CROWDFUNDING AND THE JOBS ACT IN 2016 2 Right now, you can only turn to a limited group of investors -- including banks and wealthy individuals -- to get funding. Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and it s time our laws did as well. Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in. President Barak Obama 2012 1
April 2012 JOBS Act Signed by President Obama September 23, 2013 Title II- Rule 506(c) of Reg D General Solicitation June 19, 2015 Title IV- Regulation A+ May 16, 2016 Title III- Regulation CF CROWDFUNDING PLATFORMS EQUITY BASED CROWDFUNDING Title II- 506(c) Removed Ban on General Solicitation No $$ Limits Accredited Investors Only 2000 Investor Limitation Title III- Regulation CF Must use funding portal $1 million raises All investors Limits on investor amounts Title IV- Regulation A+ Mini-IPO Up to $50mm All investors 2000 total/ 500 nonaccredited limit 2
Title IV- Regulation A+ Title IV Reg A-Tier 1 Title IV Reg A-Tier 2 Maximum Offering Amount $20,000,000 $50,000,000 Offeree Types All, including non-accredited investors All, including non-accredited investors Individual Investment Limits None $2,000 minimum, 5% of income or net worth below $100,000 and 10% above $100,000. $100,000 max Investor Verification N/A Self Certification General Solicitation Unrestricted Unrestricted Pre-Filing/Testing the Waters Allowed with no pre-filing; must Allowed with no pre-filing; must file solicitation materials with offering statement (filed 48 hours prior to first sale) file solicitation materials with offering statement (filed 48 hours prior to first sale) Closing Speed Slow- SEC and State Slow- SEC approval required Qualification required Offering Documents Form 1-A or other offering Form 1-A or other offering statement-sec qualification and statement-sec qualification state approval required required Financial Disclosures Reviewed financials Audited financials Ongoing Disclosure Filing None Annual; semi-annual reports; current reports including audited financials 7 Title II-506(c) Accredited Crowdfunding 8 Title II-506(c) Accredited Crowdfunding Rule 506(b) Rule 506(c) (Title II of the JOBS Act) General solicitation allowed No Yes Cooling off period Yes (common practice is 21 days) No. Investor may invest immediately Accredited Investors Yes. "Unlimited number of accredited investors and up to 35 other nonaccredited, sophisticated purchasers" Yes. Unlimited number of accredited investors only. Verification of accredited investor status Investor must satisfy the accreditation requirement or the issuer must reasonably believe the investor is accredited. Must take "reasonable steps" to verify the investor is accredited, which includes verification by income, and net worth for natural persons 3
Title II-506(c) Accredited Crowdfunding Must take reasonable steps to verify accredited Review Copies of any IRS form that reports the income of the purchase and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year; Written confirmation from broker-dealer, RIA, licensed attorney or CPA Does a Reg D. Platform need to be a Broker-Dealer or work with a broker dealer? Many listing sites are not: Title II-506(c) Accredited Crowdfunding Regulation D, Regulation A, Regulation S and Regulation CF preempt states on offering of securities. But, states can decide who can sell those securities to their residents. There are no uniform or specific exemptions across each of the 51 jurisdictions for 506-D or Reg A securities. Must rely upon an issuersexemption, use a broker-dealer, or register itself in each state as a securities dealer. 12 4
Title III-Section 4(a)(6) Regulation Crowdfunding $1 million to all investors in offering/12 months Across all controlled or common control entities Investor limited in investment amount If income or net worth is less than $100,000, limited to greater of $2,000 or 5% of lesser of income or net worth If income and net worth are bothgreater than $100,000, then limited to 10% of the lesser of income or net worth/max $100k Offering must be through broker or through a funding portal. Disclosure requirements Requirements are conditions to availability of exemption Issuer Requirements Must be U.S. entity May not be an investment company, blank check company or SEC reporting company. No SPVs Must provide disclosure material on Form C Company information, description of business, ownership, risks, etc. Not reviewed Q&A-similar to Reg D. disclosures Financial Statements $100k or less, not audited $100k-$500k reviewed $over $500k audited, unless this is first offering 14 Issuer Requirements (Continued) Ongoing Disclosure Requirements Form C Form C-U: used to update progress on offering Form C-AR: Annual Report May cease filing ongoing reports if: Issuer becomes fully reporting; 1 annual report/no more than 300 equity holders 3 annual reports, but not more than $10 million in assets All 4(a)(6) securities are sold or repurchased; or Issuer ceases to do business. 15 5
Funding Portal (Intermediaries) Must be registered and approved by SEC and FINRA Must have a reasonable basis for believing that Issuer has met disclosure and process requirements Issuer has sufficient way to keep accurate investor record Deny Bad actors or potential fraud Sufficient Systems Notice regarding promoters Investor Qualifications (limits)- Investor reps OK Communication Channels- Promoters and employees Must use qualified third party escrow Transactions Confirm purchases Process cancellations and reconfirmations 16 Funding Portal (Intermediaries)(Cont.) Must make disclosure material available 21 days prior to first sale (or amendment) Compensation disclosure Educational Material Acknowledge Risks Protect Privacy of Investor Information Funding Portals Cannot: pay for personally identifiable information have interest in any issuer- other than compensation Provide investment advice (a lot of discussion about curating) solicit offers or sales or compensate others to solicit Hold funds 17 Funding Portal (Intermediaries)(Cont.) Funding Portals Can: Determine terms for issuers on portal; Apply objective criteria to highlight; Search functions Communication channels; Advise issuers on content and structure; Compensate third parties for advertising or referrals to portal; Pay broker dealers Receive compensation from BD; Advertise portal and one or more issuers Funding Portals Cannot: Pay for personally identifiable information; Have interest in any issuer-other than compensation; Provide investment advice (curating and highlighting) Solicit offers or sales or compensate others to solicit offers or sales; Hold funds 18 6
