Congratulations to Kassandra Mayhew, BALLE’s new Marketing Manager

Congratulations to Kassandra Mayhew, BALLE’s new Marketing Manager

We here at Cutting Edge send our congratulations to Kassandra on her new position as Marketing Manager with BALLE.

Kassandra led our marketing and communications efforts in 2017 and 2018 and we are grateful for how she lifted our brand and strengthened our connections to clients and community. We look forward to collaborating with her (and BALLE) in the coming months. Let’s keep building resilient local economies together!

Thank you and best wishes to Kassandra.

— John, Brian, Kim and the whole Cutting Edge Team

P.S. See our job opening here.

A Mission Driven Pickling Company Reached Their Direct Public Offering Goal in Less Than Two Months, This Is Where They Are Now

A Mission Driven Pickling Company Reached Their Direct Public Offering Goal in Less Than Two Months, This Is Where They Are Now

Seventeen years ago a small pickling company called Real Pickles, based in Greenfield, Massachusetts, became dedicated to changing the food system. Owners Addie Rose Holland and Dan Rosenberg practice traditional fermentation using only produce sourced from local family farms. Their pickles are a representation of how they operate their mission driven business — with meticulous care.

Part of Real Pickles’ vision to change the food system included transitioning their business into a worker-owner co-operative to actively support their workers and demonstrate a working model for other food businesses to follow.

Twelve years after Real Pickles was founded, Addie and Dan began the process to worker-owned co-operative by evaluating capital raising strategies to successfully make the transition. They chose a direct public offering (DPO) strategy (that Cutting Edge Capital structured and advised on), finding that a community capital raise aligned with their mission to build up community.

After five years of settling into the success of their direct public offering, Real Pickles co-owner Addie Rose shared with us where they are now and how they got there.

What is Real Pickles? 
Real Pickles is a worker-owned co-operative on a mission to build a better food system. We make traditionally fermented pickles, sauerkraut, kimchi and other vegetables that are nourishing and rich in probiotics. We source all of our vegetables from family farms in the Northeast and sell our products only within the Northeast region.

When did you begin your first raise?
We started our first direct public offering (DPO) community capital raise in the spring of 2013. The purpose of the raise was to finance our transition to a worker co-operative.

What was your goal amount and how long did it take to reach it?
Our goal was $500,000.00 and we reached it in less than 2 months!

How did you network and market to raise capital? 
We started planning our networking and marketing efforts several months before the offering was approved for release. We attended many events to maintain a high awareness of our brand, and practiced a carefully-crafted message. Connections with like-minded partner organizations, including our regional Slow Money chapters and other businesses with investor connections were important for spreading the word. After twelve years in business, Real Pickles enjoyed strong community support, and we were able to leverage our years of networking and marketing to reach out to our community for this raise. See this resource for more information on our process.

What was challenging about the direct public offering process?
Initially, we were expecting to work with a local attorney that could support us through the legal process of setting up a DPO. After many discussions with local firms, it was clear that we’d need to work with someone who had specialized knowledge of the securities regulations and process, as well as the interest in working with a small business (with limited resources). We were introduced to Cutting Edge Capital and found our match!

What was your favorite aspect about the DPO process?
It was heartening to see how excited people in our community were to invest locally. Many people in our area are committed to local eating and shopping, but there aren’t many opportunities for local investing. The popularity of our raise demonstrated that there is an appetite for this kind of community investment opportunity!

What are the longstanding results of the capital raise? And what have those results allowed Real Pickles to accomplish?
Our capital raise allowed Real Pickles to transition to a worker-owned co-operative, with all of the anticipated benefits to our employees and our larger community (see here, here, and here). In addition, we gained a fantastic group of community investors, many of whom were longtime customers or suppliers, who as investors are now even more committed to our business and our mission!

Discuss the expansion of your team and the growth of your business.
Since our transition to a co-operative, we have doubled the number of worker-owners on our team (from the founding five worker-owners) and our business has continued steady growth. The new energy and ideas that new owners bring is welcomed by everyone. We feel that our business is stronger than ever, and that our team is well-prepared to guide our business into the future.  

Back row, L to R: Kristin Howard, Tamara McKerchie, Heather Wernimont, Andy Van Assche, Brendan Flannelly-King. Front row, L to R: Annie Winkler, Addie Rose Holland, Lucy Kahn, Katie Korby, Dan Rosenberg.

