CHAPTER 9

Going Back for Seconds: Launching Multiple Crowdfunded Offerings

Raising money for your company through crowdfunding techniques is a little bit like getting hooked on drugs, alcohol, or other addictive substances: if your experience is a good one overall, you probably won’t be able to wait until the next hit.

Generally, as I’ve hinted throughout this book, the fewer investors your company has, the better and easier it will be to keep them happy and on board for the long haul. Managing a crowd of hundreds or thousands of investors is easy for large public companies with the staff and budget to have an investor-relations department wholly devoted to the task. It is far more difficult for a start-up company that needs to devote 100 percent of its management time to developing the products and services that will ensure the company’s success, with as few distractions as possible.

While Title III crowdfunded offerings may be an excellent way (heck, perhaps the only way) for start-ups and concept companies to raise the capital necessary to start down the entrepreneurial path, your long-term goal in managing finances should be to raise money from fewer and fewer, and better and more sophisticated investors as you grow your business.

Can You Launch Other Offerings at the Same Time as Your Crowdfunded Offering?

Generally, yes. Title III does not prohibit you from having concurrent (simultaneous) offerings of your company’s securities. Regulation Crowdfunding specifically states that Title III offerings are not to be “integrated” with other offerings for purposes of determining the limitations on those other offerings. So, for example, if you are raising money from accredited investors in an offering under SEC Rule 506(b), which prohibits general solicitation and advertising, the fact that you are using general solicitation methods in your Title III crowdfunding will not “taint” your Rule 506(b) offering as long as you don’t make any general solicitation of the latter offering (for example, by inadvertently mentioning it in an email to your Title III investors in one of your funding portal’s chat rooms). But—and it’s a big but—an issuer conducting a concurrent exempt offering for which general solicitation is not permitted will need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Regulation Crowdfunding. For example, the issuer may have had a preexisting substantive relationship with such purchasers. Otherwise, the solicitation conducted in connection with the crowdfunding offering may preclude reliance on Rule 506(b).

The amount your company can raise under Regulation Crowdfunding in any 12-month period is limited to $1 million. So, if your company raises $800,000 in an offering that closes on June 30, it will have to wait until July 1 of the following year if it wants to raise more than $200,000 under Regulation Crowdfunding. Similarly, if an affiliate of your company (defined as an entity “under common control with” the issuer) or a predecessor of the affiliate, has raised capital under Regulation Crowdfunding during the preceding 12 months, that offering will limit the amount your company can raise under Regulation Crowdfunding until the 12-month period has expired.

Although the SEC allows concurrent offerings of securities under different exemptions, it may be difficult as a practical matter to keep each offering within its particular “silo” of regulations. Your funding portal and advisors will need to keep a watchful eye on the progress of each offering to make sure they don’t “cross paths” in such a way as to lose their specific exemptions.

Keep in mind, though, when launching private offerings of securities outside the JOBS Act, that the old restrictions on those offerings remain in effect. So, for example:

When making an offering under SEC Rule 506(b), you cannot use general solicitation or general advertising to promote the offering and cannot have more than thirty-five investors who are not accredited investors.

When making an offering under SEC Rule 504, you cannot use general solicitation or general advertising to promote the offering and cannot raise more than $1 million from private offerings (other than Title III crowdfunded offerings) during a twelve-month rolling period.

You may be required to file your offering documents with state securities regulators under state blue-sky laws that haven’t been specifically preempted by the JOBS Act.

The “Upstairs-Downstairs” Offering

A (potentially) very effective way for start-up technology companies to raise money under the JOBS Act may be a two-tiered offering structure that I call an “upstairs-downstairs” offering (with apologies to the much-loved British television series of that name, which had much higher ratings than our MoneyHunt show).

