Lone Star Empire Blockchain Partnership

A Smart Partnership

(100.000.000 SBX @ $1.00 ea.)




A total of 100 000 000 Lone Star Empire Tokens will be created (symbol SBX pronounced ‘Lone Star Bucks’). 90 Million (SBX) will be made available through initial token offering (ITO) @ $1.00 ea. Founders, Developers and Operations team will be allocated 10M SBX to be held in locked escrow until MOE Farms is cash flow positive, (projected to be third quarter 2019). For a maximum of 100 000 000 SBX.

The MOE Farms project developers looked at dozens of metrics, formulas and tools for placing a reasonable, although speculative, forward looking valuation on SBX tokens. Projected Price to earnings ratio (PPE) is one of the most commonly used and useful methods for accessing potential future value.

The formula for the forward PE ratio is:

ITO Price Per Token /Expected Earnings Per Token.

With a maximum of 100 000 000 SBX authorized and available for trade at close of offering, with 10M allocated to founders’ team. Projected net asset value (NAV) + Cash from earnings = $2.86 per token in third fiscal year. At 9x NAV + Cash from earnings could support a price of $25.00 per SBX within three years.

SBX valuation driver will be real assets producing highly sought-after products marketed to highly motivated and affluent customer groups and end-users. SBX will be backed by grid-independent assets; real estate, food, feed, fertilizer, water, fuel, producing power from on-site production of 100% renewable natural gas and bio-diesel for a sustainable, and balanced closed loop eco-system.

All funds are to be wired directly into contractors, vendors and service providers accounts. MOE Farms founders, development and management team will not exercise control over escrow funds at any time. Disbursements are to be in accord with build-out schedule and proof-of-work, invoices for work completed are submitted and third party on-site certification with hundreds of on-site security cameras that any token holder can access 24/7 from any web enabled device.

Two copies of Blockchain, (Public Ledger) will be held on-site in an ultra-secure, grid independent, EMP hardened facility, Data Caster Labs. First 75 miles of internet connection will be laser to fiber in addition to encryption. This will provide a level of protection unavailable with other tokens.

In the event of disruption to internet, power grid, disaster manmade or otherwise. SBX will be secure and accessible on-site and will always be exchangeable into Beyond Organics and Prime+ quality food, water, feed, fuel, security and grid independent power with all the amenities of a trophy class preppers paradise.

Project Details

Home Page:

MOE Farms

Corporate Structure:

Blockchain Partnership

Team Openness:

Complete Transparency, Access and Availability Generous. Call, Text, Email or Come See us

White Paper:      



Yes (Beyond Organics, EQ Power, Data Caster Labs)

Token Details

Role of Token:

Proof of Stake, Enhanced Access to Products, Eco-System Services and Voting Rights

Token Supply:

100 Million

Distributed in ICO:      

90 Million (Founders 10 Million SBX to be Held in Locked Escrow Until MOE Farms is Cash Flow Positive)


Ethereum to Data Caster Labs Platform (In Development)

Sale Details

Sale Period:

December 17 Through January 17, 2017


1 USD (Equivalent Coin) = 1 SBX

Accepted Coins:


Token Distribution Date:      

7-10 Days From Close of ICO

How are Funds Held:

Direct Deposit to Trusted Escrow With Multi-Sig Security, 2 of 3 Required, See Operations and Build-Out for Detail





General use of proceeds, in Millions $:



·         15 Mw power, packing and waste water recovery plants. $16.0

USDA inspected multi-species packing plant (beef, pork, poultry, and game), 45 beeves per day cap. Waste to Bio-Gas/Diesel plant; cooling, heating, power generation (fertilizer, feed, fuel, and energy).

·         Beyond Organics© Garden facilities. (450k sf) $ 12.0

·         Real Estate acquisition, Knox County, Texas 5,230± acres. $10.5

·         Prime+© Livestock genetics, housing and handling facilities. $9.5

1,500 head Wagyu Prime+ beef operation (scaling to 3,600 head). 375 head American Landrace and American Landrace/ Duroc crossbred heritage pork operation. 5,000 count ‘Range-Fed’ poultry operation.

·         General operations budgeting, fiscal years 1-3. $6.5

·         Production, packaging, labeling, and warehousing facilities (75k sf) $6.0

·         Magnum Opus Manor (MOMs) Lodge. (22.5k sf) $4.0

·         Facilities related infrastructure, furnishing, fixtures and equipment. $3.75

·         M.O.E. Vineyards© 30± acres scaling to 100± $1.75

·         6 zone 360° security syst. to incl. 512 cameras and multi-sensor on-site enforcement. $1.5

·         Funding; organization, promotion and administration. $.75

·         Engineering, machining and fabrication shop. $.75

·         Multi-mix Batch plant; asphalt, concrete and cement. $.5

·         Landing strip, ¾ qtr. mi. and helipad. $.5

·         Data Caster Labs 10-year Leases w/ Power Purchase Agreements.



15-18 months w/ $47M budgeted, approx. $9.4M per quarter draw down


1. General Specifications Document – SOW: A Project Plan, including but not limited to, the item descriptions below. This document will include the Design, Engineering, BOMs, Project Timelines, Product and Service Quotes, Etc.

2. Aerial 3D & CAD – Structure and Infrastructure Layout: A baseline 3D CAD map of the property, and the placement of all structures and pathways.
3. Building Specification and Design Criteria for Operations, Maintenance, Security and Monitoring: Define the size, scope and requirements.
4. Building Specification and Design Criteria for Utilities: Define the size, scope and requirements.
a. Power Plant(s) Stationary and Mobile: Define and Quote the initial 15MW to the Planned 45MW of power plant assets. b. Water Treatment: Define, Size and Quote the on-site water treatment requirements for all uses. c. Waste Water Treatment: Define, Size and Quote the on-site waste processing requirements for all uses.
5. Distribution Utilities – kWh, BTU, Gas, Water, Sewer and Telecom: Define, layout and quote the utility path and requirements of each.
6. Building Specification and Design Criteria for Livestock Production for Hogs, Chickens, and Wagyu: Livestock production facilities including the air, water and waste treatment requirements. Includes water, waste management, anaerobic digestion, biogas, NPK separation and organic solids.
7. Building Specification and Design Criteria for Food Processing and Storage: Define the size, scope and requirements.
8. Building Specification and Design Criteria for Data Center(s): Define and quote the size, scope and requirements.
9. Technology - Data, Voice, Video, Wireless, Security, Network Operations Center and Monitoring: Define and quote all technology components for the short, mid and long-term operations and services to others.
10. Legal – Contracts for Suppliers of Products, Services, Warranties and Spare Parts: Prepare the supplier agreements, implement the proper insurance and risk management procedures.





 Financial Administration and Consolidated Reporting: PENDING


 Financial Administration

·         Back Office Accounting for Management Company and General Partner Entities

·         Investor Capital Account Tracking

·         Waterfall Calculation Tracking

·         Cash Management (bill pay, deposits, transfers, etc.)

·         Processing of Investor Capital Calls and Distributions

·         Investor Relations and Support

·         Accounts Payable Management

·         Bank Statement Reconciliation

·         Payroll Administration

·         Federal and State Tax Return Preparation for Partnerships and LLCs

·         Dedicated P.O. Box and Mail Management

·         Create and Maintain Secured Client Portal for Each Investor

·         Document Management for Fund and Investor Correspondence

                        Consolidated Reporting

·         Financial StatementsBalance Sheet, Income Statement, Cash Flow Statements, rolling 12-Month Reports, Budget, Consolidated Entity Reports, NAV

·         Custom Reports- Investor Reporting Package, Management Reporting Package, Ad hoc Reporting


·         Launch and Formation Consulting- Fund Structure, Tax Strategy, Fund Offering Documents, Policies and Procedures

·         External Audit Support

·         Compliance and Regulatory Support

·         Budgeting and Forecasting

·         Financial Analysis

·         Strategic Planning, Fractional CFO



Initial Escrow Administrator Fund Allocation Schedule:

(A Smart Contract: Reader Friendly Version)


All funds will be managed and paid out in accord with a 3-step proof-of-work verification and certification process through a multi-signature (2 of 3) trusted escrow. After project bids are accepted and approved, a purchase order will be submitted to the trustee by email attachment and a public record is published to the MOE Farms website not later than 10 days before payable (every effort will be made to post at least 30 days in advance). When work is complete, verification and certification for payment in three (3) steps:

1.    Contractor/vendor submits certification request to Former Knox County Judge Travis Floyd’s (22 years RET.)  office. Judge Floyd performs on-site verification of work and if approved, digitally signs off on vendor/contractor invoice and submits to escrow agent.

2.    On-site security cameras will provide visual proof-of-work to any interested party with a web-enabled device; 24 hours a day, 7 days a week.

3.    Contractor/vendor request and documentation must then be matched to Initial Escrow Fund Allocation Schedule as published 10-30 days in advance on the MOE Farms website.

Finally, approvals and documentation will be submitted to escrow agent. Escrow agent is then authorized to move funds from escrow into contractor/vendor designated account in accord with wiring instructions submitted with request. This is perhaps the most robust authentication and transparent fund allocation protocol, yet designed.


$10,460,000.00 Closing on LG Ranch property WIRING INSTRUCTIONS: To follow

$25,000.00 to Seller for administration costs and associated expenses. WIRING INSTRUCTIONS: To follow

Total sale price at close $10,485,000.00 to seller at wiring instructions above.

$667,000.00 Eaton Equipment Services, LLC., ‎Road & Dirt Work 1st 1.5 Mi X 24’ State Hwy. Grade w/6” base, Entry + 2 ck point gates = 1.330M$, 50% to Start Balance of $663,000.00 on certification.  2nd 1.8 Mi X 24’ State Hwy. Grade w/4” Base = 1.508M$. 50% Down, $754,000.00 Start Balance of $754,000.00 on certification. Tot. 2.838 M$. Total 3.3 miles Est. 120-day timeline.

$10,000.00 Knox City-O’ Brian CISD for temp office space and utilities March through December 2017

$12,000.00 Michael Burkham relocation expense reimbursement, Packing & Processing Plants General Manager

$15,000 Mike and Debbie Morehouse for ranch services rendered March-2017 through August 2017 WIRING INSTRUCTIONS: To follow

$150,000.00 Retainer Barger Tech Environmental, Build -Out General Contractor.

1. General Specifications Document – SOW: A Project Plan, including but not limited to, the item descriptions below. This document will include the Design, Engineering, BOMs, Project Timelines, Product and Service Quotes, Etc.