Why did you choose the cooperative structure?
The purpose of our conversion was to demonstrate an alternative model for a growing natural foods business that keeps ownership local, supports our employees, and protects our strong social mission into the future (see here).  

Have you noticed more interest or response to direct public offerings in general in your own community after Real Pickles’ success with a DPO?
There has been a lot of interest in community capital raising since our DPO. In fact, our neighbor Artisan Beverage Co-operative made a similar raise within a couple of years after ours – as well as CERO in Boston. Many other business owners have reached out to discuss possibilities. It is great to see that this method of community investment is gaining momentum.

Share three key pieces of advice you have for business owners looking to go the direct public offering route. 

  1. Partner with your community to build a strong network and campaign. Make sure you are tapping into any existing “buy local” or Slow Money organizations.
  2. Take time to prepare before your raise. Be sure to craft your messages carefully and have your materials ready to go, so that you can focus on needed networking and communication with investors.
  3. Carefully consider the minimum share price to make it accessible (the most exciting part of a DPO!!) and yet maintain your investor pool at a manageable size (we ended up with 77 investors, which feels just right for us!).

What are you most excited about for the future of Real Pickles?
I’m excited for more and more workers to become owners at Real Pickles, and I love to see our workers practicing the art of ownership. Our business is in good hands for a future of smart growth, meaningful jobs, and partnering with our community to build a better food system!

If you’re interested in direct public offerings or transitioning your business into a worker-owned co-operative, fill out our contact form here or email us at info@cuttingedgecapital.com.

Opportunity Knocks: New Tax Incentives for Community Investment Funds

Opportunity Knocks: New Tax Incentives for Community Investment Funds

Since 2015, a bipartisan coalition of lawmakers has advocated for tax incentives for those who invest in low-income communities, recognizing that the benefits from the economic recovery have largely bypassed those communities. Their efforts were rewarded when their proposed opportunity zone program was included as Subchapter Z of the 2017 tax law overhaul that was passed in December. While Subchapter Z wasn’t specifically tailored to community capital, it offers tax incentives that will apply to some kinds of community investment funds.

First, here’s how the new law works: A taxpayer with capital gains can defer capital gains tax if they sell their appreciated assets and, within six months, roll over the profits into a “qualified opportunity fund.”

But it gets better. Investors in the qualified opportunity fund who hold their investment for at least 5 years will have their basis bumped up by 10% of the deferred gain (thus reducing their capital gains tax), and by another 5% if they hold it for 7 years. In 2026, there will be a realization event (in which investors are taxed on the other 85% of the original profit invested in the fund, assuming the investment has been held for 7 years). But if they continue to hold their investment for at least 10 years, their basis is bumped up to the market value of their investment, which means any further capital gains tax is eliminated completely.

A qualified opportunity fund is a partnership or corporation with at least 90% of its assets consisting of qualified opportunity zone property (and acquired after 12/31/2017), which can include:

  • Equity interests in a corporation or partnership that is an opportunity zone business (and issued directly by the corporation or partnership, not acquired in secondary sales); or
  • Tangible property (real or personal) located in the opportunity zone that is either first used by the fund or is substantially improved by the fund (the latter meaning that additions to its basis exceed its original basis).

A business is an opportunity zone business if:

  • Substantially all of its tangible property is located in the opportunity zone;
  • At least 50% of its gross income is derived from operations in the opportunity zone;
  • A substantial portion of its intangible property is used in its operations in the opportunity zone; and
  • Securities comprise less than 5% of its total assets by tax basis.

While this new law provides tax incentives to invest in funds that serve low-income communities, it does not provide any new strategies under the securities laws. It is probably inevitable that the vast majority of qualified opportunity funds will be open to accredited investors only, like nearly all private funds.

However, there are at least three strategies that allow a qualified opportunity fund to be open to its entire community, including non-accredited investors:

  1. Real estate fund: A fund whose primary business is investing in real estate and 90% of whose assets consist of real estate in an opportunity zone will be a qualified opportunity fund and will be exempt from the burdensome regulations of the Investment Company Act of 1940 (the “1940 Act”), which paves the way for the fund to raise capital via a direct public offering – making it a true community investment fund.
  2. Small business holding company: This type of fund is exempt from the 1940 Act if most of its assets comprise controlled or majority-owned subsidiaries – the idea being that the fund is in whatever business its subsidiaries are in, rather than in the securities investment business. Again, if 90% of its holdings are businesses in opportunity zones, it will also be a qualified opportunity fund.
  3. Intrastate fund: A closed-end fund of up to $10 million, all of whose investors reside in the same state, is eligible to seek an exemptive order from the SEC that allows it to raise community capital via a direct public offering and while avoiding all or most of the 1940 Act’s regulations. Such a fund could invest in either business or real estate in opportunity zones and thereby also become a qualified opportunity fund.

