CHAPTER 7

After Your Successful Crowdfunded Offering Is Completed

If your offering fails to reach its target amount (or the minimum offering amount you specified in your offering documents) by the scheduled closing date, the ball game’s over. The funding portal takes down your listing, those who invested in your offering get their money back, and you and your management team go back to square one.

If your offering reaches its target amount within the specified offering period, congratulations! I predict you and your cofounders will be enjoying a very wild (and well deserved) celebration indeed. Just make sure you don’t use any of your investors’ money to fund the party (they really, really don’t like that).

And don’t celebrate for too long. You and your management team have lots more work to do.

Getting Your Money from the Funding Portal

While an offering is pending, Regulation Crowdfunding requires a funding portal to direct investors to transmit funds to a “qualified third party” (usually a bank, brokerage firm, or other financial institution) that has agreed in writing to hold the funds for the benefit of, and to promptly transmit or return the funds to, whoever the funding portal directs.

Upon completion of a crowdfunded offering, the funding portal is required to direct the qualified third party to transmit funds to the issuer on the later of the following dates:

The date on which the total invested funds exceeds the target offering amount (or the minimum offering amount described in the issuer’s Form C disclosures) and the five-business-day cancellation period has elapsed for all investors

Twenty-one days after the offering commenced

The funding portal is also required to deliver:

To each investor: a confirmation of her transaction at the time her funds are released to the issuer

To the issuer: a list of the names, addresses, and other contact information for each investor who participated in the offering, along with the number of securities purchased by that investor and the total amount of his investment

Issuing Your Securities to Investors

Now you and your management team have work to do. Because funding portals under Regulation Crowdfunding are prohibited from handling securities or money, you will have to deliver your securities to each investor in your crowdfunded offering or provide some other evidence of their interest in your company.

Debt securities such as promissory notes almost always exist in physical form. You should have a separate note for each investor and send the original note to each investor, keeping only photocopies for your company records.

Equity securities are different. Under the corporation laws of virtually every state, securities can be either “certificated” or “uncertificated.”

Certificated Securities

Certificated means that the investor receives an actual certificate—a piece of paper made from dead trees—as evidence of his or her shares in your company.

Under the corporation laws of virtually all states, a corporation must have stock certificates for each class of its capital stock (common and preferred) that state on their faces:

The name of the issuing corporation and that it is organized under the law of the state of X

The name of the person to whom the certificate was issued

The number and class of shares the certificate represents

In addition, the designations, relative rights, preferences, and limitations applicable to the class of stock represented by the certificate must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the corporation will furnish the shareholder this information on request in writing and without charge.

When you incorporated your company, your lawyer probably sent you a corporate minute book—a three-ring binder with room for your corporate resolutions and other important corporate papers. That minute book had a section called “Certificates” with preprinted certificates for you to fill in when you issue them to somebody.

I have formed literally hundreds of corporations in my career, and I can tell you two things about those certificates:

1.There aren’t nearly enough of them to accommodate a crowdfunded offering of securities.

2.The information required to be placed on the front and back of each certificate with the designations, relative rights, preferences, and limitations of the class of stock represented by the certificate isn’t there.

You and your management team will have to type that information on each certificate—every bleeding one—by hand. If you run out of certificates, or didn’t have enough in the first place, you will have to order more. This process will take at least a week to two weeks, so be sure to order the extra certificates before you begin your crowdfunded offering.

LLCs are not required to have certificated membership certificates, although the LLC laws in virtually every state permit LLCs to issue them. The information required in a membership certificate is basically the same as that in the corporation statute, with one or two minor exceptions that your attorney can explain to you.

I always recommend that my LLC clients issue membership certificates to their investors: they look nice, investors feel they got something for their money, and if your company crashes and burns, they might have some residual value as collectibles on eBay.

Uncertificated Securities

Uncertificated means there is no physical security—the number of shares is recorded on the issuer’s books and records and exists only as an electronic data entry.

The corporation laws of most states require corporations to send holders of uncertificated shares a written statement of the information required on stock certificates for certificated shares. While it is tempting to treat all crowdfunded securities as uncertificated and just send the required statement by email (or even less personally, to rely on the confirmation statement from the funding portal as containing the required information), I’m in favor of issuing actual certificates to your investors, for the reasons stated above.

Complying with State Blue-Sky Laws

Title III of the JOBS Act expressly preempts state securities laws requiring registration or filing of documents in connection with crowdfunded offerings. That does not mean, however, that your company is off the hook when complying with these laws.

Title III does not restrict the states’ ability to take enforcement action with respect to fraud or deceit by issuers or funding portals. Especially for smaller offerings of $100,000 or less, which will certainly be deemed too small for the SEC to care about, it is more likely than not that your company will be sued by a state regulator if it commits fraud or otherwise makes material misstatements in Title III crowdfunded offering documents.

States are also allowed under Title III to impose fees for Title III crowdfunded offerings if (1) the issuer is located in that state and/or (2) more than half of the participating investors in the offering reside or have a place of business in the state. You will need to check with your lawyer to see if any state rules require you to pay a fee, especially if both your company and most of your crowdfunded investors are located in the same state.

