August 15, 2018
Howard Marks
Chief Executive Officer
StartEngine Crowdfunding, Inc.
750 N San Vicente Blvd.
Suite 800 West
West Hollywood, CA 90069
Re: StartEngine Crowdfunding, Inc.
Offering Statement on Form 1-A
Filed June 29, 2018
File No. 024-10862
Dear Mr. Marks:
We have reviewed your offering statement and have the following
comments. In some of
our comments, we may ask you to provide us with information so we may better
understand your
disclosure.
Please respond to this letter by amending your offering statement and
providing the
requested information. If you do not believe our comments apply to your facts
and
circumstances or do not believe an amendment is appropriate, please tell us why
in your
response. After reviewing any amendment to your offering statement and the
information you
provide in response to these comments, we may have additional comments.
Form 1-A filed June 29, 2018
Cover Page
1. Please revise the cover page to disclose:
The minimum investment amounts for the Common Tokens and Preferred
Tokens, as
referenced on page 14;
That the maximum offering dollar amount will be raised through the sale
of shares of
Common Tokens or the shares of Series Token Preferred Stock or any
combination
thereof;
That the offering shall commence within two days of the offering
statement being
qualified. Refer to Rule 251(d)(3)(F) of Regulation A;
That you will accept BTC or ETH as consideration for the Tokens; and
Howard Marks
FirstName LastNameHoward Marks
StartEngine Crowdfunding, Inc.
Comapany NameStartEngine Crowdfunding, Inc.
August 15, 2018
August 15, 2018 Page 2
Page 2
FirstName LastName
That investors who tender BTC or ETH in exchange for Tokens may
receive fewer
tokens than expected as a result of any volatility between the
time of receipt of such
consideration and application of the conversion formula. In this
regard, we note your
disclosure in the penultimate risk factor on page 11.
The Offering, page 5
2. With respect to the delivery of the Tokens, please disclose that an
investor will be
required to obtain a compatible crypto-wallet, such as MyEtherWallet,
Mist, Parity or
imToken to receive the Tokens, as indicated on page 15.
Risk Factors
We are seeking registration as a broker-dealer..., page 7
3. Your website states that you are also in discussions with tZero and
other broker-dealers to
offer the StartEngine token on their ATS platforms. Please revise to
disclose this
information, either here or elsewhere in your offering statement.
If the company cannot raise sufficient funds it will not succeed..., page 9
4. Please revise to clarify that you have no committed sources of
financing, as disclosed at
the bottom of page 16.
5. We note your disclosure that "[i]f the company manages to raise only
the minimum
amount of funds sought, it will have to find other sources of funding
.. . ." (emphasis
added). Please reconcile this disclosure with your statement on the
cover page and
elsewhere that there is no minimum offering amount. Also please
clarify here or in a
separate risk factor that because this is a best efforts offering with
no minimum, any
investment in the stock is potentially the only investment in the
stock, which could leave
the company without adequate capital to pursue its business plan.
Holders of our Preferred Stock are entitled to potentially significant
liquidation preferences...,
page 10
6. Please revise to include the liquidation preferences among the Series
Seed Preferred
Stock, the Series A Preferred Stock and the Series Token Preferred
Stock.
The definitive ownership of the ownership will be recorded..., page 10
7. Please expand your disclosure to inform investors of StartEngine
Secure's limited
experience in providing transfer agent services for digital assets.
The further development and acceptance of digital assets..., page 11
8. Please revise your disclosure in this section to specifically discuss
any unfavorable
regulatory actions in jurisdictions where you plan to do business.
Howard Marks
FirstName LastNameHoward Marks
StartEngine Crowdfunding, Inc.
Comapany NameStartEngine Crowdfunding, Inc.
August 15, 2018
August 15, 2018 Page 3
Page 3
FirstName LastName
In the event the smart contract does not work as anticipated..., page 12
9. Please expand this risk factor to disclose that currently known
vulnerabilities of smart
contracts may cause transactions on the blockchain to be executed not
pursuant to the
agreed upon terms with the Token holder, and that the Token holder may
have no
mechanism to stop or unwind the transaction.
Plan of Distribution, page 14
10. Please disclose how the company will accept BTC and ETH as payment and
the custodial
practices for the payments that you will receive. In this regard, it
is unclear whether you
intend to use a digital wallet provider or hold it internally. If you
will hold the digital
assets in hot wallets, describe where those wallets will be located
and who will have
access to them. Please also identify who will have the authority to
release the proceeds
from the wallet. In addition, please add a risk factor to specifically
address the
vulnerabilities and risks of accepting and holding BTC and ETH in such
manner.
