Kurt: As many of you may have seen in the news, the JOBS Act and Crowdfunding rules were finally passed last week. How does the new JOBS Act related to Crowdfunding apply to EB5?
Scott Andersen: What happened approximately a week ago was that Title III finally went live.
People have been talking about crowdfunding and the ability to engage in crowdfunding for a long time, but technical crowdfunding, at least on a federal basis, became live just a week ago and the rule allows issuers to raise $1 million through the use of a funding portal or a securities broker-dealer that can target non-accredited investors.
The reason this has been exciting for the marketplace is that now you have a mechanism that allows you to target exclusively non-accredited investors so that they can participate in your offering.
It could theoretically be used in EB5 if somebody who put forth a project, determined that it made sense to include an offering that targeted non-accredited investors and wanted to focus on doing a small portion of the offering using this exemption.
Kurt: The term crowdfunding can mean something much broader than what we see in Title III. Isn't that right?
Jor Law: What Scott mentioned was “technical” crowdfunding. The lawmakers came out with this idea of crowdfunding, which legally is a capital raise that doesn't exceed $1 million in a 12-month period and which has other conditions to it. Within EB5, it's possible to use it, but its practicality is limited.
What most people call crowdfunding is any sort of funding from the crowd, and it started off with non-equity-based crowdfunding, like the Kickstarters and the IndieGoGos of the world where someone just donated or pre-bought products or rewards for their donation.
The JOBS Act created various categories of securities exemptions which could be used to solicit the crowd in some form or another. That's Title II 506(c), Title III Regulation C, is what Scott just talked about, and then there is Title IV, Reg A+.
I think it's important to note that there's a legal and technical definition of crowdfunding, which is very, very limited and goes contrary to what most people call crowdfunding. Then there's the broader general public concept of crowdfunding, and most of that is captured within the JOBS Act through various titles.
Even then, many people, when they refer to crowdfunding, refer to even more than that. Among industry practitioners, when used loosely as a term, crowdfunding really refers to Title II, III and IV of the JOBS Act.
Scott Purcell: Title II is the 506(b) or 506(c), where you can use general solicitation. In other words, advertise securities offerings to people you've never met. Title III is raising up to $1 million from anyone in the country, accredited or non-accredited, and Reg A, of course, is a private, public offering. Mini IPOs, as many people refer to it.
You can mix and match these things, and there may be different times when you use different things. A lot of us here already know that you may run concurrent 506(c) offering with a Reg S offering, depending on where the investors reside, but you can also run different parts of the capital stack through various crowdfunding exemptions.
Regarding your non-EB5 money, maybe you do run a Title III, now called the 4(a)(6) exemption offering of $1 million in order to galvanize some local support for the project.
Say you sold $1 million worth of securities in a separate offering to people who are local to the project, so that the next time you go into a zoning board meeting you have a couple thousand people there who are definitely pro the project. That might help you leverage things to get it to a point where you can raise the EB5 money as a 506(c), or even raise the money through a 506(c) concurrently. You can think about mixing and matching.
Kurt: If someone decided that they wanted to take advantage of Title III, how would you suggest that they get started? What's their first step?
Scott Purcell: The first step is to know that you have to do it through a funding portal, which is either a broker-dealer that's operating a funding portal or this new class of SEC-registered, FINRA-member entity called the 'funding portal'. With your own offering, you can use a broker-dealer to help you raise funds, such as Primary Capital.
You can also do it yourself or do both. You could raise some money yourself through your existing investors or through your website. You can have a broker like Primary Capital help sell it. Our broker-dealer, FundAmerica Securities, doesn't sell; we only help clear transactions.
You can do a lot of things yourself, but with a Title III, within certain rules, you can advertise the offering anywhere you want, but the execution of it actually has to go through a funding portal or a broker-dealer. There's no option on that.
You need to understand that you will be involving a FINRA-member firm in that and you also have to file a Form C instead of a Form D, which you're used to with your 506 offerings, and that has to be filed ahead of time instead of at the end of the offering.
Those are the two main things. It's really easy to do, but you'll be filing a Form C and you will be conducting it either through a broker-dealer or a funding portal.
Kurt: My guess is that this might be a very small amount to raise for someone like John Leo's firm (Primary Capital), but it seems to me that your funding portal might be a much better solution for an issuer.
Scott Purcell: We don't have a funding portal. We're the power behind funding portals, so anyone who's raising money online, about 80% of the market is using FundAmerica services, but we don't have a funding portal ourselves.