Creating a Stock Transfer Ledger

There is one other section of your corporate minute book you need to look at: the “Stock Transfer Record” or “Stock Transfer Ledger,” which usually appears at the end of the book.

As anyone who has ever written or self-published a newsletter can tell you, the hardest part of the job is keeping track of your mailing list.

It’s the same with investors: you need to keep track of every outstanding share in your company at all times. If you ever decide to solicit large investments from venture capitalists or accredited investors under Title II or Regulation D, launch a mezzanine offering with institutional investors, or (from my lips to God’s ears) decide to make an initial public offering of your shares, your underwriters or venture capital investors will want to see this information on demand.

This means keeping track of the name, address, telephone number, and email address of each investor and updating that information every time the investor:

Changes her address or email address

Adds a cell phone or other telephone number as a secondary number

Dies, so that his shares are transferred to someone else (hopefully just one) as part of probating his will

Sells her shares to someone else after the one-year holding period required by Regulation Crowdfunding

Gets divorced, so that some of his shares are transferred to his ex-spouse by court order

Files for bankruptcy, so that her shares are transferred to a creditor by court order

Updates his will and transfers the shares to a trust benefiting his descendants in perpetuity (called a dynasty trust; this is becoming an increasingly popular tool in estate planning)

Has any other change that may prevent you from getting hold of her when you really need to do so

Traditionally, companies kept track of this information in the “Stock Transfer Record” at the end of their corporate minute book. Today, an Excel spreadsheet is probably a more efficient way to keep track of this information, or, for email communications especially, an account with Constant Contact or another website that facilitates email newsletters.

If you do use a spreadsheet, I recommend that you print it out periodically, make two copies, put the original in your corporate minute book, and send the copies to your accountant and your lawyer. This is information you absolutely, positively cannot afford to lose.

I always advise that companies maintain their own shareholder lists. If this is a task you really don’t feel comfortable doing yourself, I’m sure some funding portals will offer this as an additional service to their issuers—for a hefty fee, of course.

Updating Your Capitalization Table

The last thing you should do before you start spending your crowdfunded cash is update your capitalization table (cap table), a chart that shows:

Each class of your company’s securities

The number of issued and outstanding shares of each class

The number of options and warrants you have granted to people to acquire shares of each class in the future

The percentage ownership of each class

A brief summary of the principal terms and conditions of each class of securities

If you don’t already have a cap table for your company, now is the time to create one, as this will be one of the first things venture capitalists and other professional investors will ask for when considering your company for a follow-up offering.

Here is an example of what a cap table looks like (the example is from an offering of nonvoting Class B membership interests in an LLC, but it can be easily adapted to a corporation or other legal entity):

Filing Your Annual Reports and Holding Your Annual Shareholders Meeting

Your company will be required to file an annual report with the SEC on Form C-AR (basically an update of the information submitted on your initial Form C) within 120 days after the end of your company’s fiscal year. You will also be required to post a copy of each annual report on your company website. Failure to file the annual report on time will, among other things, disqualify your company from future offerings under Regulation Crowdfunding, which requires that any ongoing annual report that was due during the two years immediately preceding the currently contemplated offering must be filed before an issuer can make an offering under Regulation Crowdfunding.

Your company will be required to file the annual report until the earliest of the following events occurs:

Your company is required to file periodic reports under the Securities and Exchange Act of 1934.

Your company has filed at least one annual report and has fewer than three hundred holders of record.

Your company has filed at least three annual reports and has total assets that do not exceed $10 million.

Your company or another party purchases or repurchases all the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities.

Your company liquidates or dissolves in accordance with state law.

Virtually every state corporation law requires companies to hold an annual meeting of shareholders and special meetings of shareholders to approve particular matters. For most start-up companies, these are relatively informal affairs, which may take the form of conference calls or casual meetings over lunch.

No more.

If your crowdfunded investors have voting rights (not recommended), you will have to involve them in these meetings. Depending on your state’s corporation laws, you will be required to give notice of each meeting to all your investors at least ten days prior to the meeting date and confirm that they received the notice. You must also allow your investors to be physically present during the meeting, either in person or by telephone conference call (in a handful of extremely forward-thinking states, meetings can take place via webinar or other electronic means).

Even if your crowdfunded investors do not have voting rights (highly recommended), you may be required by your state corporation law to give them advance notice of shareholder meetings if particular items are on the agenda (such as mergers, acquisitions, or amendments of your company’s charter documents affecting their rights as shareholders). You may also be prohibited from dealing with your nonvoting shareholders in a harsh and oppressive manner in some states. Talk to your attorney to learn more about your state’s specific rules for dealing with nonvoting shareholders.

Making Sure Your Company Doesn’t Get Too Big

Generally, a company that has more than two thousand total investors or more than five hundred investors who are not accredited investors is required to register its securities and file periodic reports with the SEC under the Securities and Exchange Act of 1934, just like a public company is required to do. Regulation Crowdfunding exempts a crowdfunded issuer from this requirement as long as it:

Files its annual reports promptly and on time

Has $25 million in total assets or less

Appoints an SEC-registered transfer agent for its securities

An issuer that exceeds these thresholds will be granted a two-year transition period before it will be required to start filing periodic reports under the 1934 act, provided it timely files all its ongoing reports pursuant to Regulation Crowdfunding during the two-year period.