11. We note your disclosure that you are initially offering your
securities in all states other
than Florida and Nebraska. However, this appears inconsistent with
Item 5 of Part I of
your Form 1-A, where you list the jurisdictions in which the
securities are to be offered,
including such states. Please reconcile.
Process of Subscribing, page 14
12. Please revise to discuss in greater detail the AML and OFAC due
diligence procedures, as
referenced in this section.
13. We note your disclosure at the bottom of page 14 that StartEngine
Secure will "store the
shareholder records using StartEngine LDGR on the blockchain." Please
revise to
describe the nature of such blockchain in greater detail (e.g.,
private or public blockchain,
etc.).
Determination of number of Tokens Issued For BTC and ETH, page 15
14. Please revise to explain in greater detail the mechanics of how
payments in BTC and ETH
are calculated in terms of the exchange rate being used and provide
illustrative examples,
as appropriate. Please also describe the "recognized" currency
exchanges that Prime Trust
will use to determine the daily BTC and ETH exchange rates.
15. You disclose that when the company accepts BTC or ETH as payment, you
anticipate
holding an investor's payment in its original form for less than a
day. Please clarify the
extent to which such time frame would limit an investor's ability to
receive a return of his
or her investment in its original form.
Investors' Tender of Funds, page 15
Howard Marks
FirstName LastNameHoward Marks
StartEngine Crowdfunding, Inc.
Comapany NameStartEngine Crowdfunding, Inc.
August 15, 2018
August 15, 2018 Page 4
Page 4
FirstName LastName
16. We note your statement that tendered funds will only be returned to
investors in the event
that you decide to terminate the offering. Please confirm that
investors will be able to
request that the funds be returned to them while they are being held
in escrow.
17. We note your disclosure that for "payments in BTC or ETH, the closing
will take place, if
practicable, within 24 hours of the remittance of funds." Please also
disclose the time
period for the closing with respect to payments other than in BTC or
ETH.
18. Please file your escrow agreement as an exhibit to your Offering
Statement. Please see
Item 17(8) of Part III of Form 1-A.
19. Please revise to explain how an investor will know if his/her money is
being held in
escrow. In addition, we note your disclosure on the cover page that
you expect closings to
be held at least monthly, but since you also state that you will hold
closings whenever you
determine to accept funds, please revise to explain how investors will
know when they
should expect to receive their shares.
20. We note your disclosure that a closing will occur each time you
determine to accept
funds. Please revise to clarify whether by "funds" you mean the
receipt of the BTC/ETH
or the receipt of the cash upon exchange of the BTC/ETH by PrimeTrust.
Please also
confirm that purchases using BTC/ETH will also go through the escrow
process and be
subject to rolling closings.
Issuance of Tokens, page 15
21. Please file the form of the smart contract or a written summary of
such contract as an
exhibit to the offering statement pursuant to Item 17 of Form 1-A.
Ensure that all of the
material terms of the Tokens, as embedded within the smart contract,
are described in the
offering statement. To the extent that you have not developed your
Token, please tell us
when you will do so.
22. In light of recent reports that at least two of the wallet providers
that you identify on page
15 have experienced a cybersecurity breach (i.e., MyEtherWallet and
EtherDelta), please
add a risk factor disclosing the risks associated with the specific
wallet providers that you
reference.
Additional Perks, page 16
23. We note your disclosure that investors who invest at least $1,000 will
receive a "10%
discount on investments on StartEngine during the first 24 hours of a
Regulation CF
offering." Please revise to clarify how such discount will be
calculated. Also please
disclose an estimate of the value of the invitation to the annual
StartEngine owners'
event. In this regard, we note the related information appearing on
your website at
https://www.startengine.com/own.
Regulation, page 21
Howard Marks
FirstName LastNameHoward Marks
StartEngine Crowdfunding, Inc.
Comapany NameStartEngine Crowdfunding, Inc.
August 15, 2018
August 15, 2018 Page 5
Page 5
FirstName LastName
24. If applicable, please disclose whether you intend to register as a
money transmitter or
money transfer service provider, and how you intend to comply with the
related state and
federal regulations.
Regulation S, page 24
25. Please discuss any steps you have taken to comply with the securities
laws in foreign
jurisdictions. In this regard, we note your disclosure in the second
risk factor on page 8,
which suggests that you have structured your offering to comply with
certain foreign
laws. Also please expand your disclosure to briefly describe the
resale restrictions
contained in Regulation S.
Intellectual Property, page 24
26. If material, please include a risk factor addressing your ability to
protect your intellectual
property rights.
