SEC Regulation A+ Better than Crowdfunding Real Public Financing for Growth Companies. John Tishler

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1 SEC Regulation A+ Better than Crowdfunding Real Public Financing for Growth Companies John Tishler Sheppard Mullin Richter & Hampton LLP 2015

2 Old Regulation A From 1980 until JOBS Act in 2012, limit was $5 million Allowed: general solicitation Non-accredited investors Immediate resales by investors Required: filing of abbreviated offering document with the SEC SEC review and comment Blue sky qualification Seldom used since 1990s 57 filed in filed in 2011

3 JOBS Act Title IV (Regulation A+) Created new exemption with cap of $50 million in any 12 month period SEC may increase this amount every two years Allows public solicitation including solicitations of interest before a written offering document is prepared or filed Securities issued not restricted securities Requires issuers to file audited financial statements with the SEC annually Limited to equity securities, debt securities, debt convertible into equity and guarantees of these securities Offerings to qualified purchasers exempt from Blue Sky qualification SEC to adopt implementing regulations; no deadline.

4 What is Crowdfunding? Money for Goods (Not securities) Kickstarter Indiegogo General solicitation to accredited investors (JOBS Act Title II) Arrived September 23, 2013 AngelList, FundersClub, Crowdfunder RealCrowd, Realty Mogul, Fundrise Broad-based, limited seed capital (JOBS Act Title III) Final rules scheduled for April 2016 Mini-public offerings (JOBS Act Title IV)

5 Regulation A+ SEC adopted amendments to Regulation A effective June 19, 2015 Establishes 2 types of offerings Tier 1 Offering Up to $20 million in securities in 12-month period Not more than $6 million in offers by existing security holders that are affiliates Tier 2 Offering Up to $50 million in securities in 12-month period Not more than $15 million in offers by existing security holders that are affiliates Securities are not restricted securities Selling stockholders limited to 30% of initial Reg A+ offering Available for securities issued in M&A

6 Eligibility Organized in and have principal place of business in U.S. or Canada Prohibited issuers SEC reporting companies Business development companies under ICA Blank check companies Asset-backed issuers Oil, gas, or other mineral rights Subject to SEC suspension of offering notice Failed to file required ongoing reports in prior 2 years Bad actors (matches Rule 506(d))

7 Testing the Waters Permitted Soliciting interest in potential offering Includes social media Permitted before and after filing Form 1-A Legends required Solicitation materials used after publicly after filing Form 1-A must be: preceded or accompanied by a preliminary offering circular or contain a notice directing potential investors to current offering circular Preempts contrary state laws

8 Integration No integration with: Title III of JOBS Act (Regulation Crowdfunding) registered offerings Unless Reg A+ offering abandoned and issuer solicited persons other than QIBs or institutional accredited investors Up to 30 day cooling off period if so Rule 701 or employee benefit plan Regulation S Offerings conducted more than 6 months after completion Still potential integration with Regulation D Concurrent offerings may be permitted in certain cases

9 Shelf Offerings Continuous or delayed offerings permitted Similar to Rule 415 Continuous offerings permitted for Tier 2 if commenced within 2 calendar days of qualification At the market offerings not permitted Acquisition shelf filings not permitted

10 Tier 1 versus Tier 2 Offering Limit SEC Filing Blue Sky Qualification Limitations on Investors Restrictions on resale Offering communications Regulation A Tier 1 of Reg A+ Tier 2 of Reg A+ $5M within prior 12 months Form 1-A; subject to review Required, not streamlined None unless imposed by state law None except for affiliates $20M within prior 12 months Form 1-A; subject to review Required, new streamlined process available None unless imposed by state law None except for affiliates $50M within prior 12 months Form 1-A; subject to review Exempt Investment limits for non-accredited investors None except for affiliates Permitted Permitted Permitted

11 Tier 1 versus Tier 2 Financial Statement Requirements Ongoing reporting Exchange Act Registration Regulation A Tier 1 of Reg A+ Tier 2 of Reg A+ Current balance sheet, 2 years income statements, interim periods. Generally no audit requirement. Disclose use of proceeds Same as Reg A. Audit required only if prepared for other purposes. Termination of offering report (Form 1-Z) No Same as Reg A. Audited annual financial statements required. On-going reporting obligations Reg A+ investors not counted so long as subject to Tier 2 reporting, meets small business issuer tests and uses transfer agent Continuous offerings No Yes, if commenced within 2 calendar days of qualification

12 Tier 2 Investment Limitations Non-accredited investors may invest no more than 10% of greater of: Annual income or annual revenue Net worth or net assets Not applicable if securities will be listed on national securities exchange No verification required

13 Tier 2 Reporting Obligations Stub report covering period between Form 1-A financials and issuer s first reporting period Annual reports (Form 1-K) Includes audited financial statements and MD&A Due 120 days after fiscal year end Semi-annual reports (Form 1-SA) Includes semi-annual financial statements and MD&A Due 90 days after end of semi-annual period Current reports (Form 1-U) Similar to 8-K but fewer items Due within 4 business days Reporting obligations may cease after year in which offering is qualified Only If securities held of record by less than 300 people

14 Secondary Trading Securities not restricted securities So Rule 144 applies only to sales by affiliates Tier 2 reporting satisfies 15c2-11 obligations Allows OTCBB and OTCQB quotation Tier 2 reporting does not satisfy Rule 144(c) unless issuer voluntarily files quarterly information Tier 2 state pre-emption does not extend to secondary trading

15 Filing and Qualification Process Issuers file with SEC electronically via EDGAR Confidential submission of a Form 1-A for first-time offerings permitted Must be filed publicly 21 days before qualification Q&A disclosure format eliminated Model B or Form S-1 standards required Prequalification Period: Issuers deliver preliminary offering circular to prospective purchasers 48 hours before sale Unless subject to Tier 2 reporting obligations Access equals delivery

16 Model B Disclosure Offered securities Director and officer compensation Material risks Use of proceeds Business overview MD&A Beneficial ownership information Related party transactions Financial statements not more than 9 months old

17 Final Thoughts Keeping it Real Real Crowdfunding Real alternative to IPOs less than $50M No Section 11 liability for underwriters Real alternative to fairness hearing for securities issued in M&A transactions Real alternative to shell mergers But usual caveats apply to shell mergers