2. Aerial 3D & CAD – Structure and Infrastructure Layout: A baseline 3D CAD map of the property, and the placement of all structures and pathways.
3. Building Specification and Design Criteria for Operations, Maintenance, Security and Monitoring: Define the size, scope and requirements.
4. Building Specification and Design Criteria for Utilities: Define the size, scope and requirements.
    a. Power Plant(s) Stationary and Mobile: Define and Quote the initial 15MW to the Planned 45MW of power plant assets.

    b. Water Treatment: Define, Size and Quote the on-site water treatment requirements for all uses.

    c. Waste Water Treatment: Define, Size and Quote the on-site waste processing requirements for all uses.
5. Distribution Utilities – kWh, BTU, Gas, Water, Sewer and Telecom: Define, layout and quote the utility path and requirements of each.
6. Building Specification and Design Criteria for Livestock Production for Hogs, Chickens, and Wagyu: Livestock production facilities including the air, water and waste treatment requirements. Includes water, waste management, anaerobic digestion, biogas, NPK separation and organic solids.
7. Building Specification and Design Criteria for Food Processing and Storage: Define the size, scope and requirements.
8. Building Specification and Design Criteria for Data Center(s): Define and quote the size, scope and requirements.
9. Technology - Data, Voice, Video, Wireless, Security, Network Operations Center and Monitoring: Define and quote all technology components for the short, mid and long-term operations and services to others.
10. Legal – Contracts for Suppliers of Products, Services, Warranties and Spare Parts: Prepare the supplier agreements, implement the proper insurance and risk management procedures.


$1,670,832.00 Central Power Systems & Services.Corporate Headquarters / 9200 Liberty Drive / Liberty, MO 64068 / 816-781-8070. 50% Down Payment required at the time of order for 24 – 450kW PowerForce Generator Sets. Balance $1,670,832.00 FOB 10-01-17. Price of $139,236.00 each for a total order price of $3,341,664.00 as per quote dated 6/27/2017. WIRING INSTRUCTIONS: United Missouri Bank 1010 Grand Ave Kansas City, MO. 64106 Routing # - 101000695 A/C # - 9870603667 Swift Code- UMKCUS44

$27,000.00 Diane Joffrion – Board of Advisors – March 2017 – October 2017, WIRING INSTRUCTIONS: To follow

$90,000.00 MOE Farms executive management team relocation costs, setup and administrative expenses through August 2017, WIRING INSTRUCTIONS: To follow

Additional allocations will be posted, in advance, as build-out continues and General Contractor Specifications Document is developed, payroll as profit centers are commissioned and staffed, on-going materials and equipment purchases, etc. see Build-out



This website, or content herein, does not constitute an offer to sell, or a solicitation of an offer to buy, partnership interests in Lone Star Empire, BP. Any such offer or solicitation may only be made by delivery of an approved confidential offering memorandum. Past results if any, and of agribusiness investments in general, are not necessarily indicative of future performance, and results may be volatile. Investing with Lone Star Empire Partners involves the risk of loss as described in the associated confidential offering documents.


Regulatory Case for SBX

The Tokens have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States or to or for the benefit of US persons (as defined in Regulation S under the Securities Act) unless they are so registered, or an exemption from the registration requirements of the Securities Act is available.

One such exemption allows the resale of Tokens purchased for their own account and for investment who (i) are not otherwise affiliated with the Lone Star Empire BP, (ii) have been exposed for some time to the economic risks that ownership of Tokens entails, and(iii) are not part of the distribution of the Tokens.


A Securities Law Framework for Blockchain Tokens

A blockchain token is a digital token created on a blockchain as part of a decentralized software protocol.

There are many different types of blockchain tokens, each with varying characteristics and uses. Some blockchain tokens, like Bitcoin, function as a digital currency. Others can represent a right to tangible assets like gold or real estate.

Blockchain tokens can also be used in new protocols and networks to create distributed applications. These tokens are sometimes also referred to as App Coins or Protocol Tokens.

These types of tokens represent the next phase of innovation in blockchain technology, and the potential for new types of business models that are decentralized - for example, cloud computing without Amazon, social networks without Facebook, or online marketplaces without eBay.

However, there are a number of difficult legal questions surrounding blockchain tokens. For example, some tokens, depending on their features, may be subject to US federal or state securities laws. This would mean, among other things, that it is illegal to offer them for sale to US residents except by registration or exemption. Similar rules apply in many other countries.

The Framework focuses on US federal securities law because these laws pose the biggest risk for crowdsales of blockchain tokens. In many jurisdictions, there may also be issues under anti-money laundering laws and general consumer protection laws, as well as specific laws depending on what the token actually does.

This document is a general guide for developers and users of tokens.

Part 1 is designed to estimate how likely a particular token is to be a security under US federal securities law.

Part 2 sets out some best practices for crowdsales.

Part 3 is a detailed securities law analysis by Debevoise & Plimpton LLP.

As more fully set forth in the component parts of this document, the document does not constitute legal advice and should not be relied on by any person. Developers and users should consult their own counsel in connection with their initiatives in this area.

You should not rely on this Framework as legal advice. It is designed for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This Framework is provided “as is” with no representations, warranties or obligations to update, although we reserve the right to modify or change this Framework from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction.

December 7, 2016

An initiative of Coinbase, Coin Center, Union Square Ventures and Consensys

Part 1: How to determine if a token is a security

The Howey Test

The US Supreme Court case of SEC v Howey established the test for whether an arrangement involves an investment contract. An investment contract is a type of security.

In the context of blockchain tokens, the Howey test can be expressed as three independent elements (the third element encompasses both the third and fourth prongs of the traditional Howey test). All three elements must be met in order for a token to be a security.

1.            An investment of money

2.            in a common enterprise

3.            with an expectation of profits predominantly from the efforts of others.

Using the Framework

Click here to access the framework (google sheet). Save a copy in order to use it, or follow the manual instructions below

Step 1: Access the google sheet or refer to the copy of the framework in the Appendix.

Step 2: Review each characteristic and determine whether or not it applies to the token.

Step 2: For the criteria that apply, add or subtract the corresponding points to get a total for each element.

Step 3: You now have three-point scores, one for each element. Your lowest point score represents your overall risk score.

Please remember that this methodology produces nothing more than an estimate. You should seek your own legal advice, tailored to your own specific situation and considerations.

Part 2: Best practices in token sales

The following principles help inform and protect buyers, and increase the chances of a successful token sale, especially for a sale which occurs before there is a live network using the token. They are guidelines and are not designed for any specific situation. Please consult your legal and other advisors.

Most of these best practices do not directly affect whether a token is a security under the Howey Test

Principle 1: Publish a detailed white paper


               Describe the protocol and the network.

               Identify a clear and compelling reason for the token to exist.

               Provide a detailed technical description of the proposed implementation

               Set clear expectations for total token supply and distribution

               Have an independent expert review the whitepaper


A whitepaper defines the network and its use cases. It is critical for buyers to be able to understand the characteristics and functionality of the token they are buying, the challenges and risks of development, and the benefits of using the network.



Principle 2: For a presale, commit to a development roadmap

      Text Box: How?Provide a detailed development roadmap

      Include estimates of time and costs for each stage of the project

      Include a breakdown of estimated expenses by category

      Allocate funding for each stage of development and consider restricting access to funding until milestones are achieved

      List the names of key members of the development team and advisors

      Be transparent about remuneration paid to key members of the development team and advisors

      Quantify early contributions of members of the development team and advisors

      Between sale and launch of the network, report back to token holders periodically on progress against the development roadmap

      Set aside funds for independent security audits and a bug bounty program

Why? A clear development roadmap gives buyers confidence that the proceeds of the sale will be properly used for the project and that the network will be launched, meaning that they will be able to use the tokens as intended.

Setting aside funding for each stage of the project helps establish structure and allows buyers to assess the likelihood of success. Using blockchain features to restrict the development team’s access to funding can deliver more transparency.

Members of the development team and advisors should be paid full and fair value for their services, through a combination of money and tokens. Quantifying the value of contributions, especially early contributions (pre-crowdsale) provides transparency.

Identifying the development team and advisors helps potential buyers assess the credibility of the project and its potential for success. It reduces the likelihood of fraud.

Note: Many aspects of Principle 2 only apply to token sales which occur before there is a live network using the token

Principle 3: Use an open, public blockchain and publish all code

      Text Box: How?Use an open and transparent blockchain

      Use open source software

      Where possible, commit to using standard or well-known token contracts (e.g. ERC20)

      Do not use a private or unintelligible blockchain, or one for which the developer is the sole or primary transaction validator

      Commit to undertake an independent security audit before launch

Why? Building with open source software and using an open, public blockchain provides

transparency, enables real participation from token holders and independent developers, allows for auditing, and helps prevents fraud.

Enabling real and meaningful participation in the network from a diverse set of independent parties may also strengthen the arguments against the second and third criteria of the Howey test, because participants are less reliant on the initial developers.

Principle 4: Use clear, logical and fair pricing in the token sale

      Text Box: How?Set a maximum number of tokens to be sold in the crowdsale

      Use a pricing mechanism which does not increase over time. Consider a Dutch Auction or similar mechanism to price tokens fairly

      Set a cap for the amount to be raised

      Set a minimum amount and refund buyers if the minimum amount is not met

      Denominate the price in one currency (e.g. ETH or BTC)

Why? The total proceeds from a crowdsale should not exceed the estimated costs of

development. A crowdsale should be capped at the number and price of tokens required to raise this amount.

Pricing mechanisms which increase over time can encourage irrational behavior (e.g. FOMO) and do not treat buyers equally. Setting the price in a single currency reduces the potential for confusion and arbitrage.

Principle 5: Determine the percentage of tokens set aside for the development team

How? Decide on the percentage of the total token supply that represents a fair reward for the work of the development team and advisors.

Release those tokens to the development team incrementally over time (contingent on their continued work on the project).

Why? Concentrating too many tokens in the hands of the development team and other

contributors increases the risk of centralization of control of the network. On the other hand, setting aside too few tokens does not align the interests of the development team with the interests of other token holders.

Releasing tokens to the development team over time aligns their interests with other users over a longer period.

Releasing tokens to the development team over time also reduces the risk of affecting the market - it prevents large numbers of tokens from flooding the market at one time.

Principle 6: Avoid marketing the token as an investment

       Text Box: How?Do not promote the token as an investment that will increase in value

       Promote the token based on its functionality and the use case for the network

       Avoid analogies with existing investment language and processes - e.g. ‘ICO’

       Provide appropriate disclaimers about the token as a product, not as an investment.

Why? Marketing a token as a speculative investment, or drawing comparisons to existing

investment processes, may mislead or confuse potential buyers. It may also increase the likelihood that the token is a security.