With any of these strategies, a community-scale fund can open up the opportunity for community ownership of community assets, with everyone able to participate on a level playing field, and everyone able to reap the profits from local ventures.

It should be noted that governors of each state had until late March to designate low-income census tracts as opportunity zones, but some have asked for a 30-day extension. However, only 25% of the low-income communities in each state may actually be designated as opportunity zones. It remains to be seen which communities will actually win that designation.

But community investment funds can be offered to the public in any community anywhere in the U.S. At Cutting Edge Capital we believe community investment funds are an effective way to significantly move the needle toward a more inclusive, democratic and decentralized economy.

If you would like to see this happen in your community, here are some steps you can take:

  1. Look at this map, which shows the census tracts that may be eligible for designation as an opportunity zone.
  2. If your community includes eligible census tracts, write to your governor, asking him or her to designate those tracts in your community as an opportunity zone.
  3. If you would like to see community investment funds serve your community, fill out our intake form to make an appointment with us to explore the kinds of funds that can be offered in your community.
Beyond the Money: The Impact of Community Capital

Beyond the Money: The Impact of Community Capital

I was recently at Women and the Environment, an amazing conference in Santa Barbara hosted by Pacific Standard Magazine and the awesome folks at LoaCom. I was fortunate to attend, speak, and  hear about the great work being done, and the great work still to do, on environmental and social justice issues, much of which is being led by women. I addressed the conference participants along with Tracy Gray of 22 Group and LA Cleantech Incubator, Shally Shankar of The Schmidt Family Foundation, and Sharyn Main of the Santa Barbara Foundation on capital financing options.

Often at conferences I talk about the different ways to utilize community to raise capital. But this time I wanted to focus on how community capital strategies are part of social and environmental justice solutions and to discuss why who is allowed to invest matters. In other words, I wanted to discuss why the impact of community capital is about much more than just the money. Here are my notes from my remarks at the conference:

We at Cutting Edge Capital like to call our solutions “community capital” strategies. What are community capital strategies? Investment offerings that are open to both high net worth individuals and institutions, and to community (non-accredited or retail) investors.

The current model for capital raising, even in many social and environmental justice enterprises, is to reach out to the wealthiest accredited investors in our networks when capital is needed. That model is not wrong, but choosing only that approach means that enterprises are missing the opportunity to engage all supporters (regardless of their wealth) and missing out on the impacts that flow from doing so.

Community capital strategies democratize our economy in a variety of ways. Here are some of the impacts community capital offerings can have on investors, enterprises, and the broader community:

Community Investors. Community capital offerings allow everyone to invest in alignment with their values. Currently, non-accredited or community investors are not permitted to invest in most private enterprises, including social and environmental impact companies. Most people are limited to putting investment dollars into Wall Street offerings: publicly traded stocks, mutual funds, and money market accounts. Offerings that are open to community allow those members to invest in businesses, cooperatives, nonprofits or other enterprises that offer innovative solutions, are committed to good environmental practices, and/or are supporting social justice missions. It is the practice of so many impact organizations to reach out to community to help shape their missions and the foci of their work. We need to ask ourselves: why do we leave those community members out of the investment opportunity when it is time to implement the ideas the community helps define?

Entrepreneurs/Enterprises. How do we increase equity and access to capital for women and people of color? This is a question we in the impact capital space have been trying address from the start. To date, much of the focus has been on getting more women and people of color in front of existing traditional, institutional, and accredited sources of capital. However, community capital is an alternative to traditional capital that can organically level the playing field. When a broader segment of community is invited to invest, those investors will be more diverse than most existing high net worth investors and funding institutions. Entrepreneurs that receive funding will likely reflect the community that is investing in them. Community members will choose  entrepreneurs that speak their language (literally and figuratively), echo their values, and are committed to impacts that solve problems in their community. In other words, if more women and people of color are investing, more women and people of color are likely to receive funding.

