Big Exit: Crowdfunded on StartEngine Under Reg CF, Hylete Fitness Apparel Files S-1 to IPO on the NYSE

In 2017, Hylete Fitness Apparel raised $1 million on StartEngine, a leading US-based investment crowdfunding platform.

Jump forward two years later and Hylete has some good news for early investors. Hylete has filed for an initial public offering (IPO) with shares expected to trade on the New York Stock Exchange (NYSE).

StartEngine stated, “We’re happy for Hylete and wish them the best as they enter the final stretches of preparing to go public.”

According to the offer page, Hylete investors purchased Class B Common Stock at $1/share at a pre-money valuation of $25 million. The securities were issued under Reg CF.

Today, according to the S-1  filing, Hylete is looking to issue  Class A common stock at price per share of between $8 to $10.

While it is not immediately clear as to the impact of the investors who participated in the Reg CF offering, the S-1 states that Hylete intends to convert all outstanding shares of their preferred stock and all outstanding shares of their Class B Common Stock into shares of Class A Common Stock, prior to the date of the offering.

The Class A Common Stock offering will raise approximately $13.7 million, or $15.8 million if the underwriters exercise in full their option to purchase additional shares, assuming an initial public offering price of $9.00 per share.

Hylete is a “digitally native, fitness lifestyle company engaged in the design, development, manufacturing, and distribution of premium performance apparel for both men and women.”

While still reporting a loss, Hylete reports net sales for 2018 were $11,689,200, an increase of 33.2%, from net sales of $8,773,025 in 2017.

It will be interesting to learn how Reg CF investors make out. By listing on the NYSE (if it is approved), investors will have the option to sell their shares – an important opportunity to benefit from the investment and any capital gain.


StartEngine Receives ATS License. So When Will Secondary Trading in Crowdfunded Securities Start?

StartEngine, one of the larger securities crowdfunding platforms in the US, has received an Alternative Trading System license (ATS). StartEngine has long shared its intent to pursue an ATS license as it seeks to provide a liquidity path for crowdfunded securities.

Crowdfund Insider reported last month that StartEngine had been approved as a Broker-Dealer. To receive approval as an ATS, a platform must first become a Broker-Dealer. At some point during July, StartEngine finally became a regulated ATS.

According to the Securities and Exchange Commission (SEC), an ATS is a trading system that meets the definition of “exchange” under federal securities laws but is not required to register as a national securities exchange if the ATS operates under the exemption provided under Exchange Act Rule 3a1-1(a). To operate under this exemption, an ATS must comply with the requirements set forth in Rules 300-303 of Regulation ATS.

To put this in perspective, an ATS may operate similar to an exchange providing trading in securities with a CUSIP. Many, aspiring Fintech platforms are seeking ATS approval. Some of these platforms are looking to trade digital assets – an emerging sector of finance which creates additional challenges for regulators. And multiple Fintechs already have ATS licenses which are in use. Think Templum, OpenFinance, SharesPost and more.

So when will “StartEngine Secondary” go live? Good question.

StartEngine is not the first crowdfunding platform to receive ATS approval. SeedInvest, now a part of digital asset ecosystem Circle, has held an ATS license for many months yet has yet to provide trading for a single security (as far as we know). It is not clear why the delay.

But it is certain that StartEngine did not pursue an ATS for fun – it is a long, arduous legal process. Expect a trading system to emerge in the coming months and most certainly by some point in 2020.

The current list of approved ATS platforms is embedded below.

[pdf-embedder url=”” title=”SEC ats list 07 31 19″]

StartEngine 2.0: Crowdfunding Platform Becomes Broker Dealer

Crowdfunding Platform Tops $100 Million in Funding

StartEngine, one of the largest crowdfunding platforms in the US, has been approved as a broker-dealer. Following 18 months of working with regulators, Broker-Dealer StartEngine Primary, is now a wholly-owned subsidiary of StartEngine Crowdfunding Inc. and is registered with the SEC and is a member of FINRA.

StartEngine co-founder and CEO Howard Marks commented on the news:

“We have now achieved over $100 million in total raised for companies. Since 2016, our mission has been to help entrepreneurs achieve their dreams. This is an important milestone in our journey, and we feel we are just getting started. Before the JOBS Act, entrepreneurs were stuck either raising money from professional investors or borrowing money from banks if they had assets to mortgage. Equity crowdfunding is now a real alternative, and soon it will be mainstream. The future of finance is with the crowd.”

StartEngine shared that since launch, the platform has secured funding for over 275 companies from 38 Industries. Over 56,000 investors have made more than 100,000 investments. StartEngine, on average, has raised $55.60 per minute.

[easy-tweet tweet=”StartEngine has secured funding for over 275 companies from 38 Industries. Over 56,000 investors have made more than 100,000 investments. StartEngine, on average, has raised $55.60 per minute” template=”light”]

The pursuit by StartEngine of broker-dealer license has been previously reported but represents an important step in the evolution of the investment crowdfunding platform. Currently, StartEngine is a “full-stack” investment site issuing securities under Reg CF, Reg A+ as well as Reg D. But by becoming a FINRA regulated Broker-Dealer, StartEngine may take advantage of a broader range of services.

According to an email distributed by Marks:

Through StartEngine’s Broker-Dealer, the company may:

  • Help more companies raise capital under Regulation A+, which means more investment opportunities for the investor. 

  • Increase StartEngine’s revenue because now it can accept commissions for Regulation A+ offerings in exchange for the additional services they can provide through the broker-dealer.

Marks said the Broker-Dealer license was the next step in their “ultimate goal of becoming a marketplace for private investments.” A Broker-Dealer license is also a precursor to being approved as an “Alternative Trading System (ATS).

When StartEngine receives its ATS license, the platform may then provide a secondary trading marketplace for issued securities. This trading platform, to be called StartEngine Secondary, will create liquidity for investors and allow them to buy and sell shares purchased in companies that have previously raised capital on StartEngine.

This secondary market will give investors the possibility of earning a return before a successful company gets acquired or goes public.

In a posted document, StartEngine added some further insight into its aspirations.