Using a short, relevant disclaimer which accurately describes the risks of the tokens, protocols and network is useful. Long, legalistic disclaimers about the risks of investment are not helpful to buyers and may provide the impression that the token is an investment.

Part 3: Detailed Securities Law Analysis

Debevoise & Plimpton

Text Box: December 5, 2016Securities Law Analysis of Blockchain Tokens

You should not rely on this Memorandum as legal advice. It is designed for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend and can give you tailored advice. This Memorandum is provided “as is” with no representations, warranties or obligations to update, although we reserve the right to modify or change this Memorandum from time to time. No attorney-client relationship or privilege is created, nor is this intended to be attorney advertising in any jurisdiction.

This outline sets forth our analysis as to whether cryptographic blockchain tokens (known as “Blockchain Tokens”) with certain features (in our parlance, “rights” versus “investment interests”) would be considered a “security” for purposes of Section 2(a)(1) of the Securities Act of 1933 (“Securities Act”) and Section 3(a)(10) of the Securities Exchange Act of 1934 (“Exchange Act”).

In order to analyze Blockchain Tokens under the federal securities laws, we start with the broad definition of “security” contained in Section 2(a)(1) of the Securities Act: “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement ... investment contract ... or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing” (emphasis added).[1]

Based on that definition and our reading of relevant case law, as well as on our understanding of the facts and our review of the materials you provided on the structure of Blockchain Tokens, we conclude that appropriately designed Blockchain Tokens would not be deemed to meet the definition of security and, accordingly, that the federal securities laws would not apply to the initial distribution and subsequent trading of such Blockchain Tokens.[2]

We stress that this conclusion is dependent on the particular features of the relevant Blockchain Token. Accordingly, this outline first lists various rights that a Blockchain Token might have that we believe support the conclusion that it is not a security, as well as various investment interests a Blockchain Token might have that we believe would make such an instrument more likely to be considered a security. We then summarize the relevant legal principles for determining what constitutes a security, and why we conclude, based on those principles, that properly designed Blockchain Tokens are better considered something other than a security. Finally, we analogize these types of Blockchain Tokens to the rights of a franchisee or licensee, who would not be treated as a security-holder.

I.                    Nomenclature

A.                We understand that Blockchain Tokens can have different features depending on how they are designed, but at a basic level each Blockchain Token is associated with one or more computer systems.

B.                 For purposes of this analysis, we have adopted two specific terminologies:

1.                  Because they are associated with one or more computer systems, when discussing Blockchain Tokens for purposes of the analysis, we use the term “system” to include any computer system, network, platform, application, software or protocol.

2.                  When considering whether a Blockchain Token could be deemed to constitute a security, we use the term “rights” to indicate features a Blockchain Token might have and likely not meet the definition of security—these rights may be individual rights or a bundle of rights granted to the holder of the Blockchain Token.

We sometimes refer to these as “non-security Blockchain Tokens.” We use the term “investment interests” to indicate the features that a Blockchain Token may have that would, in our view, increase the likelihood that it would be considered a security. We sometimes refer to these as “Blockchain Token securities.”

II.                 A Preliminary List of Rights and Investment Interests

A.                While we broadly discuss features that may result in a Blockchain Token being viewed as a non-security, a further analysis based on the individual facts and circumstances of each relevant Blockchain Token (and its

the Securities Act. As such, the SEC or a court could reach an alternative conclusion different from those provided in this memorandum.

system) generally would be required to appropriately determine whether a particular Blockchain Token would constitute a security and fall under the federal securities laws.

B.                 We generally believe that a Blockchain Token with one or more of the following rights likely should not meet the definition of security (non­security Blockchain Token):

1.                  Rights to program, develop or create features for the system or to “mine” things that are embedded in the system;

2.                     Rights    to access or license the system;

3.                     Rights    to charge a toll for such access or license;

4.                     Rights    to contribute labor or effort to the system;

5.                     Rights    to use the system and its outputs;

6.                     Rights    to sell the products of the system; and

7.                     Rights    to vote on additions to or deletions from the system in terms

of features and functionality.

C.                 We believe that a Blockchain Token with one or more of the following investment interests likely should constitute a security Blockchain Token:

1.                  Ownership interest in a legal entity, including a general partnership;

2.                     Equity interest;

3.                     Share of profits and/or losses, or assets and/or liabilities;

4.                     Status as a creditor or lender;

5.                     Claim in bankruptcy as equity interest holder or creditor;

6.                  Holder of a repayment obligation from the system or the legal entity issuer of the Blockchain Token; and

7.                  A feature allowing the holder to convert a non-security Blockchain Token into a Blockchain Token or instrument with one or more investment interests, or granting the holder an option to purchase one or more investment interests.

D.                We believe that non-security Blockchain Tokens can be issued in different classes where each class has different bundles of rights (whether overlapping or not), so long as the class does not include investment interests.

E.                 We believe that the combination of investment interests with rights into the same Blockchain Token likely would result in a Blockchain Token security.

F.                  We note that an ownership interest in a fund or other legal entity vehicle that buys non-security Blockchain Tokens would still constitute ownership of a security, even if the fund would not be deemed to own any securities.

G.                We have considered the question of whether issuance of a Blockchain Token prior to the existence of a system would constitute a security. We have not found conclusive law on the subject, but believe that the better view is that a non-security Blockchain Token does not become a security merely because the system as to which it has rights has not yet been created or completed. Although not specifically mentioned in any case law, there is a significant school of thought that argues in favor of having the launch of the system and of the associated Blockchain Tokens occur as close in time as possible in order to reduce the likelihood that the Blockchain Tokens will constitute securities. We do not express a view on the viability of this line of reasoning, but note that it potentially implicates the common enterprise element of the Howey test and the “risk of loss” analysis, each discussed below.

III.              Analysis under the Howey Test

A.                Based on the background above, we consider below whether a Blockchain Token would fall under the definitions of security outlined in the Securities Act and the Exchange Act, as well as subsequent case law further defining the term security.

B.                 The seminal Supreme Court case for determining whether an instrument meets the definition of security is SEC v. Howey, 328 U.S. 293 (1946). The Supreme Court has reaffirmed the Howey analysis as recently as 2004 in SEC v. Edwards, 540 U.S. 398 (2004).

C.                 Howey focuses specifically on the term “investment contract” within the definition of security, noting that it has been used to classify those instruments that are of a “more variable character” that may be considered a form of “contract, transaction, or scheme whereby an investor lays out money in a way intended to secure income or profit from its employment.”

Howey, 328 U.S. at 298; Golden v. Garafolo, 678 F.2d 1139, 1144 (2d.

Cir. 1982) (stating “investment contract” has been used as a way to classify instruments that do not fit other categories); see also Black’s Law Dictionary (10th ed. 2014).

D.                From our understanding of them, Blockchain Tokens seem most likely to be analyzed as an investment contract. Some of the investment interests listed above are more properly characterized as traditional types of securities, so their combination with a non-security Blockchain Token likely produces a Blockchain Token security.

E.                 Not every contract or agreement is an “investment contract” and the Supreme Court developed a four-part test to determine whether an agreement constitutes an investment contract and therefore a security.

F.                  The Court articulated the test as follows: A contract constitutes an investment contract that meets the definition of security if there is (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits; (iv) solely from the efforts of others (e.g., a promoter or third party), “regardless of whether the shares in the enterprise are evidenced by formal certificates or by nominal interest in the physical assets used by the enterprise.” Howey, 328 U.S. at 298-99. In order to be considered a security, all four factors must be met. See Edwards, 540 U.S. at 390.

G.                We provide our analysis of a non-security Blockchain Token below, based on each Howey factor:

1.         Investment of Money. Under Howey, and case law following it, an

investment of money may include not only the provision of capital, assets and cash, but also goods, services or a promissory note. See, e.g., Int’l Bhd. Of Teamsters v. Daniel, 439 U.S. 551, 560 n.12 (1979); Hector v. Wiens, 533 F.2d 429, 432-33 (9th Cir. 1976); Sandusky Land, Ltd. V. Uniplan Groups, Inc., 400 F. Supp. 440, 445 (N.D. Ohio 1975).

(a)               Given the broad definition of a money investment and the fact that non-security Blockchain Tokens will be distributed through a sale by the issuer to the buyers with the price set per token, we conclude that this factor should be satisfied.[3] We reach this conclusion notwithstanding the
fact that there may be a cap on the total amount raised and purchased.

2.                     Common Enterprise. Different circuits use different tests to

analyze whether a common enterprise exists. Three approaches predominate: (i) horizontal; (ii) narrow vertical and (iii) broad vertical. We define each and then discuss below.

(a)               Under the horizontal approach, a common enterprise is deemed to exist where multiple investors pool funds into an investment and the profits of each investor correlate with those of the other investors. See e.g., Curran v. Merrill Lynch, 622 F.2d 216 (6th Cir. 1980). Whether funds are pooled appears to be the key question, and thus in cases where there is no sharing of profits or pooling of funds, a common enterprise may not be deemed to exist. See e.g., Hirk v. Agri-Research Council, Inc., 561 F.2d 96, 101 (finding discretionary future trading account was not investment contract because there was no pooling of funds); Wals v. Fox Hills Dev. Corp., 24 F.3d 1016 (7th Cir. 1994) (promoter of condominium timeshare did not pool profits and thus no common enterprise existed).

(b)               The narrow vertical approach looks to whether the profits of an investor are tied to a promoter. See SEC v. Eurobond Exchange Ltd., 13 F.3d 1334 (9th Cir. 1994) (imposition of profit limitations on investors through requiring promoter to receive excess return rate tied promoter’s fortunes to investors).

Text Box: right to mine in order to earn the eventual rights or rewards to a token, it might be reasonable to conclude that no investment of money had occurred.

The broad vertical approach considers whether the success of the investor depends on the promoter’s expertise. If there is such reliance, then a common enterprise will be deemed to exist. See e.g., SEC v. Continental Commodities Corp., 497 F.2d 516 (5th Cir. 1974) (promoter’s recommendations regarding certain futures contracts demonstrated investor reliance on promoter’s expertise).

Analysis under the approaches:

(i)                 Text Box: (d)Under the horizontal approach, the Blockchain Token may be considered a common enterprise where the reward for work—through mining or otherwise—correlates to the reward received by other participants. Thus, although the issuer has some control over the protocol, the rewards received by the token holders (e.g., through the receipt of more tokens or other forms of rewards) would likely be correlated.

(ii)              Under either of the vertical approaches, however, a common enterprise may not exist given the decentralized nature of the Blockchain Token framework, whereby Blockchain Token holders depend on their own efforts (mining or otherwise), rather than the issuer’s expertise (even though in certain cases the issuer may control or influence technical permissions or changes to the protocol). Thus, depending on the level of control of exerted by the issuer, the less of a reliance on the issuer’s expertise, may result in the view that a Blockchain Token should not be viewed as having a common enterprise.

