Crowdfunding: Additional capital for your business?

Transcription

1 Crowdfunding: Additional capital for your business? Rebecca Perkins Orr & Reno, P.A. Association of Corporate Counsel Small Law Department Committee February 12, 2015

2 Overview 1. What is crowdfunding? 2. Legal framework 3. New crowdfunding rules 4. Benefits and challenges 5. Looking forward 2

3 1. What is crowdfunding?

4 What is crowdfunding? l Crowdfunding is a way for entrepreneurs to raise additional capital directly from individuals l Description from Kickstarter: 4

5 What is crowdfunding? 5

6 What is crowdfunding? Current Economy l Difficult for small businesses to get capital Dodd-Frank Banks Family and friends financing; difficult; too small-scale l New markets: technology changes, online marketing Revenues hard to predict l Crowdfunding provides an alternative 6

7 What is crowdfunding? 7

8 What is crowdfunding? l Crowdfunding already a real market force l In 2010, $89 million changed hands through crowdfunding 2011, $1.47 billion; 2012, $2.66 billion; 2013, $5.1 billion projected (Huffington Post, 9/7/2013; Forbes, 5/8/2013) Lack of market data for 2014 or projections for 2015 yet l In early 2012, there were over 450 crowdfunding platforms By the end of 2012, some estimates put this number at 8,880 (Triple Pundit, 2/9/2013; NASAA Article 12/5/2012) 8

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10 What is crowdfunding? l Some Platforms Kickstarter Indiegogo Fundable Razoo Crowdrise AngeList Invested.in l Equity Crowdfunding Crowdfunder EquityNet l Specific Uses SoMoLend: lending only Fundrise: real estate investing Quirky: products made by people like you Sellaband GoFundMe: Keep every dollar you raise RocketHub: educational tools Appbackr 10

11 What is crowdfunding? Types of crowdfunding: l Donation or reward crowdfunding l Debt crowdfunding l Equity crowdfunding 11

12 2. Legal framework Current law

13 Legal framework Securities l What is a security? Expectation of profit important component (Howey test) l Sales of securities highly regulated Federal law: regulated by the SEC Securities and Exchange Commission State law: regulated by the Bureau of Securities Regulation 13

14 Legal framework Securities l Purposes of regulation: risk of fraud Issuers required to fully disclose all material information that a reasonable shareholder would require in order to make up his or her mind about the potential investment. 14

15 Legal framework Securities - state law l New Hampshire requires registration for sale of securities, unless exempt Registration statement, offering circular or prospectus, investor agreement, Form U-2, and Form U-2a l Few exemptions from registration Debt to be paid off within 9 months Fewer than 10 sales of securities in a 12-month period Fewer than 25 sales during the issuer s existence Shares in a cooperative 15

16 Legal Framework Some lingo l SEC: Securities and Exchange Commission l Register: file a registration statement with the regulator, including all public disclosure documents l Issuer: the company l Investor: an individual, an institution, an accredited investor l Accredited Investor: net worth of $1 million or income of $200,000 ($300,000 joint) l Intermediary: either a brokerdealer or crowdfunding portal registered with the SEC l Broker-dealer: financial institution registered with the SEC licensed to sell securities l Crowdfunding Portal: online platform that facilitates crowdfunding sales 16

17 3. New crowdfunding rules Equity Crowdfunding

18 New crowdfunding rules Overview l Jumpstart Our Businesses Act ( JOBS Act ) Title III amends Section 4 of the Securities Act of 1933 (15 U.S.C. 77d) Signed into law April 5, 2012 l Regulation Crowdfunding Proposed rule published October 23, 2013 Comments period closed February 2014 Final rule still not published 18

19 New crowdfunding rules Overview l Exemption from federal and state registration for specific transactions Includes specific requirements for issuers, investors, and intermediaries States retain some oversight and enforcement rights, including those unrelated to state registration 19

20 New crowdfunding rules Issuers l Can raise up to $1,000,000 in 12-month period Family and friends contributions do not count Amounts raised by entities with common control count towards total l Must be U.S. entity (no types specified) l Business plan required Wide range of project descriptions, articulated ideas, and business models acceptable l No secondary sales 20

21 New crowdfunding rules Issuers l Disclosures are detailed l Target capital amount and intended use of proceeds Names of officers and directors, as well as shareholders owning over 20% Ownership and capital structure Description of financial condition and financial information l Disclosures filed with SEC, provide to investors and give to intermediary (publicly available through EDGAR) 21

22 New crowdfunding rules Investors l Investors are all treated identically under the rules individuals, financial institutions and all in between No accredited investor test l Investors subject to investment limits Under $100,000 in annual income: higher of (i) $2,000 (ii) 5% of annual income or (iii) 5% of net worth Over $100,000 in annual income: up to 10% of annual income, but limited to $100,000 in 12 months l Intermediary tracks investment amounts of each investor l No limit on number of investors 22

23 New crowdfunding rules Intermediaries crowdfunding portals l Website where interest in issuer is offered for sale Cannot be compensated based on sales or own shares l Determines if issuer can keep records of owners Deny issuers access if not in compliance l Certain disclosures at account opening i.e. Risks of owning securities 23

24 New crowdfunding rules How does it work? l Investment commitment is made on the platform l Closing occurs on funding deadline Can cancel commitment unconditionally up to 48 hours before deadline Must return all funds if target not met 24

25 4. Benefits and Challenges

26 Benefits and challenges Benefits of crowdfunding l New source of capital Nontraditional investments l Marketing Audience engagement / ownership Feedback on product l Platform is the center of the offering Investors must be exposed to all the required disclosures Wisdom of the crowd l Advice from partners l General safe harbor for small deviations from Regulation Crowdfunding 26

27 Benefits and challenges 27

28 Benefits and challenges Challenges of crowdfunding l Legal risk lawsuits Expressly subject to civil actions against issuer, directors and officer, if untrue statement of material fact l Periodic disclosures l Ability to deliver by startups l No IP protection l Reputation 28

29 5. Looking forward

30 Looking forward l JOBS Act also amended Regulation A and Regulation D General solicitation of accredited investors now allowed No $1 Million limit l State Legislation 30

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32 Questions? This presentation is for Orr & Reno s use only and unauthorized use or reproduction is strictly prohibited. 32