The company said that StartEngine Primary LLC will help facilitate future offerings that are being conducted under Regulation A+. Regulation Crowdfunding offerings (those that are looking to raise up to $1.07M) will continue to be conducted through StartEngine Capital LLC, StartEngine’s funding portal, as is required by Regulation Crowdfunding (Reg CF).

StartEngine said that, over time, users may notice a few changes with Regulation A+ offerings, which may raise up to $50 million.

Those changes include:

  • More customers raising capital through Regulation A+ on StartEngine
  • Investors from all 50 states will be able to invest in Regulation A+ offerings
  • StartEngine plans to conduct larger raises under Regulation A+, and more of them, bringing users on our platform a greater variety of investment opportunities.

StartEngine said they view Reg A+ as “the gold standard for companies.” Under the securities exemption, shares may be immediately tradeable.

Marks added that with the Broker-Dealer registration, StartEngine has become a modern financial firm offering only crowdfunding services from Reg CF ($1.07 million funding cap) to Reg A+ ($50 million funding cap). He also appeared to be exiting the Reg D sector which is only for accredited investors.

“As Broker-Dealer, we now can help companies raise millions of dollars directly from the crowd. The future of finance is with the crowd.”

[easy-tweet tweet=”StartEngine 2.0: #Crowdfunding Platform Becomes Broker Dealer” template=”light”]

Reg CF Topped $200 Million Raised in May

Reg CF, the crowdfunding exemption that allows issuers to raise up to $1.07 million online, has topped the $200 million mark, according to StartEngine – a crowdfunding platform that tracks the exemption’s progress.

In May, according to the report, issuers raised $5.7 million pushing the total to $203.5 million since the exemption became actionable in May 2016.

StartEngine notes that it took almost 2 years to hit the $100 million mark. It took half that time to raise the next $100 million. Of course, there are far more funding portals in the space today then there were back in 2016 and awareness is higher.

In May, the report points out that Texas, California and New York were the states with the most capital raised under the exemption. These three states have consistently been at the top of the list each month.

The Securities and Exchange Commission (SEC) issued a report on Reg CF earlier this month.

While their data only went until the end of 2018, the snapshot was interesting. The SEC said that between May 16, 2016, and December 31, 2018, there were 1,351 offerings seeking in the aggregate a target, or minimum, amount of $94.3 million and a maximum amount of $775.9 million. Of the completed offerings, approximately $107.9 million has been raised during the period.

Out of these completed rounds, 29 offerings raised the max amount of $1.07 million. The vast majority of the issuers raised far less than the cap.

While utilization of the exemption appears to be accelerating, it pales in comparison to Reg D, an exemption that is estimated to raise about $1 trillion each year.

Industry advocates have petitioned the US government to improve Reg C including raising the exemption cap to $20 million to make it more palatable to a wider audience of businesses.

StartEngine’s Self Crowdfunding Campaign Keeps Pushing Forward

StartEngine, one of the larger investment crowdfunding platforms in the US, continues to push forward with its self-crowdfunding campaign has now raised approximately $825,000 from 699 investors.

StartEngine is seeking from $500,000 to $9 million under Reg A+ at a pre-money valuation of $119 million.

Launched earlier this spring, the offer seeks up to $9,000,000 from the sale of Common Stock. There is an additional $1,000,000 offer on the table for the sale of Preferred Stock for a total of $10,000,000.

Investors in preferred shares must invest $200,000 or more. Common share investors have a minimum of just $502.50.

To date, including previous rounds, over 4,000 members of the StartEngine community have invested in StartEngine. Last year, StartEngine raised approximately $5 million from almost 3,500 investors at a valuation of $65 million.

The Reg A+ Offering Circular provides additional information on the share sale.

StartEngine recently announced it had surpassed 200,000 users on the platform. To date, StartEngine has raised around $90 million for 265 different companies. StartEngine is full stack meaning the platform leverages all three crowdfunding rules: Reg D 560c, Reg A+ and Reg CF. The platform has dabbled in the crypto sector too and would like to move into the security token sector once the regulators clear the path.

What’s in Store for the Future?

StartEngine is pursuing a broker-dealer license as well as an Alternative Trading System (ATS) license. Once StartEngine has both, the platform can set up a secondary marketplace to help provide liquidity for a traditionally illiquid asset.


Automated Retail Tech Company PopCom Secures Nearly $950,000 Through StartEngine Funding Round

PopCom (formerly Solutions Vending, Inc.), an automated retail technology company, has successfully raised nearly $950,000 through its Title III regulation crowdfunding campaign on StartEngineFounded in 2012, PopCom is the company behind PopCom Kiosks and the PopCom API. Its data and analytics SaaS makes kiosks and vending machines smart through data collection at the point of sale (POS).

“At PopCom, we believe successful brands are intelligent, mobile, and resilient–and we engineer our automated retail solutions to be exactly that. Our mission is simple: equip entrepreneurs and brands with future-ready retail solutions that allow rapid retail expansion, incredible customer experiences, and powerful sales data.”

PopCom’s patents are currently pending for a new automated retail hardware design called PopShop Kiosks with a solid software IP. The company has raised more than $900,000 from TechStars, Canopy Boulder, Backstage Capital, and Jumpstart. It has also formed a direct partnership with Kiosk Information System to white-label its software to become the preferred automated retail CRM software provider.

“We’re redefining omnichannel strategy for worldwide brands– from Fortune 500 companies to nimble e-commerce entrepreneurs, providing a completely new direct-to-consumer channel backed by unparalleled data and frictionless transactions.”

PopCom also reported that will be “disrupting” massive regulated industries, including Legal Cannabis, Pharmaceuticals, and Other Verticals like alcohol, tobacco, lottery, and gambling. 

“PopCom’s white label software solutions can be used to create a fully compliant, simplified, and automated point of sale system regardless of jurisdiction with advanced metrics available for consumer behavior and demographics. “

Funds from the StartEngine round will be used to continue the growth and development of PopCom’s products. The campaign is set to close mid-April.

StartEngine’s Reg A+ Self Crowdfunding Offering is Now Live. Invest by Credit Card up to $10K

StartEngine, a leading full-stack crowdfunding platform is in the first full week of a self crowdfunding round using Reg A+. StartEngine previously raised $5 million in 2018 using Reg A+.