(e)               Given the diverging approaches, the law on the “common enterprise” element is somewhat unclear and not easily susceptible to analysis. Putting things in more practical terms: In one sense, it would appear that the system is a common enterprise because it involves the efforts of Blockchain Token holders (and perhaps others) to create, update and enhance a system that is used by the Blockchain Token holders and third parties. On the other hand, it is possible to conceive of a system that does not rely on concerted effort to create, update or enhance such as where independent actors use the base code for a variety of unrelated activities (for example, IBM’s Watson can be used for many different purposes by independently operating groups).

(f)                Nevertheless, it would seem to us to be the case that where the issuer of the particular Blockchain Tokens uses the funds derived from the issuance to create, support or

maintain the system, a court might find the common

enterprise element satisfied.

(i)                 This may similarly apply in the case of a presale made prior to the launch of the system. For example, one court has found that a purchase agreement that was entered into prior to the construction of a resort community demonstrated a common enterprise. This was in part because the construction company was pooling presale purchase commitments in order to obtain financing to fund the project, and thus the completion of the project was dependent on generating sufficient investor interest. See Wooldridge Homes, Inc. v. Bronze Tree, Inc., 558 F. Supp. 1085 (D. Colo 1983).

(ii)              Although not definitive in this regard, depending on how the presale is structured, and whether the construction of the system is contingent on those funds, it may increase the likelihood that this element would be met.

(iii)            That said, we believe the better view is that a non­security Blockchain Token's character is not changed merely because it is sold before the system is constructed or in order to raise funds for construction of the system. We view presales as more akin to buying the right to use the system in the future, as opposed to receiving some type of investment interest. We think the analysis should hinge on whether the Blockchain Token holder can exploit directly the system for his/her own creative purposes or to produce a good or service sold to others (that is, profit from the rights separate from others using the system). We do not believe it is dispositive that the holder may sell the Blockchain Token prior to doing so; it is the fact that s/he could exploit the system that makes the difference.

(iv)             An alternative test, known as the “risk capital test,” considers whether an investment may be viewed as passive and relying on the efforts of others. Specifically, this test looks at four factors: (i) whether funds are being raised for a business venture or enterprise; (ii) whether the transaction is offered indiscriminately to the public at large; (iii) whether the investors are substantially powerless to effect the success of the enterprise; and (iv) whether the investor’s money is substantially at risk because it is inadequately secured. See Silver Hills Country Club v. Sobieski, 55 Cal. 2d 811 (1961). The risk capital test applies to a limited number of jurisdictions, and typically has been applied in the context of original “start-up” capitalization— particularly where membership is nothing more than a sale of right to use the existing facilities—i.e., where “the benefits of the membership have materialized and have been realized by other members prior to any capital raised by the sale of [the memberships].” See Jet Set Travels Club v. Corporation Com’r, 21 Or. App. 362 (1975). Thus, in these select jurisdictions, depending on the structure of the presale, there is some risk that the use of funds to raise capital may be viewed as a security, although this would be mitigated where some of the benefits have already been realized by other holders. We note that these cases involved memberships that did not allow for commercial exploitation for profit of the eventual club, but rather created only a personal right of use. We understand that non-security Blockchain Tokens will allow for the exploitation of the system by the holder, much like a licensee has rights to commercially exploit the license.

3.                  Expectation of Profits. Under this element, profit refers to the type

of return or income an investor seeks on their investment (rather than the profits that the system or issuer might earn).[4] Thus, for purposes of Blockchain Tokens, this could refer to any type of return or income earned as a result of being a Blockchain Token holder, which would be narrowed to the extent it is derived passively, ie., from the efforts of others. Since courts consider this factor through the lens of the “efforts of others” factor, we analyze

this prong along with the fourth factor below. In other words, just because there is a return or profit, does not mean that the investment contract is a security. It is the essentially passive nature of the return, as determined by the “efforts of others” analysis, that results in an “investment contract” and security as opposed to a simple contract instrument.

4.          Solely from the Efforts of Others. Typically, courts have been

flexible with the word “solely,” such that, in addition to the literal meaning, it also will include significant or essential managerial or other efforts necessary to the success of the investment. See e.g., SEC v. Glenn W. Turner Enters., 474 F.2d 476, 482-83 (9th Cir.

1973)                               ; SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir.

1974)                                (holding that where promoters retain immediate control over the essential managerial conduct of an enterprise, rather than remote control similar to a franchise arrangement, this element is met); but see Hirsch v. Dupont, 396 F. Supp. 1214, 1218-20 (S.D.N.Y. 1975), aff’d, 553 F.2d 750 (2d Cir. 1977) (indicating that solely should have literal application).

(a)                                        We analyze the “expectation of profits” and “solely from

the efforts of others” factors below:

(i)                 The expectation of profits resulting from the purchase of a Blockchain Token would primarily relate to whether the holder receives (i) rights and/or (ii) investment interests. While non-security Blockchain Token holders may receive money or other forms of financial incentives by virtue of holding the token, we believe that any such incentives are derived through their own efforts, rather than through a passive investment (as would be the case with a Blockchain Token security).

(ii)              Essentially, each of the rights allows the non­security Blockchain Token holder to utilize, contribute to or license the use of the system in various ways, none of which would be considered a passive investment. Rather, we see the non-security Blockchain Token holders as active participants, like franchisees or licensees.

(iii)            Furthermore, although an issuer may have some managerial oversight over the system and the distribution of the Blockchain Tokens, if the holders retain voting rights related to changes to the protocol and other legal rights enforced through technical permissions, this would seem to strengthen the view that token holders have no reliance on the efforts of others. That said, security holders often have voting rights, so we do not view this point as being definitive.

(iv)             We note that appreciation in the value of a non­security Blockchain Token after issuance, due to secondary trading, does not change our view that it is not an investment contract. For example, the value of license or franchise right can increase over time due to the secondary market. Such increases in value derive both of the efforts of the holder and from the system itself, so we do not view such changes as decisive.

(v)               We note that the manner in which the sale of a Blockchain Token occurs, particularly the promotion and marketing, may also affect the “expectation of profits” analysis. For example, if the language used to promote the Blockchain Token includes words like “investment,” “returns” or “profits,” the purchasers of the Blockchain Token may be more likely to expect profits from the efforts of others than if the Blockchain Token is promoted on the basis of the usefulness of the rights attaching to it.

(b)               Courts have also analyzed the existence of voting rights through this Howey factor. Whether voting rights are determinative of a security will be based on the facts at hand. For example, where (i) the holder is provided with rights that provide it with significant managerial control—

i.                    e., the ability to participate in decisions that will affect the success of the enterprise; (ii) the holder has the resources and expertise to make a meaningful contribution; and (iii) the holder does, in fact, participate in management decisions, the instrument is less likely to be considered a security.[5]

(i) Thus, in our view, similar to our analysis above, the existence of voting rights itself should not result in a Blockchain Token being deemed a security.

Rather, whether a determination would need to be made as to whether the holder would be viewed as passive or reliant on the efforts of others. Given that holders of non-security Blockchain Tokens play a more active role by using, contributing to or licensing the use of the system, it is less likely that the voting rights in this regard would be viewed as a security.

IV.              Other Analytical Frameworks

A.                Reves and Loan Versus Security. We considered several other analytical frameworks, including the rubric for analyzing whether a loan is a security under the Securities Act and Exchange Act definitions. The Supreme Court articulated this analysis in Reves v. Ernst & Young, 494 U.S. 56 (1990) through its “family resemblance” test. Given that Reves focused on the term “note” rather than “investment contract” in the definitions of security, which was later distinguished by the Edwards court on these grounds, we determined that this analysis would not be a substantive addition to the outline.[6]

1.                     That said, we do note that the first factor of the Reves test

scrutinizes the motivations of the lender and the borrower to determine whether they are motivated by commercial purposes or for an investment. We view this element as similar to the “efforts of others” factor from the Howey test, and believe that non-security Blockchain Tokens are “commercial” in nature, rather than “investment” in nature, for the reasons described in Section III.[7]

B.                 System License. Another potential framework by which to consider non­security Blockchain Tokens is by using the analogy of a software license, where the rights associated with the Blockchain Tokens could be considered in line with the contractual contours of such a license.

1.                  Software licenses typically are governed by contract law, and one way in which to categorize software may be through focusing on the legal rights of the licensor and what rights may be granted to the licensor. For example, the licensor’s rights would include the ability to grant or distribute all, some or none of the rights attached to the use of the software code (originally the licensor’s intellectual property), as well as the right to exclude certain parties from using any of those rights. Thus, the licensee would receive either all of these rights, or a portion of these rights, depending on what the licensor grants.

2.                  For the purposes of Blockchain Tokens, this structure would be applicable in the following manner: (i) the issuer acts as the licensor of the system, which includes the underlying protocol, as well as the associated rights; (ii) the token holder acts as the licensee, who receives those rights (or a portion of those rights) in order to use the underlying protocol and the overall system; and

(iii)                                any associated rights provided to each token holder are accomplished through the initial issuance of the tokens (akin to negotiating a software licensing contract between two parties).

C.                 Franchise Law. Although we do not suggest that Blockchain Tokens fall under federal or state franchise law requirements, in thinking about the rights that might be included in a non-security Blockchain Token, we drew an analogy to franchise law.

1.          Under the franchise structure, a franchisor operates as the

overarching organization that owns the intellectual property of the franchise (and business plan) and has the authority to sell the franchise right to a potential franchisee. The franchisee is the person to whom these rights are granted.

2.                  In receiving these rights, the franchisee pays money to the franchisor, which can be an initial fee, an ongoing royalty or both.

3.                  Typically, state and federal laws governing franchises require franchisors to provide to prospective franchisees detailed information about the franchise. The disclosure obligations under the various federal and state franchise laws are primarily to mitigate the risk of loss to franchisees that make a capital contribution to the franchise.

(a)               The Federal Trade Commission (“FTC”) rules require a franchisor to provide a prospective franchisee with disclosures related to the trademark being used, the total investment needed to begin operations, the provisions of the franchise agreement and other related disclosure items related to receiving the franchise rights. 16 C.F.R. pt. 436.

(b)               New York franchise law has detailed disclosure requirements for the prospectus that the franchisor must provide to the prospective franchisee. N.Y. Gen. Bus. Law § 683, et seq.

(c)               California state law requires that a franchise agreement include certain protective rights for the franchisee should the franchisor terminate the franchise prior to its expiration date. The purpose of these provisions is to mitigate the loss of investment in the case of unlawful termination by a franchisor. Cal. Bus. & Prof. Code § 20020-22.

