Crowdfunding Defined Under Titles II, III and IV


Kurt: When we look at crowdfunding we're talking about three rules: Title II, Title III and Title IV.

Title IV, being Reg A+ investment offerings, requires you to register your securities with the SEC, so that's going to bring more responsibility on you.

Title III involves raising no more than $1 million.

So my sense is that Title II, Reg D - Rule 506(c) is probably most applicable to EB-5.

John Leo: I look at crowdfunding as a great platform to supplement traditional fundraising, or vice-versa - traditional fundraising supplementing the crowdfunding platform. I think you get a much broader look and a much broader pool of investors. 

Based on our experience, Reg D investors make up 20%- 25% of the investors in the EB-5 projects. Reaching those investors through a crowdfunding platform, whether it's an issuer using their own portal or someone else's portal, is a great way to approach the market.

I don't think you'll fully fund a deal that way. I really don't think you can fund a $10-million or $20-million EB-5 project through just Reg D, but I do think it's part of the solution. I think you'll be able to attract a lot of investors that you normally would not come into contact with.

Kurt: When we look at Regulation D, Rule 506, we see it's got two elements. Soliciting solely to friends and family is obviously going to be very limited.

So when we talk about crowdfunding, we start at this very large idea that you can solicit your offering directly to the public; then we need to narrow it down to where it really applies to the EB-5 space. It’s clear to me that 506(c) is what we're typically going to be talking about when we talk about EB-5. Rule 506(c) permits general solicitation and advertising of private placements.

How broad is that concept and what are the limitations?

Jor Law: It's actually quite broad. As the others mentioned, you could do a 506(c) and then a Title III, and a Title IV, if you want. The reason why I think you've focused on Title II 506(c) is because there are actually quite limiting factors on the other ones. For example, in Title III, you can't truly generally solicit. You can basically only solicit to the extent necessary to direct someone to a funding portal.

506(c) lets you generally solicit any way you want, to anyone that you want and anywhere you want. You could generally solicit anywhere in the world without violating US law. You obviously still have to comply with local jurisdictions, but there are really no limitations other than that you should not generally solicit in a fraudulent manner.

It's much more powerful than the traditional 506(b), which would've required you to only solicit to friends and family, closed networks and pre-identified persons that you had substantial relationships with. It's a much more powerful exemption if you're able to market to the masses, to people that you don't know.

Scott Andersen: What it essentially does is blur the distinction between a public offering and a private placement because now you are able to advertise your private placement offering, publicly. There are some additional regulatory hurdles that you need to comply with in order to meet your securities exemption, and the main one is making certain that you are verifying properly the accreditation of your investors.

You can't rely on the traditional 506(b) “check-the-box” approach. Rather, you have to do a full verification of accreditation and the SEC has set forth a number of safe harbors so that you can meet that requirement. That is the essence of the JOBS Act, the ability to engage in this so-called general solicitation, which is general advertising of private securities offerings.

Find related discussion at [00:12:20] on our webinar Crowdfunding in EB-5

This post originally appeared on EB5 Diligence. Reprinted with permission

About The Author

Jor Law Jor Law practices corporate and business transactional law in Los Angeles and is a founding shareholder of Homeier & Law, P.C. Jor has represented a broad variety of clients, both domestically and internationally, from Fortune 100 companies to startup businesses and entrepreneurs in a wide range of industries, including financial services, cleantech, entertainment, aviation, food and beverage, hospitality, manufacturing, retail, real estate, and technology. In addition to counseling companies with structuring, formation, and ongoing corporate issues, Jor's practice includes finance, secured and unsecured lending, mergers and acquisitions, licensing, securities, angel and venture capital financing, internet and new media, technology, e-commerce, and other corporate transactions.

John Leo John Leo is chairman and managing member of Primary Capital LLC. Mr. Leo focuses on the day to day management of Primary, which includes compliance and risk management, in addition to the origination and execution of investment banking transactions. John Leo acquired Primary Capital in July 2007. Prior to acquiring Primary, Mr. Leo was the founder, Chairman and majority owner of American Union Securities, Inc. (AUS), which focused on investment banking, mergers and acquisitions in China. Mr. Leo sold his ownership in AUS in March 2007 to expand his focus beyond China.

Scott Andersen Scott Andersen is principal at Andersen, P.C., a securities regulatory and defense law firm. Mr. Andersen from March 2012 to February 2015 was deputy regional chief counsel at the Financial Industry Regulatory Authority (FINRA) in Los Angeles, where he oversaw all FINRA enforcement cases prosecuted by the Los Angeles office and managed the West region’s attorneys. Mr. Andersen has broad experience with regulatory investigations and enforcement actions. He has led complex criminal and civil prosecutions for the New York State Attorney General’s office, the New York Stock Exchange and FINRA.

Kurt Reuss Kurt Reuss provides all his clients with free access to due diligence reports as a licensed broker dealer representative with Primary Capital. Mr. Reuss co-founded EB5 Diligence as a way to provide his clients with the most thorough due diligence reports possible and works closely with investors to assist them in selecting a suitable EB-5 investment.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.