Community. When community members invest in local businesses those enterprises can use that capital to thrive and grow — creating jobs and a more vibrant local economy. Any returns generated by those businesses  go back to local investors. This creates a cycle of community investment, impact, wealth creation and (hopefully) community reinvestment. The process is one of reinvestment and does not extract resources out of the local economy. 

So, how do we do we achieve this? Investors (both accredited and community) need to search out and ask that investment offerings be open to community investors. Enterprises and entrepreneurs (and supporting organizations) need to explore how to make investment opportunities open to community investors.

There are a number of tools that Cutting Edge Capital has identified (as offered in our community capital toolkit) that work for enterprises at various stages of growth including: Direct Public Offerings, Regulation A+ Offerings, Regulation Crowdfunding, and Community Investment Funds. We are happy to talk about how your business or enterprise can use these tools. Click here to set up a free consultation.

Community Investment Funds: The Ultimate Impact Investment

Community Investment Funds: The Ultimate Impact Investment

There’s a refrain we’ve been hearing recently at gatherings of community organizers: “Nothing about us without us is for us.”

While these words echo a centuries-old Latin slogan (“nihil de nobis, sine nobis“), they reflect a profound truth as relevant today as it has ever been. Their meaning is something like this: “Don’t try to solve our community’s problems for us. We understand our problems and their solutions better than anyone. We simply lack the resources and tools to solve our problems. You can help us by providing those resources and tools.”

The distinction is subtle, yet critically important. It’s about community empowerment.

In the world of impact investing, wealthy (yet conscientious) investors and institutions seek to invest in ways that help to improve the plight of others, typically while still making a good return on their investment.

And while this type of impact investment is certainly a good thing, the “impact” too often addresses the effects of underlying systemic problems without addressing the underlying problems in any meaningful way. By continuing to concentrate wealth (and reinforce the class distinctions between the haves and the have-nots), this type of impact investing could even exacerbate the very problems they seek to remedy.

 

The Community Capital Solution

What if there was a type of impact investing that had the power to solve some of the underlying systemic problems and bring about positive improvements in the economic structure of our economy? As my partner John Katovich explained in a Huffington Post blog, investing in institutions of community capital does precisely this. Community capital refers to community-focused investment opportunities that are open to the public, including both wealthy and non-wealthy investors; in other words, everyone can participate in community capital.

Why is this so important? It’s because most investment opportunities are available only to the wealthy, and investment opportunities beget more opportunities, and so on. The non-wealthy have very few options, and those few options typically pay a much lower rate of return than that earned by wealthy investors. But community capital is much more than just a way for a venture to expand its pool of potential investors. It is part of a revolutionary change in the structure of the local economy, because:

  • It allows ventures to raise capital from their own community, rather than putting their fate in the hands of the wealthy institutions and investors who currently control the economy.
  • It allows everyone everywhere to invest in their local community, in local ventures, in something that’s meaningful to them.
  • When the community invests in local ventures, those ventures grow, hire local workers, generate profits locally, and pay those profits to community investors who can then reinvest. It’s a cycle that allows the community – any community – to build wealth.
  • With broadly shared ownership and participation, the community can now channel resources to where they are most needed. The community is empowered to solve its problems, leveraging the abilities and experience of all its constituents.

Community capital might be thought of as a separate asset class and an essential component of any investment portfolio, because it serves as a counter-balance to the global gyrations of the Wall Street-dominated economy while contributing to a healthier local economy.

Note that while we mainly use the term “community” in the sense of a geographically defined area, it could also be a dispersed community based around a common affinity or goal, such as renewable energy, biodynamic agriculture, or arts education.

What are the mechanisms for raising community capital? In general, a venture (nonprofit or for-profit) can raise capital from their community either directly or indirectly. The direct approach is sometimes referred to as investment crowdfunding, a term that includes both direct public offerings (DPOs) and Title III exempt crowdfunding. The indirect approach to community capital is where a community investment fund (CIF) aggregates investment from the community and then invests in local ventures. (See our separate post on several models of legally compliant community investment funds, including the charitable loan fund, the real estate fund, and the diversified business fund.)

While Cutting Edge Capital is best known for our work with DPOs, we also work with a number of CIFs, and we believe that a healthy local economy will feature a thriving mix of both. A CIF can be a particularly important component of a healthy local economy for four key reasons: Scale, efficiency, diversification, and liquidity.