4.                  In a franchise, the franchisee puts forth the effort and work directly to build up the business in his/her location and the control or management of the franchisor is more remote. Thus, courts have held that a franchise interest should not be considered an investment security. See Koscot Interplanetary, 497 F.2d at 485; Lino v. City Investing, 487 F.2d 689 (3d. Cir. 1973).

5.                  We view the holder of a non-security Blockchain Token as being similar to a franchisee in that the rights granted by the Blockchain Token allow the holder to contribute to a system in a manner remote from the issuer of the Blockchain Tokens. In essence, the issuer provides the Blockchain Token holder with rights in the system by virtue of the associated Blockchain Token, rather than through a passive investment interest.

(a)               We believe that, despite the more decentralized framework of Blockchain Tokens, the franchise analogy is still useful based on how the initial issuer grants its intellectual property—ie., the system and its underlying protocol—to each individual token holder. Under the franchise model, a franchisor grants its intellectual property (which may also include a business plan) to a franchisor. While a franchise results in a more uniform application of the intellectual property or business plan by each franchisee, in the Blockchain Token context, analogously, the token holder is granted access to a system, which is the baseline framework by which the token holder operates.

(b)               Further, we think it is useful to consider whether the use of disclosures—both to inform token holders of their rights (e.g., voting rights and other systems rights) and to demonstrate the nature of the Blockchain Token—may be useful to incorporate at the time of the issuance of the tokens.

V.                 Conclusion

A.                Based on the above, we believe that an appropriately designed Blockchain Token that consists of rights and does not include any investment interests should not be deemed to be a security, subject to the specific facts, circumstances and characteristics of the Blockchain Token itself.

B.                 Rather, given our analysis in the above, it should be characterized as a simple contract, akin to a franchise or license agreement.

* * *

We hope this outline has been helpful. Please feel free to contact us with any further questions.




Lee Schneider (Debevoise & Plimpton LLP)

Naeha Prakash (Debevoise & Plimpton LLP)

Reuben Bramanathan (Coinbase)

Shahab Asghar (Coinbase)

Fred Ehrsam (Coinbase)

Peter Van Valkenburgh (Coin Center)

Matt Corva (Consensys)

Joel Monegro (USV)

Marco Santori (Cooley LLP)

Chris Padovano (Decentralized Legal)

Demian Brener (Zeppelin)

Matthew Tan (Etherscan)

Emma Popovska (Brontech)

Chris Burniske

Further reading:


1.    Naval Ravikant, The Bitcoin Model for Crowdfunding

2.    Peter Van Valkenburgh, Framework for Securities Regulation of Cryptocurrencies

3.    Fred Ehrsam, How to Raise Money on a Blockchain with a Token

4.    Marco Santori, Appcoin Law: ICOs the Right Way

5.    Nick Tomaino, Discussing Crvptotoken Best Practices

6.    William Mougayar,  Best Practices in Transparency and Reporting for Cryptocurrency




 Last updated December 7, 2016



Jumpstart Our Business Startups Act

The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012. Title III, also known as the CROWDFUND Act, has drawn the most public attention because it creates a way for companies to use crowdfunding to issue securities, something that was not previously permitted.[1] Title II went into effect on September 23, 2013.[2] On October 30, 2015, the SEC adopted final rules allowing Title III equity crowdfunding.[3][4] These rules went into effect on May 16, 2016. Other titles of the Act had previously become effective in the years since the Act’s passage.



·         1 Legislative history

·         2 Provisions of the bill

o    2.1 Titles

·         3 Reception

o    3.1 Support

o    3.2 Criticism

·         4 Current status

·         5 Industry associations

·         6 See also

·         7 References

·         8 External links

Legislative history[edit]

Following the decrease in small business activity in the wake of the 2008 financial crisis, congress considered a number of solutions to help spur economic growth. In November 2011, the House passed several bills aimed at economic revitalization,[5] including Small Company Capital Formation (H.R. 1070),[6] Entrepreneur Access to Capital (H.R. 2930),[7] and Access to Capital for Job Creators (H.R. 2940).[8] The Entrepreneur Access to Capital Act was introduced by Patrick McHenry (R-NC) and revised in collaboration with Carolyn Maloney (D-NY). Informed by the Crowdfunding exemption movement and endorsed by the White House,[9] it was the first U.S. bill designed to create a regulatory exemption for crowdfunded securities.[10]

The passage of H.R. 2930 inspired the introduction of two Senate bills similarly focused on the new crowdfunding exemption: the Democratizing Access to Capital Act (S.1791, Scott Brown, R-MA),[11] and the CROWDFUND (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure) Act (S.1970, Jeff Merkley, D-OR).[12] All three crowdfunding proposals were referred to the Senate Banking Committee, which took no action on them until March 2012.

In December 2011, Rep. Stephen Lee Fincher (R-TN) introduced into the House the Reopening American Capital Markets to Emerging Growth Companies Act (H.R. 3606),[13] to relieve companies with annual revenue of less than $1 billion from some Sarbanes-Oxley Act compliance requirements. The bill was referred to the House Financial Services Committee.

On March 1, 2012, House Majority Leader Eric Cantor introduced and placed on the House legislative calendar a new version of H.R.3606, renamed Jumpstart Our Business Startups (The JOBS Act).[14] The revised bill included the original H.R. 3606; the already-passed H.R. 1070, H.R. 2930, H.R. 2940; and two other bills that were still before the House: Private Company Flexibility and Growth (H.R. 2167), and Capital Expansion (H.R. 4088). AngelList co-founder Naval Ravikant, who spent six months lobbying for JOBS Act reforms,[15] recalls:

It ended up being a giant dog's breakfast of different bills combined together, and then some genius, probably some congressional staffer, said "How are we gonna get this thing to pass? Oh-- let's say it has something to do with jobs. Jumpstarting Our Business Startups! JOBS, JOBS!" And then, what congressperson can vote against something called the JOBS Act? It was a miracle." [15]

After some debate and revision, the new JOBS Act passed the House on March 8.[16] On March 13, the same day that the Act was placed on the Senate legislative calendar, Sen. Jeff Merkley introduced a revised version of his CROWDFUND bill, S.2190, cosponsored by Michael Bennet (D-CO), Scott Brown (R-MA), and Mary Landrieu (D-LA). The new bill was based on S.1970 but incorporated elements from S.1791,[17] upping the investment caps. It also expanded the liability section to explicitly authorize investors to sue issuers for the amount invested or for damages.[18] On March 19, during the JOBS Act's debate in the Senate, Merkley, Bennet, and Brown amended the legislation by swapping out the language from H.R.2930 and substituting in S.2190.[19]

The resulting revision passed the Senate on March 22, and after some debate passed the House on March 27.[16] The JOBS Act was signed into law at a ceremony in the White House Rose Garden on April 5, 2012.[20]

Provisions of the bill[edit]

The JOBS Act substantially changed a number of laws and regulations making it easier for companies to both go public and to raise capital privately and stay private longer. Changes include exemptions for crowdfunding, a more useful version of Regulation A, generally solicited Regulation D Rule 506 offerings, and an easier path to registration of an initial public offering (IPO) for emerging growth companies.[21]

The legislation, among many other things, extends the amount of time that certain new public companies have to begin compliance with certain requirements, including certain requirements that originated with the Sarbanes–Oxley Act, from two years to five years.[22][23]

The primary provisions of the House bill as amended would:

·         Increase the number of shareholders a company may have before being required to register its common stock with the SEC and become a publicly reporting company. These requirements are now generally triggered when a company′s assets reach $10 million and it has 500 shareholders of record.[24][25] The House bill would alter this so that the threshold is reached only if the company has 500 “unaccredited" shareholders, or 2,000 total shareholders, including both accredited and unaccredited shareholders.[22][23]

·         Provide a new exemption from the requirement to register public offerings with the SEC, for certain types of small offerings, subject to several conditions. This exemption would allow use of the internet "funding portals" registered with the government, the use of which in private placements is extremely limited by current law. One of the conditions of this exemption is a yearly aggregate limit on the amount each person may invest in offerings of this type, tiered by the person's net worth or yearly income. The limits are $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $10,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more. This exemption is intended to allow a form of equity crowdfunding.[26] While there are already many types of exemptions, most exempt offerings, especially those conducted using the internet, are offered only to accredited investors, or limit the number of non-accredited investors who are allowed to participate, due to the legal restrictions placed on private placements of securities. Additionally, the Bill mandates reviews of financial statements for offerings between $100,000 and $500,000, and audits of financial statements for offerings greater than $500,000 (noting maximum offering of $1,000,000).

·         Define "emerging growth companies" as those with less than $1 billion total annual gross revenues in their most recent fiscal year.[27]

·         Relieve emerging growth companies from certain regulatory and disclosure requirements in the registration statement they originally file when they go public, and for a period of five years after that. The most significant relief provided is from obligations imposed by Section 404 of the Sarbanes-Oxley Act and related rules and regulations. New public companies now have a two-year phase-in, so this bill would extend that by an additional three years. Smaller public companies are also already entitled to special relief from these requirements, and the bill does not change that.[26]

·         Lift the ban on “general solicitation” and advertising in specific kinds of private placements of securities.[26] This allows broader marketing of placements, as long as companies only sell to accredited investors (based on income, net worth or written confirmation from a specified third party).[27]

·         Raise the limit for securities offerings exempted under Regulation A from $5 million to $50 million, thereby allowing for larger fundraising efforts under this simplified regulation.[26]

·         Raise the number of permitted shareholders in community banks from 500 to 2,000.[26]

·         The bill prohibits the crowdfunding of investment funds.[28]

The first six sections, or "Titles," of the JOBS Act are named after the original bills that each was based on, and the last section, Title VII, tells the SEC to conduct outreach regarding the new legislation to SMEs and businesses owned by women, veterans, and minorities.[29] Title III of the Act, the crowdfunding provision, has been called one of the most momentous securities exemptions enacted since the original Securities Act of 1933.[30]


The titles of the bill are:










The JOBS Act had bipartisan support in Congress.[31][32] It was supported by many in the technology and startup communities, including Google,[33] Steve Case (founder of AOL), Mitch Kapor (founder of Lotus), and many other investors and entrepreneurs. It is also supported by the National Venture Capital Association, which described the bill as modernizing regulations that were put in place almost 100 years before, by among other things facilitating use of online services to make investments in small companies. The "equity crowdfunding" provisions, also known as "securities crowdfunding," which allow companies to sell securities through open platforms, were often likened to the Kickstarter online model for funding artists and designers.[34][35]

The JOBS Act is also a welcome development for nonprofit organizations which operate crowd funding platforms for microfinance loans, such as Kiva and Zidisha. These organizations have not obtained licenses as securities brokers due to high legal compliance costs. Kiva, an organization that allows individual web users to support microloans managed by intermediaries in developing countries, complies with SEC regulations by making it impossible for lenders to earn a positive financial return.[36] Zidisha, which operates an eBay-style platform that allows individual web users to transact directly with computer-literate borrowers in developing countries, does allow lenders to earn interest, but complies with SEC regulations by not guaranteeing cash payouts.[37] RocketHub testified in Congress June 26, 2012 in support of the JOBS Act and its intent to offer equity crowdfunding.[38]

The bill was also supported by David Weild IV, former vice-chairman of NASDAQ, who also testified before Congress. Studies written by Weild, co-authored by Edward H. Kim and published by Grant Thornton, "identif[ied] changes to stock market structure that gave rise to a decline in the IPO market", and thus "gave rise to the JOBS Act", according to Devin Thorpe of Forbes magazine. This has led some to refer to Weild as the "father" of the JOBS Act.[39][40] The first company to complete an Initial Public Offering using provisions under the Jobs Act was Natural Grocers by Vitamin Cottage (NYSE:NGVC) on July 25, 2013.


