Crowdfunding Terminology and Securities Offered
Section I. Crowdfunding
A. History of Federal Securities Regulation
The U.S. Congress enacted the Securities Act of 1933 and the Securities and Exchange Act of 1934 primarily as a result of the stock market crash of 1929. In general, the legislation requires companies issuing securities to the public for the first time to register with the Securities and Exchange Commission and provide the SEC and potential investors with all relevant information by means of a prospectus and registration statement. Over the ensuing decades, with rising expenses associated with the registration process, several exemptions were created primarily to provide smaller companies an opportunity to raise capital through the sale of securities to outside investors.
In April of 2012, the JOBS Act of 2012 was enacted by the United States Congress and signed into law by the President, permitting the use of crowdfunding to fund small business entities. With the effective date of Title III of the JOBS Act, on May 16, 2016, Regulation Crowdfunding is the latest exemption from the securities registration process. Regulation Crowdfunding allows an issuing company to offer and sell securities through a registered Crowdfunding Portal. See “The JOBS Act of 2012” in the “Education” tab on our Portal.
Venture Capital 500, LLC is founded with the express purpose to create and operate a registered Crowdfunding Portal under the rules and guidelines of Title III of the JOBS ACT if 2012. Our Portal includes a platform for JOBS Act Title III Offerings. The referenced Rules and Regulations can be found on our Portal in the “Education” tab under “The JOBS Act of 2012.”
B. The Code of Federal Regulations
The Code of Federal Regulations (CFR) is the codification of the rules and regulations of the executive departments and agencies of the federal government of the United States. The CFR is divided into 50 titles that represent broad areas subject to federal regulation. The educational materials on the Venture Capital 500 portal and its platform contain many references to Title 17 of the CFR. The format used is specific Title, “CFR,” part and section; example: 17 CFR 227.300. Quick reference to the CFR can be found at www.ecfr.gov.
C. The Securities and Exchange Commission (SEC)
The U.S. Securities and Exchange Commission (SEC) is an agency of the federal U.S. government. It holds primary responsibility for enforcing the federal securities laws, proposing securities rules, and regulating the securities industry, the nation’s stock and options exchanges, and other activities and organizations, including the electronic securities markets in the United States.
Section II. Terminology
A. Crowdfunding Portal
A Crowdfunding portal means a broker acting as an intermediary in a transaction involving the offer or sale of securities in reliance on the Regulation Crowdfunding Exemption, that does not:
- Offer investment advice or recommendations;
- Solicit purchases, sales or offers to buy the securities displayed on its platform;
- Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or
- Hold, manage, possess, or otherwise handle investor funds or securities.
An Intermediary means a broker registered with the Securities and Exchange Commission or a funding portal registered under Title 17 Code of Federal Regulations 227.400. The Regulation Crowdfunding exemption includes, where relevant, an associated person of the registered broker or registered funding portal.
C. Associated Person
An Associated person of a funding portal or person associated with a funding portal includes:
- any partner, officer, director or manager of a funding portal including any person occupying a similar status or performing similar functions;
- any person directly or indirectly controlling or controlled by such funding portal, or any employee of a funding portal, except that any person associated with a funding portal whose functions are solely clerical or ministerial shall not be included in the meaning of such term for purposes of the “Regulation Crowdfunding Exemption.”
A Platform means a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Title III of the JOBS Act.
E. Types of Crowdfunding
- Debt based Crowdfunding is a financing method involving a borrower seeking funds to develop a product or business. In this type of funding, the provider of the funds receives a debt instrument from a borrower that pays back the principal of the loan plus interest over a fixed period.
- Royalty based Crowdfunding involves the Offeror selling a piece of the revenue stream in exchange for a loan of funds to develop the project or product. The investor is paid an agreed percentage of sales every month until the investment plus a specified premium is paid. The percentage is paid on sales revenue and not on a percentage of profits. The Offeror retains 100% of ownership of the entity and the product. The Investor receives a portion of the revenue stream for a fixed time-period or the occurrence of a designated event.
- Equity based Crowdfunding is an online offering of securities by a private company or individuals in exchange for a designated sum of money. It is a method of funding for startup companies and small businesses. Investors give money to a business and receive a piece of that business. This type of funding involves investment into a commercial enterprise which is subject to securities and financial regulation.