The offer seeks up to $9,000,000 from the sale of Common Stock and $1,000,000 from the sale of Preferred Stock for a total of $10,000,000. Investors in preferred shares have a minimum hurdle of $200,000 and a price per share is $7.50. Common share investors have a minimum investment of $502.50. StartEngine is issuing shares at a pre-money valuation of $119 million. The Reg A+ Offering Circular provides additional information on the share sale.

StartEngine has raised over $80 million on its platform to date. Securities are being issued using Reg CF, Reg A+, and Reg D. They also have the ability to issue security tokens and the platform was the first to issue digital securities using Reg CF.

StartEngine reports annual revenue of $4.9 million in 2018, a growth rate of 140% versus year prior. Currently, 89 companies actively raising capital on the securities crowdfunding platform.

So what’s on the roadmap of interest?

StartEngine is pursuing both a broker-dealer license and an Alternative Trading System (ATS) license. This will allow the company to provide liquidity for investors in secondary transactions and move beyond primary issuance.

Additionally, StartEngine is reporting you may now invest up to $10,000 by using your credit card. Previously the amount was capped at $2000.

Our Military Travel Now Seeking Funds Through Reg CF Round on StartEngine

Our Military Travel, a U.S. travel platform specifically for military personnel, is now seeking funding through its Regulation Crowdfunding (Reg CF) campaign on equity crowdfunding platform StartEngine.

Founded in 2018, Our Military Travel describes itself as a travel company that is dedicated to the men and women who are in or are veterans of the U.S. armed forces, as well as their families. The platform reports that it is dedicated to becoming the leisure travel “brand of choice” for all veterans, enlisted/active, reserves, National Guard, family of military and ALL patriotic Americans. The platform offers deals on the following:

  • Hotels
  • Airline tickets
  • Rental cars
  • Vacation packages
  • Travel Insurance

Our Military Travel also revealed:

“We give back to the military community by contributing a percentage of our profits to veteran and military-related nonprofit organizations. Plus for all qualified hotels stays, you receive a ‘Free Patriotic Gift’ that’s branch specific and 100% Free. As a true startup, Our Military Travel wants to honor the 45M+ military community and patriotic Americans. We were founded by Robert Rogener, a serial Entrepreneur, Chief Executive Officer, and the proud son of a WWll Veteran. He saw the need for more comprehensive and innovative travel options tailored specifically for veterans, military personnel, military families, and patriotic Americans.”

Speaking about the platform, Robert Rogener, Founder and CEO of Our Military Travel, stated:

“ is not your ordinary booking travel website, for us Patriotism is paramount! As an innovative travel booking company, we proudly offer our entire military community and patriotic Americans outstanding travel value, by offering discounted leisure travel rates, on hotels, airline tickets, rental cars, and vacations, in addition we contribute a percentage of our profits to veteran and military-related nonprofit organizations.”

Funds from the StartEngine round will be used to continue the growth of the Our Military Travel platform. It is set to close this upcoming spring.

Reg CF Closes the Year at $161.5 Million in Crowdfunding. Total for 2018 was Flat versus Year Prior

The StartEngine Index tracking Reg CF crowdfunding issuers was published a few days ago. According to StartEngine, total successful offerings since the securities exemption was launched in May of 2016 now stands at $161.5 million.

So how does 2018 compare to the year prior? Excellent question.

During 2018, issuers raised $75.8 million. In 2017, issuers raised $72 million. Barely a bump higher.

In December, issuers raised $5.1 million a bit less than in November – a tepid month.

The Index reports that 732 companies launched Reg CF offerings in 2018. Out of this number, StartEngine launched the most with 252 campaigns. Wefunder launched 158 offerings in 2018, and SeedInvest 65.

StartEngine does not share successful offerings which are probably a better metric.

The most popular industry to use Reg CF is Food & Beverage. Obviously the fact it is consumer-facing helps. During 2018, $17.4 million was raised followed by Technology ($8.1 million), Media & Entertainment ($5.4 million), and Blockchain ($4.9 million).

California ($21.8 million) was the top state to use the exemption followed by Texas ($8.6 million) followed by New York state ($8.2 million).

Overall, 19 companies raised the maximum amount of $1.07 million in 2018.

Many companies that want to raise more than this amount have been using side by side Reg D/Reg CF offerings. Perhaps a bit clumsy but effective.

Reg CF is the smallest of the three investment crowdfunding exemptions:

  • Reg D 506c is accredited crowdfunding where you can raise as much as you want
  • Reg A+ requires significant disclosures similar to a “mini-IPO” but companies may raise up to $50 million
  • Reg CF issuers can raise $1.07 million via a regulated funding portal or broker-dealer while providing different tiers of ongoing disclosure.

The fact that Reg CF has experienced muted growth is indicative of the shortcomings of the exemption.

Reg CF regulations were created by a combination of Congressional statute and rulemaking by the Securities and Exchange Commission (SEC). It is clear that few of these policymakers engaged in the rulemaking process spent time in the real world of early-stage funding. A non-sensical cap of $1.07 million (which the SEC could change to something more reasonable without Congress) and a litany of compliance fouls have hobbled the exemption while adding excessive cost. That being said, it is a credit to the platforms that use Reg CF as it is a bit of a mess yet some issuers are using it to raise growth capital with the help of the portals.

Will Congress revisit Reg CF in 2019? Or will the Commission act and use their authority to help the little guy? Let’s hope so.

StartEngine to Close Reg D STO Round After Securing Funding Target

StartEngine is set to close its security token offering (STO), using the Reg D 506c securities exemption, this evening (December 31st). The round, which only open to accredited investors, made its debut less than six months after StartEngine closed its first Reg A+ round, raising nearly $5 million from 3,425 investors.

As previously reported, for investors participating in the Reg D offering, tokens may be purchased for $7.50 each or a 25% discount to price expected in the Reg A+ STO. Minimum investment for the accredited offering has been set at $10,000. Under Reg D rules, issued securities must be locked up for one year. Under Reg A+, securities can become immediately tradable – a characteristic of the securities exemption that has made it of interest to the STO/ICO realm.

