Crowdfund Investing For Dummies
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When you make the decision to cancel your crowdfund investing project, you need to take the appropriate steps to make sure you’re compliant with the Securities and Exchange Commission (SEC). Consult an attorney who has securities experience to ensure you have guidance that is specific to your situation. The SEC’s number-one concern here is that fraud didn’t take place.

One way to protect yourself from any suspicion of fraud is to consult with your attorney to learn about the process that the SEC has determined you must follow to be compliant with its regulations.

This means that you’ll absorb all the costs related to posting your campaign on the funding portal. Any money that you spent on producing a pitch video, as well as money you paid to the funding portal for its services (which could include a background check fee, success fee, escrow fee, and transfer fees), can’t be reimbursed by investor funds (which may have been part of your original financial plan).

You most likely will have to pay the escrow agent (the third party that collects investor funds) another fee to return all the money. It’s important to realize that this is your financial responsibility — not the responsibility of your investors.

Here are the steps you must take to ensure SEC compliance in the event of a cancelation:

  • Contact your online funding platform and seek guidance from its staff. Consult its Terms and Conditions, which likely contains a section letting you know what to do if you need to cancel a project. Don’t make any assumptions. Find out from the platform what its specific rules and procedures are.

  • Notify your investors of what you’re doing and why. Doing so is important to maintain your crowd’s trust. But it’s also important so the SEC knows you’re sharing appropriate communication with your investors.

  • Take the appropriate action to return the cash to your investors and get their equity shares back (if your campaign offered equity participation). If you used an escrow/transfer agent to collect the money and distribute the shares in the first place, you’ll likely have to engage that entity again. Your funding portal is your information source for how to accomplish this step.

  • Request confirmation from the escrow/transfer agent and/or from your funding portal that all the investors received their money back. You want to have documentation on file that demonstrates that every dollar has been returned.

  • Inform the SEC by phone that the project has been canceled and the investor money returned. Your funding portal reported information related to your campaign and how much money you raised to the SEC when you hit your funding target. The SEC thinks you’ve got that cash until you tell it otherwise.

    The SEC Office of Compliance and Inspections is your main point of contact here. Reach out to them, introduce yourself, and tell them what’s happened. Let them know the steps you’ve taken, and ask what else you need to do to be fully compliant. Keep a record of who you spoke to and when, as well as of the nature of your conversation and any follow-up steps that were suggested to you.

  • Write a formal letter to the SEC repeating the information covered in your phone call. Reference the date and time of your call to the SEC, as well as the name of the person you spoke to. Reiterate that all the money has been returned to your investors, and provide your complete contact information.

    Keep a copy of this letter. Send the original via Certified Mail, FedEx, or UPS for delivery confirmation. You want to have a record of receipt so you know that you’ve done everything necessary to let the SEC know you canceled your project and are in compliance with the law.

Expect that both the SEC and the funding platform will follow up with you to make sure all appropriate steps have been taken.

If you don’t follow these steps, in addition to dealing with your life-changing event, you’ll probably be dealing with a lawsuit from your investors and one from the SEC. You don’t want this. Consult with your attorney. Be transparent, be efficient in your communication, and stay above the law.

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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