Section III. Securities Offered on Our Portal
A. Common Shares
Common shares are the units of ownership in a corporation. If there is only one class of shares issued, they may also be called common stocks, common shares, capital shares, shares, or stocks.
There are two fundamental rights of holders of common shares:
- Holders of common shares are entitled to vote for the election of a Board of Directors and on other matters that may be presented to them; and
- Holders of common shares are also entitled to the net assets of the corporation when distributions are made in the form of dividends or liquidating distributions.
However, common shareholders are the last to be paid in the event of a liquidation of the company. There is also no assurance that any assets will be available to pay common shareholders and in that event investors could lose all their investment.
There are also rights of holders of common shares in addition to the fundamental rights listed above, including:
- The right to inspect the books and records of the corporation.
- The right to sue on behalf of the corporation to right a wrong committed against it.
- The right of access to the financial information of the corporation.
B. Preferred Shares
Typically, Preferred Shares are classes of shares with some rights that are preferential to those assigned to common shares, but they may also be limited in some way. Usually, but not always, preferred shares are non-voting.
Holders of preferred shares are entitled to a “priority” in payment as against the holders of common stock including the following:
- Priority payment of a specified distribution referred to as a dividend usually established as a specified dollar amount or as a percentage of the price of the preferred share.
- Repayment of the price of the preferred shares and any unpaid dividend in the event of the sale or dissolution of the corporation.
- Other priority rights that may be established in the Articles of Incorporation or By-Laws of the corporation.
However, there is no assurance that the Issuer will have any assets to pay preferred shareholders in the event of a liquidation and in that event, the preferred shareholders can lose their entire investment.
C. Corporate Bond
A Corporate Bond is an interest-bearing debt instrument containing a corporation’s promise to pay a fixed sum of money (yield) at some future time. Holders of corporate bonds generally have priority of payment over any other instrument of ownership or debt in the corporation.
However, there is no assurance that the Issuer will have any assets to pay bond holders in the event of a liquidation and in that event, the bond holders can lose their entire investment.
D. Corporate Debenture
A Corporate Debenture is very much the same as a corporate bond. Generally, a debenture is backed only by the general credit and financial reputation of the Issuer. The terms “bond” and “debenture” are often interchangeable but the difference between the two is that the bond holders have a priority of payment ahead of holders of debentures.
However, there is no assurance that the Issuer will have any assets to pay debenture holders in the event of a liquidation and in that event, the debenture holders can lose their entire investment.
Section IV. General Securities Terminology
A. Unregistered Stock also known as Restricted Stock
Unregistered Stock or Restricted Stock is a security that is not registered with the SEC and therefore may not be sold publicly unless specified conditions are met. A restricted security is usually acquired in a nonpublic transaction in which the buyer gives the seller a letter stating the buyer’s intent to hold the stock as an investment rather than resell it.
Dividends are a distribution of a portion of a corporation’s earnings or profits to a corporation’s preferred and common shareholders on a pro rata basis. Usually the dividends are paid in the form of cash or additional shares.
A Prospectus is a formal legal document which is required by and filed with the Securities and Exchange Commission that provides details about an investment offering to the public. The prospectus must contain certain required facts that an investor needs to make an informed investment decision.
D. Offering Circular
An Offering Circular is a type of prospectus for a bond, debenture, preferred stock, common stock or other security instrument of a company. An offering circular may also be referred to as a prospectus, offering memorandum, or private placement memorandum (PPM). The “offering circular” term is often used instead of “prospectus” in certain situations, such as when the securities offering are not required to be registered with the SEC. Offering memoranda are needed when seeking securities identification numbers or listing on various global stock exchanges.
For offerings under Title III, Regulation Crowdfunding, the SEC uses a Form C as a disclosure guideline or document that must be filed by the Issuer and shared with the Portal and potential Investors. We require this information for any potential Issuer or Offering on our Portal.
E. Closely Held Corporation
A Closely Held Corporation is a corporation whose common stock is owned by a relatively small group. In this type of corporation all of the functions are often performed by the same group. These individuals serve as shareholders, officers, and directors and are involved in the management and operation of the business. A closely held corporation differs from a publicly held corporation since its stock is neither issued nor traded to the public at large.