StartEngine claims it hosted the first Regulation CF ICO and many more since. Blazing this trail has only given us more inspiration. The platform reports its goal to use blockchain for its new service and services planned for the future, which is StartEngine Secure, LDGR, and StartEngine Secondary.

“Contingent on the SEC’s and FINRA’s approval of StartEngine as a broker-dealer and Alternative Trading System (ATS), we intend to launch StartEngine Secondary, which will operate a secondary marketplace for tokenized securities, in the months ahead. This secondary market will be supported by StartEngine Secure, a trusted source and registered transfer agent, and LDGR, a decentralized application for logging transactions in Regulations CF, D and A securities.”

StartEngine added that its goal is to raise $10 million with STO in order to help achieve its vision for these services. Ultimately, the StartEngine team believes the funding will enable them “to realize” their broader goal of creating the modern financial firm.

Stable Token Developer Monetran Now Seeking Funds Through Reg CF Round on StartEngine

Monetran, a U.S.-based developer of stable coin Moneda, is now seeking funds through its Title III (regulation CF) funding round through crowdfunding platform StartEngine. Launched earlier this year, Monetran stated its mission is to establish a digital currency for everyday use in internet commerce:

We intend to ensure that the currency has tangible value and that people everywhere will find it desirable for transactions. We believe that, ultimately, our efforts will result in a cheaper, faster, more flexible method of transferring funds, bringing benefit to people the world over. Moreover, we believe that the mining portion of blockchain technology is a wasteful process which can be replaced by eliminating that procedure in favor of the Byzantine Consensus Algorithm model, which was refined by the Stellar network and adopted by Monetran.”

According to Monetran, Moneda Tokens will be built on the Stellar Blockchain platform and function as the primary medium of exchange usable within its own proprietary Monetran application. The company reported that through the Monetran network, the Moneda Tokens may be used for money transfers and commerce payments as a medium of exchange between any individual(s) and firm(s), that accept such a payment method. The Monetran application will also be used to transfer Moneda between users as well as convert Moneda Tokens to applicable fiat currency.

Although Monetran expects its native token, Moneda, to gain universal acceptance in the first world, it also intends to make its system available to those in the developing and third-world countries. Many inhabitants of those areas lack access to financial systems which many of us take for granted. We believe the Monetran system, taking advantage of the many features of the Stellar Network, will make swift, economical transactions available to millions of people who previously had to deal with slow and expensive transfers of funds, which is part and parcel of most existing processors.”

Funds from the StartEngine campaign will be used to continue development of Moneda. The funding round is set to close at the beginning of January.

Reg CF Dips in November Following Strong October

Following a relatively strong October, Reg CF (Regulation Crowdfunding) crowdfunding dipped by almost half, according to the monthly StartEngine Index.

In October, companies raising money under the securities exemption raised $10.6 million a – record month. In November, companies raised just $5.6 million – a significant decline.

StartEngine hypothesizes that Thanksgiving, one of the USA’s most popular holidays, was the cause of the dip. Too much turkey and football, perhaps.

The StartEngine Index now shows that, in aggregate, companies using Reg CF have raised $156.8 million since May 2016 when the securities exemption was finally made available (it passed into law in 2012 but it took the SEC several years to share the rules. The total number of companies that raised money now total 348 with almost the same number of companies failing (327).  Currently, StartEngine says there are 624 Reg CF offerings raising money.

As for StartEngine’s November, they claim the top spot having raised more than half of the total – $2.9 million

StartEngine Updates on Reg D Offering in New SEC Filing

StartEngine, one of the leading investment crowdfunding platforms in the US, has filed a Form D with the Securities and Exchange Commission (SEC). As CI reported last month, StartEngine commenced a Reg D offering while their Security Token Offering (STO) under Reg A+ remains in limbo, waiting for SEC qualification.

According to the Form D, StartEngine has raised $500,000 from a single investor since commencing the crowdfunding offer which is open only to accredited investors. StartEngine is accepting minimum investments of $10,000. Current rules require StartEngine to file with the SEC within a short amount of time following the initial receipt of money. StartEngine previously raised capital under Reg D in 2015.

StartEngine plans to raise up to $10 million at $7.50 share under Reg D. This represents a 25% discount from their Reg A+ offering which will be open to non-accredited investors.  The valuation of the firm for the Reg D stands at $119 million.

StartEngine is not alone in filing a Reg A+ STO. Numerous firms have filed to issue securities on the blockchain under Reg A+ but as of yet – not a single one has qualified. The SEC continues to take a very cautious approach to issuers seeking to manage securities using distributed ledger technology. Many of the challenges intrinsic to STOs were recently highlighted in an article here.


MuleChain Now Seeking Funds on StartEngine For Blockchain-Powered Delivery Service

MuleChain, a U.S.-based decentralized P2P delivery and warehouse services on blockchain provider, announced on Wednesday it is now seeking funds through its equity crowdfunding campaign on StartEngine for its blockchain-powered delivery service. MuleChain is described as a blockchain smart contract-based venture project that has been in development since the beginning of 2018. It was revealed:

“MuleChain is positioned in the right place at the right time: the crossroads of decentralized blockchain emergence and the recent establishment of successful peer-to-peer on-demand models. We want your investment in order to make this elegant technological solution to real-world problems a reality.”

MuleChain also revealed that it will utilize blockchain technology to create a social value that has the potential to evolve into a global movement powered by individuals instead of being limited to the traditional limits of a simple commercial enterprise. Every traveler could be a mule and every person staying at home could become a pack station owner.

“Everybody, rich or poor, young or old, able or disabled, men or women of any race and origin, will have this new job opportunity to earn occasional extra income at a time that is most convenient for them or even make a full-time living for themselves. In addition, the new convenience assistance service concept could help drastically reduce fossil fuel burning, lower humanity’s carbon footprint, help improve the global environment and save many trees!”

In regards to seeking funds on StartEngine, Ralph Liu, CEO and Founder of MuleChain, went on to add:

“MuleChain is moving into our next stage of growth to complete the build-out of the platform, web, and mobile apps in order to officially launch our services on a well-grounded foundation. We chose Regulation Crowdfunding on StartEngine to go worldwide with our message and connect with individuals who share our vision for democratizing the delivery and warehouse business on a decentralized P2P platform.”