An upstairs-downstairs offering would be a simultaneous launch of two offerings:

An offering of preferred stock (or LLC membership interests with preferred distributions) or convertible debt securities to accredited investors only under Title II of the JOBS Act and new SEC Rule 506(c)

A Title III crowdfunded offering of nonvoting common stock (or nonvoting LLC membership interests without preferred distributions) for friends, families, customers, employees, advisers, mentors, and others whose contributions to the company deserve to be rewarded but who do not qualify as accredited investors under the federal securities laws

An upstairs-downstairs offering allows a company’s founders to reward their friends, families, and other supporters in a way that doesn’t jeopardize their ability to raise money from sophisticated venture capital players. Generally, venture capitalists, angel investors, and other accredited investors do not like to rub elbows with people they feel (rightly or wrongly) do not belong in the room. They want the right to get their money out first if the company crashes and burns, and they want significant influence, input, and control over the way the company is managed. In contrast, most Title III investors are looking only to share in some small way in your company’s (and your) success. While some may have dreams of getting rich, few people will expect to play a significant role in your company for only a $100 or $1,000 investment (the few who do are the ones you have to watch out for, as discussed in Chapter 8).

By denying voting rights to Title III investors and giving your Rule 506(c) investors preferred shares, you have given the players what they want without really taking anything away from your Title III investors.

Another way to do an Upstairs-Downstairs offering, although one that will be possible only for larger companies, would be to combine a “mini-IPO” offering under Tier II of the new Regulation A-Plus (adopted under Title IV of the JOBS Act) with an offering under Regulation Crowdfunding.

Can You Launch Another Crowdfunded Offering Right After You Complete Your First One?

Regulation Crowdfunding expressly permits follow-up offerings of crowdfunded securities up to a maximum of $1 million over a rolling twelve-month period. Whether you should do so, of course, is a different matter.

It is axiomatic that success breeds success. A successful Title III offering may make it easier for your company to launch a second, third, or fourth offering because if you do things properly, your pool of potential investors increases geometrically with each offering (your investors tell their friends, who tell their friends, and so forth). If there has been a significant growth in your company’s social media profile since the first Title III offering, it may be particularly worthwhile to launch a follow-up offering, as you will be making essentially the same pitch to a new group of people.

But that success may come with a price: the more crowdfunded offerings you launch that are successful, the bigger the number of investors you have to manage on an ongoing basis. Keeping track of a couple of dozen investors is much, much easier than managing hundreds or thousands of them. Also, the more crowdfunded investors you bring on board, the more difficult it will be to raise capital from more sophisticated accredited investors, who won’t like sharing the table with lots of small investors, any one of whom could potentially wreak havoc by going rogue and posting negative information about your company online.

Before you launch a following Title III crowdfunded offering, it might be a good idea to poll your existing investors to see how they feel about the idea. Some may see your decision as an admission that your management team goofed with the first offering by not asking for enough money. More important, investors are always nervous about being diluted by subsequent offerings that reduce the percentage of a company’s total shares they own (discussed in Chapter 4). They will want to know that the subsequent offering will be at a higher price per share than they paid so that they will have a smaller piece of a much larger and more valuable pie. If they see their piece of the pie shrinking without an increase in the value of the company, they won’t like that, and you want to manage their adversity before you launch the follow-up offering.

Some Things to Consider When Launching a Follow-Up Offering

Here are a few things to consider when launching a follow-up offering:

You will have to prepare entirely new Form C disclosures and supplemental materials for the following offering; these may be updated versions of your previous offering documents but will have to be filed separately with the SEC and the funding portal.

You will have to justify the new offering by claiming new financial needs in the “use of proceeds” section of your Form C disclosures.

You will have to disclose the prior offering and its success in your Form C disclosures.

If you have not filed your Regulation Crowdfunding annual report (Form C-AR) on EDGAR on time, you may be barred from a following offering until that filing has been made and you have otherwise caught up with all required filings.

Your funding portal will undoubtedly charge additional fees for hosting your following offering (although these are likely to be lower than they were in the previous offering because you and your portal have a better idea of what to expect).