The final Act faced criticism on several fronts. Some proponents of crowdfunding were disappointed that the final version of Title III, the crowdfunding exemption, capped investment at $1 million and required a number of disclosures that could make the exemption unworkable for smaller start-ups, especially given the $1 million cap.[41] This title was also criticized for not including a means by which investors could form crowdfunding funds, thereby diversifying their investments.[42] While Title IV included some loosening of restrictions on the use of Regulation A, it did not grant full federal preemption. That is, for certain offerings companies still must register the offering with each state. State-by-state registration was one of the chief reasons the Government Accountability Office found for the remarkably low interest in Regulation A offerings pre-JOBS Act.[43]

The Act was also criticized by some consumer groups. For example, the bill was opposed by some securities regulators and consumer and investor advocates, including the AARP, the Consumer Federation of America, the Council of Institutional Investors, and others.[44] Among the complaints were that the loosening of investment protections would expose small and inexperienced investors to fraud.[27] The Consumer Federation of America characterized an earlier version of the legislation as "the dangerous and discredited notion that the way to create jobs is to weaken regulatory protections".[45] Criminologist William K. Black had said the bill would lead to a "regulatory race to the bottom" and said it was lobbied by Wall Street to weaken the Sarbanes–Oxley Act.[46] It is also opposed by labor unions, including the AFL-CIO,[47] the AFSCME,[44] and the National Education Association.[44]

Criticisms were levied against the House version of the bill as "gutting regulations designed to safeguard investors",[48] legalizing boiler room operations,[49] "reliev[ing] businesses that are preparing to go public from some of the most important auditing regulations that Congress passed after the Enron debacle",[50] and "a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital".[51] The bill also removed certain disclosure requirements, such as the disclosure of executive compensation, which were not in the spirit of the bill.[52]

Current status[edit]

Titles I, V, and VI of the JOBS Act became effective immediately upon enactment.[53] The SEC approved the lifting of the general solicitation ban on July 10, 2013, paving the way for the adoption of Title II.[54] As of October 2014, Titles III, and IV are awaiting more detailed rulemaking by the SEC, which did not meet its original deadlines.[55] Some have attributed the delay to former SEC chair Mary Schapiro's concerns over her legacy.[56] Title III rules were proposed for adoption by the SEC on October 23, 2013.[57] On May 16, 2016, Title III Regulation Crowdfunding rules enacted by the SEC went live.[58]

In an open meeting 25 March 2015, the Securities and Exchange Commission (SEC) elected to approve and release the long-awaited final rules for Title IV of the JOBS Act (commonly referred to as Regulation A+). Per the final rules, under Regulation A companies will be permitted to offer and sell up to $50 million of securities to the general public subject to certain eligibility, disclosure and reporting requirements.[59] While some offerings will be exempt from state registration requirements, in exchange for more extensive reporting requirements, others will not be and will still have to register with every state in which the securities are offered. For offerings made over the internet, this arguably means registering in all 50 states.[60] The final Regulation A rules were published in the Federal Register on April 20, 2015 and became effective on June 19, 2015.[61]

On October 30, 2015, the Securities and Exchange Commission "adopted final rules to permit companies to offer and sell securities through crowdfunding.  The Commission also voted to propose amendments to existing Securities Act rules to facilitate intrastate and regional securities offerings."[3]

Industry associations[edit]

A number of US organizations have been founded to provide education and advocacy related to Equity Crowdfunding as enabled by the JOBS Act. They include:

·         National Crowdfunding Association[62]

·         Crowdfunding Professional Association[63]

·         CrowdFund Intermediary Regulatory Advocates[64]

See also[edit]

·         Capital formation


1.    Jump up ^ "The CROWDFUND Act: everything you need to know". Econsultancy. Retrieved 2016-12-13. 

2.    Jump up ^ Barnett, Chance (September 23, 2013). "The Crowdfunder's Guide To General Solicitation And Title II Of The JOBS Act". Forbes. 

3.    ^ Jump up to: a b "SEC Adopts Rules to Permit Crowdfunding". www.sec.gov. Retrieved 2015-11-20. 

4.    Jump up ^ "View Rule". Reginfo.gov. 2012-12-31. Retrieved 2015-11-21. 

5.    Jump up ^ "House Panel Approves Startup Bills, Paving Way For Floor Votes | Congressman Patrick McHenry". Mchenry.house.gov. 2011-10-26. Retrieved 2015-11-21. 

6.    Jump up ^ "H.R.1070 - 112th Congress (2011-2012): Small Company Capital Formation Act of 2011 | Congress.gov | Library of Congress". Hdl.loc.gov. Retrieved 2015-11-21. 

7.    Jump up ^ "H.R.2930 - 112th Congress (2011-2012): Entrepreneur Access to Capital Act | Congress.gov | Library of Congress". Hdl.loc.gov. Retrieved 2015-11-21. 

8.    Jump up ^ "H.R.2940 - 112th Congress (2011-2012): Access to Capital for Job Creators Act | Congress.gov | Library of Congress". Hdl.loc.gov. Retrieved 2015-11-21. 

9.    Jump up ^ "STATEMENT OF ADMINISTRATION POLICY : H.R. 2930 – Entrepreneur Access to Capital Act : (Rep. McHenry, R-North Carolina, and 5 cosponsors)" (PDF). Whitehouse.gov. Retrieved 2015-11-21. 

10.  Jump up ^ Cortese, Amy (September 25, 2011). "A Proposal to Allow Small Private Companies to Get Investors Online". The New York Times. 

11.  Jump up ^ "Bill Summary & Status - 112th Congress (2011 - 2012) - S.1791 - THOMAS (Library of Congress)". Thomas.loc.gov. 2011-11-02. Retrieved 2015-11-21. 

12.  Jump up ^ "Bill Summary & Status - 112th Congress (2011 - 2012) - S.1970 - THOMAS (Library of Congress)". Thomas.loc.gov. Retrieved 2015-11-21. 

13.  Jump up ^ "Bill Summary & Status - 112th Congress (2011 - 2012) - H.R.3606 - THOMAS (Library of Congress)". Thomas.loc.gov. 2011-12-08. Retrieved 2015-11-21. 

14.  Jump up ^ "Cantor says JOBS bill set for House passage next week". TheHill. 2012-03-01. Retrieved 2015-11-21. 

15.  ^ Jump up to: a b "PandoMonthly: Fireside Chat With AngelList Co-Founder Naval Ravikant". YouTube. 2012-11-17. Retrieved 2015-11-21. 

16.  ^ Jump up to: a b "Bill Summary & Status - 112th Congress (2011 - 2012) - H.R.3606 - All Congressional Actions - THOMAS (Library of Congress)". Thomas.loc.gov. Retrieved 2015-11-21. 

17.  Jump up ^ "Crowdfunding compromise passed by US Senate, heads to House for approval". masslive.com. 2012-03-22. Retrieved 2015-11-21. 

18.  Jump up ^ "Bill Text - 112th Congress (2011-2012) - THOMAS (Library of Congress)". Thomas.loc.gov. 2012-03-13. Retrieved 2015-11-21. 

19.  Jump up ^ [1][dead link]

20.  Jump up ^ "The JOBS Act: Encouraging Startups, Supporting Small Businesses". whitehouse.gov. 2012-04-05. Retrieved 2015-11-21. 

21.  Jump up ^ Coughlan, Anne. "Audit Considerations for JOBS Act Offerings". Transaction Advisors. ISSN 2329-9134. 

22.  ^ Jump up to: a b Feldman, David. "Summary of JOBS Bill and Update". Retrieved March 19, 2012. 

23.  ^ Jump up to: a b "H.R. 3606, 112th Cong., ti. 1" (PDF). Retrieved March 19, 2012. 

24.  Jump up ^ "Section 12(g) of the Securities Exchange Act of 1934" (PDF). 

25.  Jump up ^ "SEC Rule 12g-1, 17 CFR 240.12g-1". Archived from the original on 2012-03-05. 

26.  ^ Jump up to: a b c d e Grant, David (March 8, 2012). "What does the JOBS Act actually do? Six questions answered.". csmonitor.com. Christian Science Monitor. Six discrete bills, all tied up with a bow. Together, they would have the following impacts: Raises the number of shareholders a company can have before it is forced to go public. You could call this part The Facebook Act. Facebook, among others, was growing rapidly as a private company but quickly bumped up against the 500-shareholder limit, reducing its ability to compensate employees in one of the main coins of the Silicon Valley realm: stock. The new limit would be 1,000. ~. 

27.  ^ Jump up to: a b c Marielle Segarra, "The JOBS Act: Crowdfunding and Emerging Businesses", CFO.com, October 23, 2013

28.  Jump up ^ Bearman, Asher (April 24, 2012). "You Cannot 'Crowdfund' a Fund (in Case You Were Wondering)". Communities. LexisNexis. Retrieved February 19, 2013. The new crowdfunding rules specifically prohibit investment companies, including those that are exempt from investment company registration under Section 3(c) or 3(b), from crowdfunding: (f) Applicability.-Section 4(6) shall not apply to transactions involving the offer or sale of securities by any issuer that...(3) is an investment company, as defined in section 3 of the Investment Company Act of 1940, or is excluded from the definition of investment company by section 3(b) or section 3(c) of that Act; or (4) the Commission, by rule or regulation, determines appropriate. In short, you can't crowdfund a fund. 