Blockchain, Security Tokens and SEC Regulation A+: A Deeper Dive Into the Regulatory Jungle

As the expression goes:  “Look before you leap.”  But if you are an innovator, determined to blaze a trail never before navigated – there is not much to look at. Being a pioneer can be a lonely and dangerous adventure.  Nothing could be more true when it comes to navigating the maze of Securities and Exchange Commission (SEC) rules and regulations if you are a US issuer in a fundraising mode – determined to eschew garden variety paper certificates and book-entry securities by issuing security tokens (a/k/a digital securities) in a so-called “security token offering” or STO.

If you are satisfied with raising money from (only) accredited investors, there is a clear regulatory path for the initial issuance of security tokens, as far as federal securities laws are concerned.  But if an issuer wishes to expand its investor base to non-accredited investors and raise more than $1 million, as a practical matter the only path open to an issuer is either a fully registered, SEC reviewed offering, with burdensome ongoing reporting obligations, or Regulation A+, a kinder, gentler alternative to a registered offering.

It Takes More than an Acronym

Regulation A+ has its pluses and minuses: It allows an issuer to include non-accredited investors in the offering, and provides immediate liquidity to investors, but with a catch: there is an SEC review process, a $50 million annual cap, and some ongoing reporting requirements.

Indeed, this is the very path proposed by a recently formed trade association, Institute for Blockchain Innovation, boasting 60 industry members including Indiegogo, Finova, and 500 Startups – the “JCO” – “JOBS Crypto Offering.” When I wrote about this in May 2018 on Crowdfund Insider, I described the “JCO”:

“The so called JCO is essentially a two-step process, whereby an issuer first conducts an offering to accredited investors under Regulation D, and then follows this with either a Regulation A+ offering or a fully registered offering.  This second step allows an issuer to include non-accredited investors in the offering. More importantly, by utilizing Regulation A+, or a fully registered offering, the investors will receive securities (e.g. tokens) available for immediate resale under federal law, compared to the 12 month holding period under Regulation D for private company offerings.”  

Problem solved to create a regulatorily compliant path for “public” token offerings?

Pioneer crowdfunding platform StartEngine and its seasoned securities counsel, Sara Hanks of CrowdCheck, apparently thought so when it sought to qualify its security token offering in a Regulation A+ offering in June 2018.

How’s that working out?

Well, from my vantage point, with the benefit of hindsight, StartEngine’s Reg A+ security token offering appears to be the proverbial canary in the coal mine. Unlike their first Reg A+ offering of conventionally formatted securities filed back in June 2017, which cleared the SEC in three months, by all accounts the second Reg A+ offering, this time for security tokens, appears to have stalled – StartEngine having recently privately announced that it is commencing a Regulation D offering while it waits on the SEC for clearance of its Reg A+ filing.

More on the StartEngine Regulation A+ STO below – a good case study for those issuers contemplating a security token issuance – though the StartEngine Reg A+ filing remains very much a work in progress. 

The jury (SEC) is still out on that one, and it is unclear how long the deliberations will last. And StartEngine is not alone. As of this date, I am aware of no security token which has cleared an SEC review, either under Regulation A+ or a full registration.

Some Blockchain Basics – Fact Versus Fiction – The KPMG Report

In November of 2018, KPMG published a 38-page Report entitled “Institutionalization of Cryptoassets.” It included input from such crypto notables as CoinBase and Morgan Creek Crypto (Anthony Pompliano and Chris King), which is well worth a close read.  Leaving no doubt as to KPMG’s take on cryptoassets, the first section of the Report was entitled “Crypto is a Big Deal.”

One of the “use cases” of blockchain presented by KPMG was the tokenization of securities, lauding its potential benefits:

Tokenization -the creation of natively digital tokenized representations of traditional (and emerging) assets that are issued, traded, and managed on a blockchain can reduce friction and overhead costs associated with the issuance, transfer, and management of traditional assets such as securities, commodities, and real estate assets. Cryptoassets that are tokenized versions of traditional assets could also fit well within existing regulatory frameworks, which may mitigate some regulatory uncertainty surrounding newer cryptoassets. Tokenization of traditional assets could also help increase liquidity, codify rules and regulations, and increase transparency throughout the asset lifecycle.

The premise of the Report was that in order for crytoassets to grow and thrive as a new asset class, institutional acceptance was essential:

Cryptoassets have potential. But for them to realize this potential, institutionalization is needed. Institutionalization is the at-scale participation in the crypto market of banks, broker dealers, exchanges, payment providers, fintechs, and other entities in the global financial services ecosystem. We believe this is a necessary next step for crypto to create trust and scale.

Notably, the Report identified as one of the key challenges facing the institutionalization of cryptoassets is compliance with regulatory obligations.

Consumer research giant Forrester Research has also weighed in on the potential of blockchain and cryptoassets in a recently published Report.  Though the Forrester report is behind a paywall, the title of the report is telling, particularly in terms of managing expectations:

“Predictions 2019: Distributed Ledger Technology

Continued Hype And Unrealistic Promises Drive Risk Of A Looming Blockchain Winter”

In a separate section accessible to the public on the Forrester home page, it cautioned:

The Age of the Customer was never going to be easy: customers flexing their muscles, the pace of digital, quiet destruction of industry lines, GDPR as an emerging law of the land, and a new breed of technologies deeply rooted in knowing who your customers are and how they behave. This is an unforgiving market where a leader’s decisions — or lack of decisions — have great consequence but little precedent. You need facts: A seasoned voice that can connect the dots and combine breakout strategies with operational pragmatism, that knows that the pace of ideas and dialogue is fast but the real pace of teams and organizations making deep-rooted change is relatively slow. Forrester Research focuses on the hardest, most important dynamics of the day; dynamics that have the potential to create extraordinary opportunity for some and put others in desperate straits.

This caveat is applicable to navigating the regulatory labyrinth ensnaring crypto assets, not the least of which is compliance with US securities laws: the real pace of change in this area is slow, to be sure, creating both opportunities – and pitfalls.

