Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Tuesday, November 26, 2013

How Crowdfunding Impacts Going Public Transactions

With initial public offerings (“IPOs”) in decline since the economic crisis of 2008 due to their high cost and uncertain success, more and more companies wishing to go access our public markets have turned to direct public offerings. A direct public offering, like an IPO, allows companies to raise capital and to create a shareholder base without using an underwriter or other middleman.  Crowdfunding can assist in this process.
Direct public offerings are not complicated. Typically, the company sells shares to a relatively small number of people in a private placement, and then registers the resale of those shares by filing a registration statement—usually a Form S-1—with the Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1933 (“Securities Act”). Once the S-1 is declared effective by the SEC, the company will need to find a sponsoring market maker to file a Form 211 with FINRA and to apply for a ticker symbol. That done, the company may begin trading over-the-counter as a fully-reporting SEC registrant.
In going public transactions the most common registration statement used is the Form S-1. It can be used to register the company’s own securities for resale, thus raising capital for the company, or to register seed shareholders’ stock for resale. A combination of company stock and shareholder stock may also be registered.
All private issuers are qualified to file a registration statement on Form S-1. Doing so in a going public transaction is not as expensive or time-consuming a process as many believe, and is vastly preferable to running the risks associated with a reverse merger. Those risks include undisclosed liabilities and sketchy corporate records that could lead to DTC chills or global locks, or to SEC trading suspensions.
How Crowdfunding Assists in the Going Public Process
Recently the SEC published its proposed Regulation Crowdfunding (“Reg CF”), which amends the Securities and Exchange Act of 1934 (“Exchange Act”) to accommodate the crowdfunding provisions of the JOBS Act.
Once the new rules become effective, crowdfunding will provide an alternative to raising initial capital and obtaining shareholders by using traditional private placements. It’s attractive because by listing with a crowdfunding portal, small private companies unknown to the public will enjoy enhanced visibility. People interested in investing in startups will be able to browse the portal to find information about the kind of companies they find appealing, and then buy stock through the company.
Used this way, crowdfunding will not create a public company, but it will provide an easy method for private companies to obtain the number of shares necessary to go public—more than 25—and will also raise seed capital the company can use immediately to offset its going public costs.
The company wishing to go public must then take other steps. It may, as described above, file a Form S-1 with the SEC to register the stock it sold in the crowdfunding offering. If it prefers not to go to that expense, it can wait until its new shareholders have owned their stock for more than 12 months, and then find a sponsoring market maker to file a Form 211 and apply for a ticker symbol from FINRA. FINRA will conduct a review and provide comments to the sponsoring market maker which the company and its securities attorney must address. Upon receipt of confirmation that all comments have been answered satisfactorily, a ticker will be assigned and the company’s securities will be publicly traded on the Pink Sheets.
Whichever method the company chooses, the initial crowdfunding offering will provide the foundation for a going public transaction in the future. Crowdfunding may also be used to raise additional funds once the going public process is complete. Issuers may raise a maximum of $1 million every 12 months.
This blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting SEC registration statements, Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144, SEC reporting requirements, 1933 Act registration statements on Form S-1, S-8 and 1934 Act registration statements on Form 10, OTC Pink Sheet listings, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 N
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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