disclaimers and due diligence procedures that must be made based on the equity exemption the issuing company is raising funds under so your transaction costs, including attorneys fees, are higher. Naturally, since there is more risk that debt, the return on investment (ROI) required by investors will be higher in order for them to invest.
  • You have to value your company. That’s the starting point for soliciting equity investors is to decide what your company is worth and what percentage of your company you are willing to part with at what price. There are legal documents that you can use to delay the valuation process to obtain a higher valuation in the future but they are not discussed here.

Advantages

  • No liability on balance sheets. While you still have to disclose other equity holders in your financial and corporate documents, equity doesn’t show up as a liability on your balance sheet, which is one of 4 financial documents you will need to prepare before raising capital.
  • No cash drain. Equity holders only get paid when the company goes through an initial public offering (IPO) or merger. That means you can use cash coming into the business to make the business stronger and more profitable.
  • It’s more fun. This may just be from my perspective but convincing an investor to buy into your business, really have skin in the game, and to reach your fundraising goal is much more exciting than debt.
  • Investor knowledge and expertise. Most equity investors are interested in building a successful company and offer a wide variety of expertise and skills that debt holders (think banks) would not be willing to share.  This is especially true if you use angel investor groups or venture capital (VC) funds.

Well there you have it! A brief synopsis on the pros and cons of debt versus equity. It’s not an easy to decision to make whether a company seeks debt, equity or a combination of the two. That’s why it is VITALLY important that you compose and surround yourself with a team of experts that are passionate about your business succeeding and can weigh the options with you from an accounting, legal and business practical side of things. Best of luck to you and happy capital raising!

NOTE: I will be discussing this subject in detail during our “Capital Chats” on Nov. 9th. 

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I am Dar’shun Kendrick, Private Securities Attorney and Owner of Kendrick Law Practicehelping businesses raise capital the LEGAL way. We work with “for profit” companies seeking to raise $250,000 or more through private securities (equity and/or debt) that have a line item budgeted for legal services. We do NOT find investors or introduce companies to investors; that is the job of “broker-dealers” and we are prohibited under federal securities law from doing so.  I have 2 B.A.s from Oglethorpe University, a law degree from the University of Georgia and an M.B.A. from Kennesaw State University. NOTE: I will be discussing this subject in detail during our “Capital Chats” on Nov. 9th. 

We are ONLY authorized to practice law in Georgia and therefore any legal advice in this blog only pertains to Georgia based businesses. Please visit us online to sign up for a time to discuss services or for our famous 10 point Business Legal Consultation for 1 hour.

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Filed under private debt, private equity, securities