The Long Learning Curve of Blockchain Based Applications

I rarely second guess my articles once they are in print.  But my recent article on security tokens and Regulation A+ had me rethinking the completeness of my analysis – when it came to the use of Regulation A+ as a viable path to putting newly issued cryptosecurities in the hands of the general public.

In theory, Regulation A+ is well suited for this purpose. However, in practice, no Regulation A+ filing has yet to clear an SEC review. I attributed this primarily to the existence of a long learning curve by the SEC in the cryptoasset/tokenized security world.  I neglected to mention that there is also a long learning curve for issuers who proceed down this uncharted Regulation A+ route, even with the most capable and seasoned advisors.

Looking Under the Hood of the StartEngine Regulation A+ SEC Filing

We do not, yet, have any case studies of a security token offering which has cleared an SEC review, something which the cryptoasset industry is painfully aware of.  This led me to take a closer look at StartEngine’s Regulation A+ filing, hoping to learn some lessons as to how to guide an issuer through this process.  As noted above, their first Regulation A+ offering, for non-crypto securities, cleared the SEC in three months.  The second Regulation A+ offering, for security tokens, remains pending after five months.

I began my deep dive into the StartEngine Regulation A+ securities token offering by putting their “Risk Factors” disclosures under the microscope. 

Under the terms of this offering, the investor has the choice of either receiving his or her securities in traditional or digital form. I compared the Risk Factors section, as contained in the original June 2018 filing with the most recent amendment of November 2018.  The risk factor disclosures had nearly doubled in size, the majority of the additional disclosures focusing on risks raised by issuing securities in tokenized form rather than traditional book entry or certificate form.

Presumably, most of these new disclosures were prompted by SEC comments generated during their review. (Unfortunately, the public will not be privy to the SEC comments until after the Form 1-A Offering filing is “qualified” by the SEC.)

Managing Industry and Investor Expectations

What is clear from the new, revised disclosures is that some of the promised benefits of digital securities are a ways off in time – in particular, speed of execution of transactions, and the benefits of a “smart contract” built on the blockchain.

Other potential benefits of blockchain technology, such as decentralization and transparency, are likely to never be incorporated into the digital securities ecosystem.

Long-standing institutional practice and regulatory constraints will continue to require a centralized stock transfer agent in the foreseeable future. And the “transparency” promised by distributed ledger technology is not a good fit for security ownership, trumped by privacy concerns.

Let’s take a look at speed of execution, a potential benefit of digital securities often cited by observers, including KPMG.

In fact, one of the more visible entrants in the cryptosecurity secondary market space calls itself “tZero” – a reference to the time it would be expected to complete a trade of digital securities in the secondary market.  The current standard in the securities industry for tradeable securities is T + 3 – meaning that in US markets a trade would normally settle in three days. tZero hopes to whittle settlement time down to seconds through use of blockchain technology and smart contracts.

What we learn from amendments to the StartEngine offering circular is twofold: issuance of digital securities is not necessarily fast – and so-called smart contracts may not be all that smart.

Presumably, in response to an SEC review comment, the amended Offering Circular contains a new risk factor, in the first in the section addressing specific risks of digital securities.  This risk factor is entitled:

“There is uncertainty as to the amount of time it will take for us to deliver securities to investors under this offering.”

Read further and you will discover that there is more than “uncertainty” – there is, potentially, what many investors would consider unconscionable delay in the issuance process for their securities, digital or otherwise:

“Although, based on our experience in our prior offering, investors who provide the information required by the subscription agreement and give accurate instructions for the payment of the subscription price should receive their securities in no more than six months, we cannot guarantee that you will receive your securities by a specific date or within a specific timeframe.” [Emphasis added]

No mention of expedited delivery for those investors who elect to receive their securities in tokenized form.

And How About Those Smart Contracts?

Another risk factor disclosure, added to the Offering Circular by way of an amendment, makes it clear that blockchain based smart contracts are not all that smart – at least not yet. 

There is a new risk factor, entitled The smart contracts will have limited functionality and you will only be able to transfer Tokens through the transfer agent.” When you read on, you learn the following:

“The smart contracts that govern each of the Common Tokens and the Preferred Tokens are different from other smart contracts used for securities tokens in other offerings. The smart contracts in this offering provide that wallet holders and third parties will not be able to transfer Tokens.  If you elect to hold your shares in the form of a Token, you will not be able to transfer the assets in and out of the wallet without the involvement of the stock transfer agent.  The stock transfer agent will need to validate all transfers and communications before any transfers may be made.”

Read on in the Offering Circular and you will learn that “The smart contracts allow for StartEngine Secure to both grant and remove Tokens from a wallet and nothing else.” Putting a finer point on the limitations of the StartEngine smart contract, we are also then told: 

“The smart contracts do not have transfer functionality and only the transfer agent may transfer the shares. The terms of the smart contracts do not impose any additional limitations on the transfer of Tokens.”

So much for decentralized, blockchain-based systems – and their purported benefits for digital securities. The transfer agent is a regulatory lynchpin for traded securities. Don’t expect this to change anytime soon.

The Future of Security Tokens and SEC Reviews

I expect that security tokens have a long and bright future.  But make no mistake – this is an evolutionary process – not a revolution.

As I noted in an earlier article, we are not yet even in the proverbial “early innings” – with one observer recently remarking that the stadium is still being built.  The StartEngine case study demonstrates that perhaps we do not yet have optimal pathways to even get to the stadium – either from a technological or regulatory point of view.

The current status of the StartEngine Regulation A+ security token offering is unclear. But what we do know, according to a recent article in Crowdfund Insider, is that in early November 2018 StartEngine embarked upon a new, private placement of security tokens to accredited investors, at a 25% discount to the Regulation A+ offering – to conclude no later than when the Regulation A+ offering is cleared by the SEC.  Not a hopeful sign five months after the initial SEC filing.

And a close look at the most recent StartEngine filing suggests that both StartEngine, the SEC and security token advisors still have a ways to go on the security token offering “learning curve” as they chart new waters for Regulation A+ and security tokens. 