29.  Jump up ^ "Black Businesses to Have More Access to Capital". Black Enterprise. Retrieved 2015-11-20. 

30.  Jump up ^ "Crowdfunding: Maximizing the Promise and Minimizing the Peril" (PDF). Archived from the original (PDF) on September 25, 2013. Retrieved April 29, 2013. 

31.  Jump up ^ "Small Biz Jobs Act Is a Bipartisan Bridge Too Far". Bloomberg. March 18, 2012. 

32.  Jump up ^ Liberto, Jennifer (March 8, 2012). "House to pass bipartisan bill aimed at start-ups". CNN. 

33.  Jump up ^ Chavez, Pablo (March 15, 2012). "Bipartisanship, new businesses and new jobs, with a little help from your friends". Google's Public Policy Blog. Google. Retrieved February 19, 2013. As we highlighted in a recent post on Google’s Policy by the Numbers blog, entrepreneurs need access to capital to make grow their ideas into successful companies. We are excited to see members of Congress working to promote entrepreneurs’ efforts to build new companies and create new jobs. Last week, the House of Representatives passed the Jumpstart Our Business Startups (JOBS) Act with nearly full bipartisan support. The JOBS Act makes it easier for startups to raise capital. The crowdfunding provisions drafted by Congressman Patrick McHenry and Majority Leader Eric Cantor are particularly exciting and we applaud the House for its focus on helping to promote innovation and economic growth. 

34.  Jump up ^ Albanesius, Chloe (April 5, 2012). "Obama Signs JOBS Act to Boost Startups". PC Magazine. 

35.  Jump up ^ Colao, J.J. (April 5, 2012). "Breaking Down The JOBS Act: Inside The Bill That Would Transform American Business". Forbes. 

36.  Jump up ^ Kiva Case Study, Sarah Anderson and Joel Ramirez, December 6, 2007

37.  Jump up ^ Daniel, Rozas (July 5, 2011). "Microfinance without the MFI? Zidisha tests the boundaries of microlending methodology". Financial Access Initiative. New York University. Archived from the original on 28 March 2014. Retrieved 27 July 2013. 

38.  Jump up ^ "JOBS Act Implementation". C-SPAN Video Library. Jun 26, 2012. Retrieved 27 July 2013. 

39.  Jump up ^ Devin Thorpe (August 6, 2013). "Live Interview With Crowdfunding Leader David Weild IV". Forbes. Retrieved October 11, 2013. 

40.  Jump up ^ "What the Jobs Act Means for the IPO Market". Bloomberg News. September 23, 2013. Retrieved October 11, 2013. 

41.  Jump up ^ "Must Read: How to Fix Title III Crowdfunding Rules". Crowdfund Insider. 2015-10-16. Retrieved 2016-12-13. 

42.  Jump up ^ Williamson, James J. "The JOBS Act and Middle-Income Investors: Why It Doesn’t Go Far Enough". Retrieved 2016-12-13. 

43.  Jump up ^ Office, U.S. Government Accountability (2012-07-03). "Securities Regulation: Factors That May Affect Trends in Regulation A Offerings" (GAO-12-839). 

44.  ^ Jump up to: a b c "Organizations and Individuals Critical of Anti-investor Provisions in the House JOBS Act and Companion Senate Bills", Consumer Federation of America.

45.  Jump up ^ "Public Interest Groups Oppose Anti-Investor 'Capital Formation' Bills", Consumer Federation of America open letter to Sen. Johnson and Rep. Shelby.

46.  Jump up ^ Jobs Act 2012 a Recipe for Fraud, The Real News Network

47.  Jump up ^ William Samuel, American Federation of Labor and Congress of Industrial Organizations, Open letter to Sen. Johnson and Rep. Shelby, February 29, 2012

48.  Jump up ^ Kathleen Pender, "Financial regulations gutted in new bill", San Francisco Chronicle

49.  Jump up ^ Statement of Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law School, at Hearings Before the Senate Committee on Banking, Housing and Urban Affairs, "Spurring Job Growth Through Capital Formation While Protecting Investors" (December 1, 2011) Washington, D.C., p.1

50.  Jump up ^ Gail Collins, "The Senate Overachieves", The New York Times, March 15, 2012, p. A35

51.  Jump up ^ "They Have Very Short Memories" (editorial), The New York Times, March 10, 2012, p. SR10

52.  Jump up ^ Davidoff, Steven M. (June 11, 2013). "A Year Later, the Missed Opportunity of the JOBS Act". Dealbook. The New York Times. Archived from the original on 2013-06-19. 

53.  Jump up ^ "Testimony on "JOBS Act Implementation Update"". SEC.gov. Retrieved 2015-11-21. 

54.  Jump up ^ "SEC Approves JOBS Act Requirement to Lift General Solicitation Ban". SEC.gov. 2013-07-10. Retrieved 2015-11-21. 

55.  Jump up ^ "Anniversary Of JOBS Act Finds Investment Crowdfunders Champing At The Bit". Forbes.com. Retrieved 2015-11-21. 

56.  Jump up ^ "SEC Chief Delayed Rule Over Legacy Concerns". Wall Street Journal. Retrieved 16 December 2012. 

57.  Jump up ^ "SEC Proposes Crowdfunding Rules". CFO.com. Retrieved 24 October 2013. 

58.  Jump up ^ Cowley, Stacy (2016-05-14). "New Crowdfunding Rules Let the Small Fry Swim With Sharks". The New York Times. ISSN 0362-4331. Retrieved 2016-10-05. 

59.  Jump up ^ "ENTER THE MINI-IPO – SEC Approves Final Rules for Title IV of the JOBS Act (Regulation A+)". Crowdfundinglegalhub.Com. 2015-03-26. Retrieved 2015-11-21. 

60.  Jump up ^ "A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis". Cato Institute. 2016-05-03. Retrieved 2016-12-13. 

61.  Jump up ^ "Federal Register | Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A)". Federalregister.gov. Retrieved 2015-11-21. 

62.  Jump up ^ "National Crowdfunding Association Partners with SCORE". Archived from the original on November 9, 2012. Retrieved August 4, 2012. 

63.  Jump up ^ "Crowdfunding Professional Association Welcomes Departing National Crowdfunding Association Board to Their Coalition | Jul 19, 2012". SBWire. 2012-07-19. Retrieved 2015-11-21. 

64.  Jump up ^ "Event at CU to offer crowdfunding primer - BizWest". Bcbr.com. 2012-07-25. Retrieved 2015-11-21. 

External links[edit]

·         H.R. 2930

·         H.R. 3606

·         H.R. 1070

·         H.R. 2940

·         S. 1791

·         S. 1970

·         H.R. 2167

·         H.R. 4088

·         S. 2190

·         JOBS Act Implementation Update: Hearing before the Subcommittee on Investigations, Oversight, and Regulations of the Committee on Small Business, United States House of Representatives, One Hundred Thirteenth Congress, First Session, April 11, 2013

·         Final rules adopted by the SEC "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings"

·         Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934.

<img src="//en.wikipedia.org/wiki/Special:CentralAutoLogin/start?type=1x1" alt="" title="" width="1" height="1" style="border: none; position: absolute;" />

Retrieved from "https://en.wikipedia.org/w/index.php?title=Jumpstart_Our_Business_Startups_Act&oldid=779559395"


·         Acts of the 112th United States Congress

·         Crowdfunding

·         United States federal securities legislation



Revised SEC Regulation A+ Opens New Door to Funding

Lauren Manning, June 23, 2015

A new investing and finance rule that will provide more opportunities for startups to attract early-stage capital and more options for investors to get involved in the space took effect last Friday. Passed on March 25, 2015, and taking effect last Friday, the United States Securities and Exchange Commission (SEC) adopted a new version of Regulation A, which provides an exemption from the SEC’s registration requirements for smaller companies making an initial public offering, like AgTech startups and similar entrepreneurs.

Often referred to as Regulation A+, the new rules allow smaller companies to offer and sell up to $50 million of securities to accredited and non-accredited investors in a 12-month period, subject to eligibility, disclosure, and reporting requirements. “These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White. “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

Regulation A+ recognizes two tiers of offerings. Tier 1 is designed for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer. Tier 2 is for offerings of securities up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

Both Tier 1 and Tier 2 are subject to a number of basic requirements, while Tier 2 offerings are subject to an additional set of disclosure and ongoing reporting requirements. One of these additional requirements includes a limitation on the amount of securities non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth.

One aspect of Regulation A+ that could be particularly interesting to start ups is the “testing the waters” rule, allowing startups to essentially go out and ask anyone whether they’d be interested in investing in their company, after performing the required due diligence with a securities lawyer. During the test, potential investors can express their interest without having to make a securities purchase. In return, the startup can gather a mailing list of potential future investors and use a licensed broker dealer to sell the equity to those investors. Many are referring to this new marketing option as Kickstarter-Lite. The startup can advertise its product or service and drum up interest in the business without actually selling during the campaign. For many small-scale startups, this provides a more economically feasible way to go about early-stage fundraising.

The regulation also removes major hurdles to amassing capital from non-accredited investors. For the past 80 years, only accredited investors have been authorized to invest in American startups. An accredited investor is an individual that meets the net worth requirements established in SEC Regulation D. Individuals who do not meet the minimum threshold of Regulation D are called non-accredited investors. In general, a non-accredited individual investor is someone who has a net worth of less than $1 million, including a spouse, and who earns less than $200,000 annually, or $300,000 including a spouse, in the last two years.

In ordinary circumstances (Reg D, Rule 506(b)/(c) offerings), companies must choose between being limited to having up to 35 non-accredited investors during a round, or being completely prohibited from onboarding non-accredited investors entirely. Considering that accredited investors make up less than one percent of the entire United States population, welcoming the other 99 percent to the table creates huge opportunities for startups seeking capital.

Allowing a larger role for non-accredited investors–and the general public–to participate in early-stage fundraising marks a major opportunity for growth in the AgTech sector, particularly for startups that engage in substantial pre-market testing. Many farmers and agriprofessionals are skeptical of new products, wary that they are being sold snake oil. As a good faith gesture and indication of a company’s confidence in their product or service, many startups have offered limited-participation trials for farmers interested in seeing what the product or service is all about. In many instances, this creates a loyal fan base that has seen firsthand how beneficial the startup’s technology can be.

Now, Regulation A+ allows these early supporters to provide early-stage capital support in addition to promoting the product among their fellow farmers. This also creates an increased incentive for entrepreneurs to offer pre-market trials to farmers with the hopes of selling them on the product and engaging them as an early-stage investor. First-users of a product are often the most loyal customers and believe wholeheartedly in the company behind the product or service. Allowing those individuals to snag a stake in the company during its infancy provides even more incentive for investors and entrepreneurs to hit the soil running.

