Equity Crowdfunding GC Talks Regulations, Job Challenges

RedCrow brought Chris Laia on board quickly—the crowdfunding startup only launched its website in November 2016.

Chris Laia retired last year after nine years in the legal department of military financial services group USAA, but when he received a LinkedIn message from a former colleague about a new in-house role, he decided he would consider it.

After meeting the executive team of health care equity crowdfunding startup RedCrow in Mill Valley, California, he said "it was easy to get excited" about the job. Since January, he's been general counsel and chief compliance officer for the company.

RedCrow brought Laia on board quickly—the crowdfunding startup only launched its website in November 2016. "I give management a lot of credit for recognizing the need to bring someone in with my experience early in the process, as opposed to building everything out and then having to retrofit what had already been built," Laia said.

With RedCrow, unlike rewards-based crowdfunding platforms such as Kickstarter, investors can put money into startups for a stake in the company. RedCrow is helping people invest in companies like BrainCheck, which offers neurocognitive tests to log and track changes to users' brain health.

Laia, who is one of six employees at RedCrow, points out that the equity crowdfunding space is relatively new. "For me, it was an opportunity to do something in a new area and make a difference in helping democratize the [investing] process," he said.

The Jumpstart Our Business Startups, or JOBS, Act was signed into law in 2012 and mandated that the U.S. Securities and Exchange Commission set rules for capital formation, disclosure and registration requirements for emerging companies. Laia said his employer is exactly the type of company the law was designed to assist. "New jobs come from companies that are less than five to six years old," Laia said. "We'll be a part of helping other companies, which will help grow jobs in the U.S."

Although Laia hasn't worked in the equity crowdfunding space until now, he's spent the past three decades working in-house at financial services companies including Deutsche Bank. He also served as a staff attorney with the SEC in the 1990s.

(Photo, left: Chris Laia. Courtesy photo)

Much of Laia's job at RedCrow will revolve around complying with Title II and Title III of the JOBS Act, which governs crowdfunding. The Title II funding model is limited to accredited investors with a net worth of at least $1 million, plus a salary of $200,000 or more, and sets investment minimums at about $5,000. Title III deals allow unaccredited investors to invest as little as $500.

The SEC adopted rules for equity crowdfunding, which went into effect in May 2016, that were put in place to help small businesses with capital formation while protecting inexperienced investors.

So far, RedCrow only operates in 14 states (but it plans to be nationwide in coming months). Laia said he isn't sure what to expect with the new administration under President Donald Trump but he will be watching as Congress decides whether to raise the annual cap on fundraising from nonaccredited investors from $1 million to $5 million, which would affect companies that use crowdfunding.

When the SEC announced its guidelines, it shared amendments it was considering, including the possibility of raising the cap under Securities Act Rule 147 and Rule 504 of Regulation D.

"To enable issuers to raise that $5 million mark in today's economy is reasonable," Laia said. "I'm very hopeful that will go through the current Congress."

As health startups search for investors on RedCrow's website, they post claims about health benefits their products can provide in areas such as cardiac monitoring or gut health. Since RedCrow is merely the portal for those companies, it is not legally on the hook for these claims, but it does vet the health startups.

"[Health claims are] the issuer's responsibility, but there are minimum standards that have to be met with the law," Laia said. Those standards include making sure the startups aren't operated by "bad actors." RedCrow also has a group of external advisers in place, most of whom are in the medical profession, to review claims made by the companies seeking investments.

Despite the risk assessment process, Laia explains that "private equity is private equity" at the end of the day. "The risk is high," he said. "The expectation is that accredited investors will do their own due diligence."

Coming from USAA where the legal department was made up of nearly 300 people, it has been an adjustment for Laia to address all of the legal and regulatory issues coming his way on his own. But he intends to turn to outside counsel when necessary.

Originally published on Corporate Counsel. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Stephanie Forshee

Stephanie Forshee is a writer for Inside Counsel magazine. Previously, she has worked for the Puget Sound Business Journal, the San Fernando Valley Business Journal and Auto...

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