  • A CIF can be more scalable because it can potentially raise an unlimited amount of money and finance an unlimited number of local ventures. Note that we don’t use “scale” in the Wall Street sense of bigger transactions. In a CIF, the transactions should always be at a human scale, but we need a lot more of them to truly change the economy and to create a culture of community investment.
  • A CIF can be more efficient because each investor only needs to do due diligence once on the fund, and then the fund handles due diligence on outgoing investments.
  • A CIF is more diversified when compared to having each investor invest in one or a small number of local ventures.
  • A CIF may be in a better position than individual ventures to offer its investors liquidity (i.e., a way to sell the investment). A CIF can be set up to redeem investors who need to exit the investment.

Community investment funds and individual DPOs (or other types of investment crowdfunding) are not mutually exclusive, and there will always be a need for DPOs, particularly for ventures who prefer a direct connection with investors. Indeed, CIFs could play an important role for organizations conducting a DPO by:

  • Making a small short-term loan to cover the costs of a DPO.
  • Lending to the business on the strength of the equity raised in the DPO.
  • Providing a sounding board to the venture on pricing and other terms of their DPO.
  • Investing in the DPO early to seed it and inspire others to follow.
  • Investing late in the DPO process to backstop it and ensure its success.
  • Providing liquidity to DPO investors by purchasing their investment if they need an exit.

 

A Problem of Culture

Even though the mechanisms to raise community capital are available, they are not commonly used. Cutting Edge Capital has specialized in DPOs for years, and we have helped build several successful community investment funds. And yet, these are the proverbial drop in the bucket compared to what is needed to significantly move the needle toward a more equitable and democratic economy.

What is standing in our way? In short, the problem is that in the US we lack a culture of community capital. Most investors (both wealthy and non-wealthy) are unfamiliar with DPOs and other legal strategies of community capital. Unfortunately, so are most investment professionals and lawyers. (After all, they don’t teach these strategies in graduate school.) This unfamiliarity breeds skepticism, which is probably the biggest barrier to widespread adoption of the strategies of community capital. And making matters worse, the non-wealthy (those who don’t meet the SEC’s definition of “accredited investor”) have been trained for decades to see themselves as unqualified to invest.

This is where visionaries, philanthropists and impact investors can make a big difference. To change the culture so that community capital is as ubiquitous as a corner convenience store, we need visionaries and thought leaders to help educate their communities about the game-changing potential of community capital. We need philanthropists to donate to nonprofit organizations who are seeking to promote community capital in their local areas. We need investors who will invest in the structures of community capital (for example, as founders of community investment funds), as well as investing alongside community investors to give credibility, strength and momentum to this revolution. And, of course, we need innovative leaders to make it happen.

Together, we can build an economy in which every community is served by a constellation of community investment funds of various types, along with DPOs by local ventures, which together contribute to a vibrant community capital marketplace in which all can participate on a level playing field, and together build a more equitable, prosperous, and empowered community. In other words, this is the ultimate impact investment.

Note that this discussion is for informational purposes only and should not be taken as legal or investment advice. For more information about Cutting Edge Capital and the services we offer or to set up a consultation, please visit www.cuttingedgecapital.com or email us at info@cuttingedgecapital.com.

Today’s SEC Release Regarding Title III JOBS Act Crowdfunding

Cutting Edge Capital Applauds Today’s SEC Release

Regarding Title III JOBS Act CrowdfundingDirect Public Offerings!

The Securities and Exchange Commission’s announcement today was monumental – but not for the reasons most people had been anticipating.

While the final rules are now out for Title III of the JOBS Act regarding crowdfunding, Cutting Edge Capital was most excited to see that the Commission has also proposed new amendments for Intrastate and Regional Securities offerings!

The proposal is to increase the aggregate amount of money that may be offered and sold for Direct Public Offerings using the federal exemption from $1 million to $5 million and apply bad actor disqualifications to this Rule 504 offerings to provide additional investor protection.

Highlights of the Proposed Amendments to Rule 147

The SEC has proposed modernizing Rule 147 to permit companies to raise money from investors within their state without concurrently registering the offers and sales at the federal level.  The proposed amendments to Rule 147 would:

  • Eliminate the restriction on offers, while continuing to require that sales be made only to residents of the issuer’s state or territory.
  • Refine what it means to be an intrastate offering and ease some of the issuer eligibility requirements in the current rule.
  • Limit the availability of the exemption to offerings that are registered in-state or conducted under an exemption from state law registration that limits the amount of securities an issuer may sell to no more than $5 million in a 12-month period and imposes an investment limitation on investors.