Removing some of the restrictions regarding non-accredited investors also allows investors outside the food and agriculture who truly believe in a startup’s product or service to become involved earlier in the process. Many investors are turning their attention and wallets towards socially conscious startups that are aiming to find sustainable solutions to many issues surrounding food production and supply, like hunger, resource conservation, and sustainable farming. Regulation A+ will allow these non-accredited altruistic investors to jump into the AgTech sector, where many companies are hot on the trail of innovative solutions to many of the current issues facing modern farmers.

Some commentators, including Peerbackers and Crowdcast Network CEO and Co-Founder Sally Outlaw, have expressed a number of reservations regarding the new rules, particularly for small and medium-sized companies. According to Outlaw, a major danger of Regulation A+ is that companies who pursue funding through this avenue will become a public company, “and it comes with all the costs, compliance, and distractions that this implies.” Crowdfunding expert Dara Albright, agreed, adding that Regulation A+ may lure some companies into going public before they have really proved their business model. On top of these concerns, seeking funding through Regulation A+ will cost many startups a substantial amount of money, particularly when it comes to paying SEC compliance lawyers’ fees.

There are equal risks on the investor side of the Regulation A+ equation. Some investors eager to get involved with a startup may lack the necessary education to understand a business venture and whether making a contribution adds up to a smart investment.

Regulation A

In the United States under the Securities Act of 1933, any offer to sell securities must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration. Regulation A (or Reg A) contains rules providing exemptions from the registration requirements, allowing some companies to use equity crowdfunding to offer and sell their securities without having to register the securities with the SEC.[1] Regulation A offerings are intended to make access to capital possible for small and medium-sized companies that could not otherwise bear the costs of a normal SEC registration and to allow non-accredited investors to participate in the offering. The regulation is found under Title 17 of the Code of Federal Regulations, chapter 2, part 230. The legal citation is 17 C.F.R. §230.251 et seq.

On March 25, 2015, the SEC issued new final regulations amending Regulation A.[2] Montana and Massachusetts state regulators sued the SEC requesting a stay that would pause the implementation of Reg A.[3] The rules came into force on July 19, 2015.[4]



·         1 Regulation A+

o    1.1 Non-accredited Investors

o    1.2 Tier 1

o    1.3 Tier 2

o    1.4 Notable Offerings

·         2 Testing The Waters

·         3 References

·         4 External links

Regulation A+[edit]

On March 25, 2015, the Securities and Exchange Commission adopted final rules to implement Section 401 of the Jumpstart Our Business Startups Act by expanding Regulation A into two tiers.[5]

·         Tier 1, for securities offerings of up to $20 million in a 12-month period

·         Tier 2, for securities offerings of up to $50 million in a 12-month period

An issuer of $20 million or less of securities can elect to proceed under either Tier 1 or Tier 2. The final rules for offerings under Tier 1 and Tier 2 build on current Regulation A and preserve, with some modifications, existing provisions regarding issuer eligibility, Offering circular contents, testing the waters, and “bad actor” disqualification. The new rules modernize the Regulation A filing process for all offerings, align practice in certain areas with prevailing practice for registered offerings, create additional flexibility for issuers in the offering process, and establish an ongoing reporting regime for certain Regulation A issuers. Under the final rules, Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the SEC on an ongoing basis.

Non-accredited Investors[edit]

Regulation A allows the general public to invest in private companies. With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Regulation D (SEC), or be subject to certain limitations on the size of their investment.

Tier 1[edit]

In addition to qualifying a Regulation A offering with the SEC, companies using a Tier 1 offering must register or qualify their offering in any state in which they seek to offer or sell securities pursuant to Regulation A. Some states provide the option to have Tier 1 offerings that will be conducted in multiple states reviewed through a coordinated state review program by the North American Securities Administrators Association.

Tier 2[edit]

Issuers in Tier 2 offerings are required to qualify offerings with the Commission before sales can be made pursuant to Regulation A, but they are not required to register or qualify their offerings with state securities regulators. This partially exempts Tier 2 companies from blue sky law securities rules in each state.[6] Tier 2 offerings by such issuers, do remain subject to some state law enforcement and antifraud rules. Issuers in Tier 2 offerings may still be subject to filing fees in the states in which they intend to offer securities.

Notable Offerings[edit]

Equity crowdfunding platforms StartEngine and SeedInvest have facilitated Regulation A+ campaigns.[7] The first successful Regulation A+ campaign was completed by automotive startup Elio Motors, raising nearly $17 million from 6,600 investors. The campaign was designed, produced and marketed by CrowdfundX,[8] a financial marketing firm based in Los Angeles. Elio Motors closed out their Regulation A+ offering in February, 2016, and subsequently listed to the OTCQX,[9] making it the first crowdfunded IPO in the United States.[10] The first testing the waters successfully completed was WayBetter (maker of the social dieting app DietBet) on the SeedInvest platform in June 2015.[11]

The first real estate lending marketplace to obtain SEC qualification utilizing an amended Tier 1 Regulation A offering was Groundfloor, achieving the feat on August 31, 2015.[12] This made Groundfloor the first marketplace open to non-accredited investors.[13]

On Dec. 3rd, 2015, real estate crowdfunding company Fundrise used the newly expanded Regulation A rules to raise capital for the launch of the world’s first online Real Estate Investment Trust.

In June 2016, American Homeowner Preservation opened a Regulation A+ offering with what has been called "probably the lowest investment minimum"[14] of any Regulation A+ offering. Their minimum investment is $100.

Testing The Waters[edit]

Regulation A allows companies to conduct a publicity campaign and to solicit indications of interest from the public to assess the level of interest in investing in the company.[15] This is intended to help the company decide whether to proceed with a Reg A offering.[16]


1.    Jump up ^ http://www.sec.gov/info/smallbus/secg/regulation-a-amendments-secg.shtml

2.    Jump up ^ http://www.sec.gov/news/pressrelease/2015-49.html

3.    Jump up ^ http://www.reuters.com/article/2015/06/17/us-sec-montana-regulations-idUSKBN0OX2RZ20150617

4.    Jump up ^ https://www.nytimes.com/2015/06/19/business/smallbusiness/new-rules-let-companies-sell-stakes-to-investors-of-modest-means.html?_r=0

5.    Jump up ^ https://www.wsj.com/articles/small-crowds-get-their-day-in-investing-sun-1434655720

6.    Jump up ^ http://www.crowdfundinsider.com/2015/03/65007-the-reg-a-bombshell-50m-unaccredited-equity-crowdfunding-title-iv-takes-center-stage/

7.    Jump up ^ http://www.cnet.com/news/funded-tesla-wannabe-elio-motors-raises-big-from-the-crowd-or-did-it/

8.    Jump up ^ http://www.forbes.com/sites/moiravetter/2015/08/26/crowdfunding-elio-motors-crowdfundx-30-million-dollars/#7fcf65862da1

9.    Jump up ^ http://www.otcmarkets.com/stock/ELIO/quote

10.  Jump up ^ http://www.forbes.com/sites/amyfeldman/2016/03/01/elio-motors-first-equity-crowdfunded-company-soars-past-1b-valuation-days-after-listing-shares/#5de1ddf541cf

11.  Jump up ^ http://www.crowdfundinsider.com/2015/06/69857-seedinvest-lists-waybetter-as-reg-a-issue-to-test-the-water/

12.  Jump up ^ Ryan Lichtenwald (4 September 2015). "GROUNDFLOOR Is Breaking New Ground With The World’s First Regulation A+ Deal". Lend Academy. Retrieved 2 February 2016. 

13.  Jump up ^ Kiki Roeder (11 December 2015). "GROUNDFLOOR High Rises with $5M Series A, First of New $100M Fintech Ventures Fund". Hypepotamus. Retrieved 2 February 2016. 

14.  Jump up ^ http://www.crowdfundinsider.com/2017/01/95099-real-estate-alternative-investment-non-accredited-investors/

15.  Jump up ^ http://www.venturebeat.com/2015/06/19/why-every-entrepreneur-should-consider-a-mini-ipo/

16.  Jump up ^ http://www.inc.com/ryan-feit/a-free-call-option-for-startups-on-fundraising.html

External links[edit]

·         United States Securities and Exchange Commission (SEC) – Official site

·         Adopting Release for the amendments to Regulation A

·         Guidance on the Application of Regulation A

·         Introduction to Private Placements


We note that the Supreme Court has stated that the definitions of “security” under the Securities Act and the Exchange Act are treated as being the same, despite some technical differences. SEC v. Edwards, 540 U.S. 398 (2004) (citing Reves v. Ernst & Young, 494 U.S. 56, 61 n.1 (1990)).


Our analysis is based on our discussions with you, the materials you provided and the law as it exists as of the date hereof. We have not considered any state or non-US law analysis, including that of federal preemption related to state blue sky laws, and this outline relates solely to the definition of security under the federal securities laws. We do not express any view on any other body of law or legal construct, including without limitation the franchise laws of any state. We are unaware of any court cases, SEC rules or releases that directly address the question discussed in this memorandum as to whether Bitcoin Tokens should be characterized as a security for purposes of Section 2(a)(1) of


However, in Teamsters, the court found, in the pension benefits context, that providing labor in return for possible benefits appeared to be more akin to obtaining a livelihood rather than making an investment. Teamsters, 439 U.S. at 560. Analogously, if Blockchain Token users are granted the


More specifically, profits may include all manner of returns, such as dividends, other periodic payments or the increased value of the investment—whether it is a variable or fixed return. See e.g., Edwards, 540 U.S. at 390.


[5]      See, e.g., Williamson v. Tucker, 645 F.2d 404 (5th Cir.), cert. denied, 454 U.S. 897 (1981); Odom v. Slavik, 703 F.2d 212, 215 (6th Cir. 1983) (noting that “[t]he managerial powers vested in general partners and the express right of inspection of documents gives them the kind of leverage and ability to protect themselves that takes them outside the intended scope of the ‘34 Act”); see also Klaers v. St. Peter, 942 F.2d 535 (8th Cir. 1991) (finding no security where non-managing partners collectively had 80% voting power on “any items of partnership business which will substantially affect” the partners); Stewart v. Ragland, 934 F.2d 1033 (9th Cir. 1991) (finding no security even though each well was managed by an independent contractor after an examination of the “intricacies of the operating agreement” that laid out significant managerial powers retained by the non-operators, who were sophisticated investors).


[6]      Edwards, 540 U.S. at 390 (noting that Reves applies to the term “note” as opposed to “investment contract”).


Under Reves, if the purpose is, for example, to “facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash flow difficulties, or to advance some other commercial or consumer purpose,” it is unlikely to be deemed a security. See Reves, 494 U.S. at 66.