Securities Being Offered, page 33
27. Please provide a materially complete discussion of how the Tokens will
interact with the
Ethereum network. As part of your response, please provide the
following disclosure:
Risk factors regarding your reliance on another blockchain
network. For example,
disclose the risks and consequences to the company if the Ethereum
network ceases to
function, slows down in functionality, or forks;
A description of the content of the Ethereum-based smart contracts
underlying the
Tokens, and clarifying the whether the smart contract is subject
to change and, if so,
by whom. Considering the vulnerability of current smart contracts,
please disclose
what systems and processes (if any) have been developed to prevent
errors and
troubleshoot the functionality of the Tokens;
To the extent that there is an inherent limit in the total number
of Tokens that you can
create, please explain how that feature works and how it is
enforced;
Disclose whether a single Token may be divided into fractions of a
Token, as well as
any limits on their division, or if only whole Tokens may be
transferred or accepted;
Discuss the limits on the transfer of the Tokens, if any;
Explain how you intend to provide updates on the number of Tokens
you have sold
throughout the offering period, and the amount of proceeds raised;
and
Howard Marks
FirstName LastNameHoward Marks
StartEngine Crowdfunding, Inc.
Comapany NameStartEngine Crowdfunding, Inc.
August 15, 2018
August 15, 2018 Page 6
Page 6
FirstName LastName
Disclose what rights, if any, the Token holders have to recoup
their losses in the event
that any errors occur or hidden terms, previously not disclosed to
the investors,
negatively impact the value of the Tokens.
28. Please clearly explain any differences in the rights of investors that
hold your common
stock in the form of electronic tokens from the rights of any other
holders of common
stock.
29. We note that your cover page defines the common stock and preferred
stock offered as
Common Tokens and Preferred Tokens. However, in this section and
elsewhere
throughout the prospectus, you refer to the securities offered as
Common Stock and
Preferred Stock. Please revise to be consistent in your use of defined
terms.
30. Please tell us whether the smart contract you intend to deploy is
currently under
development. In this regard, we note your disclosure on pages 18 and
35, respectively,
that you are "developing a service called StartEngine LDGR" and that
the "Tokens will be
launched . . . with a smart contract built by LDGR." Please note that
since you are not
eligible to conduct a delayed offering, all of the offering terms must
be established and set
forth in the offering statement prior to the time of qualification.
Please revise your
disclosure accordingly.
Preferred Stock, page 34
31. Please revise to clarify whether the preferred stockholders who
purchase their shares in
this offering will be required to grant a proxy to the company's CEO
to vote their shares
on all matters submitted to a shareholder vote, as with the purchasers
of common stock in
this offering.
32. On page 5, you state that up to 7,890,624 shares of preferred stock
will be outstanding
upon completion of the offering. According to Note 6 of the Notes to
Financial
Statements, the company has 7 million authorized shares of preferred
stock. Please
explain, if true, that you will need to amend your Certificate of
Incorporation to provide
for the designation and issuance of the Series Token Preferred Stock.
Exhibits
33. We note your disclosure on page 14 that you have agreed to pay
FundAmerica LLC, a
technology service provider, a license fee of $2.50 per transaction
processed. Please file
this agreement as an exhibit to the offering circular or tell us why
it is not material. Refer
to Item 17(6) of Part III to Form 1-A.
General
34. Please define each acronym or otherwise abbreviated term the first
time it is used (e.g.,
"BTC" and "ETH").
Howard Marks
StartEngine Crowdfunding, Inc.
August 15, 2018
Page 7
35. Please confirm your understanding that "testing the waters" materials
may be used before
the qualification of the offering statement, provided that all
solicitation materials are
preceded or accompanied by a preliminary offering circular or contain
a notice informing
potential investors where and how the most current preliminary
offering circular can be
obtained. In this regard, please revise your website to include the
information required by
Securities Act Rule 255(b)(4).
36. To better understand the offering process for the Tokens pursuant to
this offering
statement, please provide us with a diagram or a detailed explanation
of the process,
starting from the initial issuance of the digital securities to the
recording of each trade in
the distributed ledger, as well as the clearance and settlement
process. Also please
describe the role of each participant in the process.
We will consider qualifying your offering statement at your request. If
a participant in
your offering is required to clear its compensation arrangements with FINRA,
please have
FINRA advise us that it has no objections to the compensation arrangements
prior to
qualification.
We remind you that the company and its management are responsible for
the accuracy
and adequacy of their disclosures, notwithstanding any review, comments, action
or absence of
action by the staff.
Please contact David Lin at (202) 551-3552 or Erin Purnell at (202)
551-3454 with any
questions.
FirstName LastNameHoward Marks Sincerely,
Comapany NameStartEngine Crowdfunding, Inc.
Division of
Corporation Finance
August 15, 2018 Page 7 Office of
Financial Services
FirstName LastName