Highlights of the Proposed Amendments to Rule 504

The proposed amendments to Rule 504 of Regulation D would increase the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million and disqualify certain bad actors from participation in Rule 504 offerings.

The Commission will seek public comment on the proposed rules for 60 days.  The Commission will then review the comments and determine whether to adopt the proposed rules.

Needless to say, Cutting Edge Capital will be supporting the Commission’s efforts to “assist smaller companies with capital formation consistent with its investor protection mission.”

JOBS Act – Crowdfunding

The SEC also finally adopted all of the major final rules via Title III of the JOBS Act[1].

These new rules create a federal exemption under the securities laws so that 6 months from now, companies can offer and sell securities on approved crowdfunding platforms[2] to raise a maximum aggregate amount of $1 million in a 12-month period.  A company must conduct its offering exclusively through one intermediary platform at a time.

Cutting Edge Capital’s DPO Lab will be offered to companies that need state-of-the art tools to best prepare for creating their own offerings.

Also, the SEC will now permit individuals to invest in securities-based crowdfunding transactions on a federal level via approved platforms or through registered broker dealers, but subject to certain investment limits.

For example, individuals who have annual income or a net worth of less than $100,000 will be limited to an investment of $2,000 or 5% of the lesser of their annual income or net worth.  If an individual investor’s annual income and net worth are equal to or more than $100,000, the limit will be 10% of the lesser of their annual income or net worth.  However, during a 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Note – How these limitations will be enforced, and who will be obligated to ensure these individuals do not exceed their limits will be left for the soon-to-be published rules, and FINRA to determine.

Disclosure by Companies 

The new JOBS Act rules impose specific disclosure requirements on issuers for certain information about their business and the securities offering.  Companies will be required to file certain information with the Commission and provide this information to investors and the intermediary facilitating the offering.

These disclosures are fairly typical of what any securities offering should have, including:

  • A description of the business and the use of proceeds from the offering;
  • Information about officers and directors as well as owners of 20 percent or more of the company;
  • The price, the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.
    • A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;

In addition, companies relying on the crowdfunding exemption would be required to file an annual report with the Commission and provide it to investors.

Note – The SEC has set a “reviewed” audited financial statement requirement here for first time filers.  While this is not as onerous or expensive as having to file audited financials at first, it is certainly not the same as having to file “compiled” financials.  There will still be significant costs to have reviewed financials created.  Also, the cost of preparing for and filing annual reports with the SEC is still unknown at this point.

Crowdfunding Platforms

A funding portal (i.e. “intermediary”) will need to be registered with the Commission, and become a member FINRA.

The SEC rules require intermediaries to:

  • Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;
  • Take “certain measures” to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;
  • Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
  • Provide communication channels to permit discussions about offerings on the platform;
  • Provide disclosure to investors about the compensation the intermediary receives;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a “reasonable basis” for believing an investor complies with the investment limitations;
  • Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with completion, cancellation and reconfirmation of offerings requirements.

The rules also prohibit intermediaries from engaging in certain activities, such as:

  • Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions;
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor;
  • Offering investment advice or making recommendations;
  • Soliciting purchases, sales or offers to buy securities;
  • Compensating promoters and other persons for solicitations or based on the sale of securities; and
  • Holding, possessing, or handling investor funds or securities.

Note – How an intermediary platform will meet the FINRA standards for all of these requirements will be interesting.  For example, how an intermediary will “take measures to reduce the risk of fraud,” provide communication channels, disclosures, meeting the “reasonable basis” regarding the investor limits, and even maintaining certain books and records related to their transactions and business, all will make for an interesting new FINRA regulatory role.

FINRA is currently the regulator for most all exchanges and broker dealers in the U.S. and anyone familiar with FINRA knows that regulation can be a significant issue in terms of compliance, policies, procedures, communications channel oversight, and staffing. And following FINRA audits and reviews, fines will likely become a significant issue should a platform be found to not be in compliance.  An intermediary will need to ensure that they are receiving enough compensation from every transaction to afford to be regulated by FINRA, and this will make for interesting financial dynamics.

[1] Those final rules and forms will become effective 180 days after they are soon to be published in the Federal Register.

[2] The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.