Perhaps I missed it, but when I reviewed the StartEngine proposed form of amended Certificate of Incorporation submitted to the SEC, conversion of the offered preferred stock into common stock still requires the holder to deliver a paper certificate – something I expect will not go unnoticed much longer by StartEngine and the SEC.

With the benefit of hindsight, there was likely an easier and better path for StartEngine to put its security tokens in the hands of the general public without indefinite delays at the SEC – utilizing Regulation A+ or a fully registered offering. So too for issuers contemplating the syndication of assets amenable to digitalization, such as collectibles (e.g. automobiles, art) or real estate.

I leave this discussion to another day – and in a less public setting than this article.

Samuel S. Guzika Senior Contributor to Crowdfund Insider,  is a corporate and securities attorney and business advisor with the law firm of Guzik & Associates, with more than 30 years of experience in private practice.  Guzik is also former President and Board Chair of the Crowdfunding Professional Association (CfPA) and CfPA Legislative & Regulatory Special Counsel. A nationally recognized authority on the JOBS Act, including Regulation D private placements, investment crowdfunding and Regulation A+, he is and an advisor to legislators, researchers and private businesses, including crowdfunding issuers, service providers and platforms, on matters relating to the JOBS Act. As an advocate for small and medium-sized business, he has engaged with major stakeholders in the ongoing post-JOBS Act reform, including legislators, industry advocates and federal and state securities regulators. His articles on JOBS Act issues, including two published in the Harvard Law School Forum on Corporate Governance and Financial Regulation, have also served as a basis for post-JOBS Act proposed legislation.

While Waiting for Reg A+ Security Token Offering to Qualify, StartEngine Launches Reg D STO

Investment crowdfunding platform StartEngine launched a Reg A+ self-crowdfunding offer for security tokens some time ago. Unfortunately, the offering has not yet been qualified by the Securities and Exchange Commission.

Last week, StartEngine opened up a “limited time” $10 million security token offering (STO) using the Reg D 506c securities exemption – an offering only open to accredited investors.

According to an email circulated by StartEngine,  the Reg D STO will only remain open until the Reg A+ STO is qualified

For investors participating in the Reg D offer, tokens may be purchased for $7.50 each or a 25% discount to price expected in the Reg A+ STO. A minimum investment for the accredited offering has been set at $10,000.

Under Reg D, issued securities must be locked up for one year. Under Reg A+, securities can become immediately tradable – a characteristic of the securities exemption that has made it of interest to the STO/ICO realm.

StartEngine is not alone in having to wait on the Feds to qualify their offering documents. In fact, this publication is not aware of a single Reg A+ security token offering that has ever qualified. The SEC has taken a go-slow approach to issuing securities on the blockchain. While there have been numerous Reg A+ filings for STOs everyone remains in a holding pattern.

StartEngine wants to become a full stack security offering platform that includes both more traditional and, eventually, securities on the blockchain. The platform is also working on a secondary trading platform and has filed to become both a broker-dealer and alternative trading system (ATS).

Interested investors may express their interest in participating in the Reg A+ offering now while Reg D investors may invest today.

Reg CF Crowdfunding Activity Jumps in September

StartEngine has published their tally of Reg CF crowdfunding campaigns for the month of September. According to their numbers published on their StartEngine Index, September showed a solid increase in total raised on active CF funding portals.

StartEngine reports that $8.7 million was raised under the Reg CF securities exemption. This was almost a $1 million increase over the month of August.

In total, Reg CF issuers have now raised $143.5 million since the exemption became actionable in May of 2016.

As for the top campaigns during September the following issuers and platforms performed the best:

  • Gin & Luck – SeedInvest $1.07 million
  • – SeedInvest $1.062 million
  • Altcoin Exchange – Wefunder $853K
  • Keezel – StartEngine $768K
  • Travis Midtown – NextSeed $700K

Food and Beverage was the top category for funding followed by tech and then manufacturing.

Regarding capital raised by the top Reg CF funding portals, Wefunder led ($3.1 million), followed by StartEngine ($2 million) and then NetCapital ($1.1).

By percentage, the following portals raised the most money in September:

It is encouraging to see some new names in the top funding list. NetCapital out of Delaware is listing both Reg CF and Reg D 506c offerings. truCrowd, out of Chicago, also lists intrastate offerings under Illinois crowdfunding rules.

In September, CI reported there are currently 44 FINRA approved Reg CF funding portals.

Elio Motors is Raising Money Again. This Time Elio is Issuing a Security Token: ElioCoin

Elio Motors (OTCQB: ELIO) is back raising money once again for its three wheel concept vehicle that has been delayed multiple times.  But this time is different as Elio is planning an initial coin offering with a security token: ElioCoin.

Elio Motors hit the crowdfunding radar when it became the first issuer ever to utilize the Reg A+ exemption to raise growth funding and then quickly trade on OTC Markets. The offering, listed on StartEngine, closed having raised about $17 million backed by over 6300 investors who purchased equity in the firm at $12 / share. Today, Elio trades at around $4 / share having struggled to put together a vehicle that actually entered into production. At the time of the crowdfunding offer, Elio was predicting its high MPG vehicles would start trickling off the assembly line in late 2017. Jump forward to today and the Elio concept has yet to produce a vehicle.

In August 2017, Elio attempted to do another funding round, filing a registration statement Form S-1 with the SEC relating to a proposed public offering of its common stock. The plan was to raise more money and jump over to the NASDAQ Global Market – but that never occurred.

Elio finally found its best hope in the form of blockchain entrepreneur and Overstock founder Patrick Byrne who threw the company a lifeline when it purchase $2.5 million worth of Elio shares. Elio simultaneously announced its intent to issue a security token – perhaps one of the first on Overstock’s tZero platform.

According to a statement this past week, Byrne has committed to becoming the first participant in the pre-sale of the forthcoming security token offering (STO).

Elio Motors intends to raise up to $25 million in the STO, which is limited to certain institutional and accredited investors pursuant to Reg D (506c).

Paul Elio, CEO and founder of the firm, called the STO a “watershed moment” for his company.

“Our newest partnerships with Dr. Byrne and other major institutional investors have further crystallized our vision of bringing the Elio to production. We look forward to the launch of ElioCoin and offering secondary trading on tZERO’s security token platform.”

Byrne added that he is honored to be the first participant in the ElioCoin pre-sale. He expressed his confidence in the Elio vision of a three wheel, gas-sipping vehicle.

“More importantly, I believe the design of the ElioCoin is groundbreaking and may pave a way for a new era in raising funds to pay for public infrastructure (such as bridges and turnpikes), real estate, and even fund pharmaceutical research (regarding which I have already been enthusiastically contacted).”

Elio said that JonesTrading Institutional Services LLC is acting as the placement agent for the pre-sale which is ongoing through October 15th,

Units in the pre-sale offering are constituted of ElioCoin Tokens and Series E preferred equity convertible at $10 per share.

Following the pre-sale, Elio plans to launch a more broadly marketed main sale of the ElioCoin.  Elio said they currently plan to issue securities under Reg D for the main sale.

So will this be the final funding round to push an actual Elio vehicle onto the highways of America? Hard to tell. Investor response has been mixed at best. For early investors that bought in at $12/share they are probably just happy Elio has not gone to zero.

Reg CF Dipped in August but Crowdfunding Total “Still Strong”

StartEngine published their monthly report on Reg CF volume and according to their numbers, $7.4 million was raised during August. This comes after a new high in July when it topped $10.7 million.

Since the securities exemption went into effect in May 2016, Reg CF has raised over $135.3 million, according to StartEngine.

In August, businesses raised over $7.4M via Regulation Crowdfunding. After a record month in July, August showed a slight dip, but the momentum is still strong. In total, companies have raised over $135.3M via Regulation Crowdfunding since its inception in May 2016. The Index grew 5.7% this month.

The top ten Reg CF campaigns in August were dominated by Wefunder – a platform that had a banner month.

The group includes:

  • Meow Wolf – $1.322 million – Wefunder
  • – $1.095 million – SeedInvest
  • Neurohacker Collective – $1,069,454 – Wefunder
  • Altcoin Exchange – $926,068 – Wefunder
  • Gin & Luck – $906,606 – SeedInvest
  • Keezel – $700,335 – StartEngine
  • Travis Midtown – $700,000 – NextSeed
  • Naia – $642,305 – Wefunder
  • Block Momma Tea & Cafe – $582,750 – Wefunder
  • Cleveland Whiskey – $580,380 – Wefunder

Observers may note that the top two campaigns went beyond the CF limit of $1.07 million. Typically, issuers will allow accredited investors to participate under Reg D (506c) or the money will have to be returned.

As for business category, Food and Beverage topped the list – same as July – with Media & Entertainment coming in second.  A relatively new phenomena is for blockchain based companies to use Reg CF to raise money and 5% of the issuers were in this sector.

StartEngine notes that 58 companies filed a Form C with the Securities and Exchange Commission during the month with StartEngine (18) in the lead followed by Wefunder (15) and SeedInvest (5).

In August, 58 companies filed their Regulation Crowdfunding offering with the SEC. StartEngine had the most filings with 18, Wefunder followed with 15, and SeedInvest in third with 5 filings.

Once again, the state of California leads with the most issuers.

StartEngine says that “momentum is still strong” most likely due in part to the good amount of filings with the SEC.

First Ever: Inaugural Los Angeles Blockchain Week Happens in October

A confluence of events has brought together a series of blockchain /crypto conferences to create the first ever Los Angeles Blockchain Week.

Just announced, Crypto Invest Summit, StartEngine Summit, Women of Crypto, Expert Dojo, UCLA and USC have all joined together to create LA Blockchain Week scheduled for the week of October 19th through 29th.

Los Angeles has been polishing its tech chops for some time now. In fact, some startup types have been heading to LA from SF to network, innovate, and relocate in sunnier southern California due to multiple reasons. There are also a good number of crypto startups that call LA home. And now they have a week long blockchain gathering to help share the crypto joy with the rest of the world.

In a joint statement, Alon Goren and Josef Holm, founders of Crypto Invest Summit and early-stage investment fund GHV, stated;

“Los Angeles is one of the world’s top blockchain and crypto eco-systems.  Our goal has always been to bring the best deals in the world to our investors and introduce the best entrepreneurs in LA to investors from around the world.  Creating a week-long festival-like environment gives even more incentive for the world to come and join us.”

Howard Marks, CEO of StartEngine Summit (and CEO of the StartEngine online investment platform), added,

“Los Angeles Blockchain Week will be a major event for the crypto marketplace bringing together all of the leaders from around the world.”

LA Blockchain Week may become the West Coast’s largest crypto conference as entrepreneurs, investors and universities, join in the week long affair.

Organizers are offering a single pass to attend all of the events. UCLA and USC, two major US universities, both have blockchain organizations that are partners in LA Blockchain Week.

“It’s great to see everyone cross-collaborate with each other and the overwhelming passion for contributing to Los Angeles’s innovation footprint,” shared Adam Levy, Co-President of USC’s Trojan Blockchain Society. “LA Blockchain Week is bound to be one of the most informative weeks our community has ever encountered in this space.”

Daniel Aghachi, founder and Co-President of Trojan Blockchain Society, said they envision USC at the forefront of blockchain tech;

“… we couldn’t be more thrilled to promote education in this space even further by partnering with LA Blockchain Week.”

Veronica Reynolds, co-founder of Blockchain at UCLA, said UCLA is super excited to collaborate on the inaugural LA event.

“Blockchain at UCLA strives to provide high-quality education and networking opportunities to students, and undertakes research and consulting work, so we can’t think of a better way to continue developing our community than by participating in this ground-breaking citywide collaboration of blockchain professionals.”

So who is scheduled to speak at LA Blockchain? The line up currently includes;

  • Steve Wozniak from Apple
  • Tim Draper
  • Rodney Sampson from Opportunity Hub,
  • Crystal Rose from Sense,
  • Former SEC Chairman Christopher Cox,
  • Nadia Hewitt from the World Economic Forum,
  • David Bleznak from Totle,
  • Amanda Gutterman from ConsenSys
  • Matt Leisin from Bloomberg
  • and many more

You can check it out here.