Marketing and Advertising Nothing Before the Launch- No Test the Waters After the Launch Tombstone Communications Websites, emails, google ads, newspapers Communications that don t mention the terms of the offering 19 Marketing and Advertising Tombstone or Terms Communications Can ONLY include the following: a statement that the issuer is conducting an offering the name of the portal and link to portal the terms of the offering (Amount offered, type of security, price, date) factual and contact information about the offeror a brief description of the business of the issuer Although content is limited, medium is not Still subject to anti-fraud rules Similar to Rule 134 Notices 20 Marketing and Advertising Non-Terms Communications Talk about the offering, so long as you don t mention the terms Just can t say what you are offering Become an investor OK Become an Owner not OK (implies equity offering) 21 7
Marketing and Advertising Non-Terms Communications We are doing a crowdfunding offering! We are going to use the proceeds of our offering to Make America Great Again by selling a million extra large red hats and extra small red gloves with logos on them, and to bring jobs back to Big Bug Creek, Arizona. The more stuff we make, the greater our profits will be. We think we are poised for significant growth. Already we ve received orders from 100,000 people in Cleveland. Invest in us TODAY, while you still can and Make Capitalism Great Again! [LINK TO PLATFORM] Feel the Burn! We are making a crowdfunding offering on SuperPortal.com to raise funds to expand our hot sauce factory. Be a part of history. Small investors have been screwed for years. This is your chance to Stick it to the Man and buy securities in a business that has grown consistently for the last five years. 22 Marketing and Advertising Other Considerations Nothing on issuer website about offering- splash-page Invest Now button is OK so long as it links to the portal and no terms Social media is OK, but must be limited to the 2 types of communications Images are OK, but if on Tombstone ad they must comply Brevity No misleading pictures (piles of money, increase in revenues) Video s OK, but same rules apply Press interviews/demo Days tricky Regular product and services ads OK Side by side terms and non-terms Portals must comply as well 23 The Fix Crowdfunding Act Fix the inability to use SPV in Reg. CF Offerings Help manage cap tables Allow non-accredited investors to follow the lead of and invest along-side with experienced investors Prevent VC skepticism Reduce number of shareholders and avoid public co status Enabling Testing the Waters in Reg CP Offerings Increasing funding amount to $5 million Increasing investor caps 24 8
Simultaneous Offerings Reg D. and Reg CF No integration of 4(a)(6) and Reg D offering Must take steps general solicitation not used in 506(b) Reg D and Reg A+ Same as above Reg A+ and Reg CF Also possible Side by side Reg D and Reg CF offerings possible 25 Anti-Fraud Compliance Must comply with antifraud provisions of federal securities laws Exaggerated or unwarranted claims, opinions or forecasts We are the fastest growing company in our industry Estimated returns or distributions; Estimated growth rate Use of graphics depicting growth Overly positive testimonials or claims; Lack of sufficient risk disclosures; Failure to disclose conflicts of interests; Failure to disclose compensation arrangements; Investor Protection Explicit in Statutory Design Crowdfunding may only be conducted through approved and regulated Funding Portals and Brokers SEC and FINRA. Entrepreneursseeking capital are specificallylimitedto what they can communicated to the public with respect to conducting a crowdfunding campaign at a particular funding portal or broker-dealer portal; no terms of the offering may be mentioned. Even the funding portal and broker-dealer portal is restricted from marketing the particular campaign and can only market the general activities of the website. No incentive fees of any kind may be paid by either the entrepreneuror the funding portal/broker-dealer portal to induce potential investors to register on their platform. 9
Investor Protection Explicit in Statutory Design (continued) Further, assuming that a potential investor even decides of their own volition to visit a funding portal/broker-dealer portal, they must register with the platform and share relevantinformation Title III requires that the funding portals provide investors with a well defined education process Title III requires review and complete standard private placement investor documentation (provide full and fair disclosure compliant with Title III, including use of proceeds and risk factors) all PRIOR to being able to invest. Funding portals are providing entrepreneurs and issuers with education as well. Additionally, unlike Title II or most other areas of the securities markets,there is clearly definedlimitation on how much any one investor may invest inany one deal or crowdfunding deals overall all (in 12 month rolling period)--capped at a percentage of their income and net worth (it varies). Funding Portals are precluded from giving investment advice Crowd Intelligence (Not Required by Title III) Substantive Issues To Be Considered Better than friends and family Fraud v Failure Investment Advice and Curation Substantive disclosure is just a good beginning Title III platforms will be able to demonstrate that investors may have convenient memories for risk disclosure (digital footprint) Liabilities of platforms Valuation is as much a problem with public companies as crowdfunding Is crowdfunding due diligence any match for conventional due diligence Contact Information Carman Tate Lehnhof Israelsen is a Salt Lake City-based boutique corporate finance and securities law firm. The Firm specializes in many areas of commercial law, including corporate and securities, '33 Act and '34 Act representation, reverse mergers, and mergers and acquisitions. J. Martin Tate, Esq. Carman Tate Lehnhof Israelsen, LLP 299 S. Main Street, Suite 1300 (801) 534-4435 mtate@clilaw.com This presentation is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer 10
Disclaimer This information may answer some questions, but is not intended as a comprehensive analysis of the topic. In addition, this information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. This document and the information contained herein is confidential. This document has been furnished to you solely for your information and neither this document nor the information contained herein my be reproduced, disclosed or redistributed, in whole or in part, by mail, facsimile, electronic or computer transmission or by any other means to any other person, except with the prior written consent of the Carman Tate Lehnhof Israelsen, LP. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. This presentation is made solely for the interest of friends and clients of Carman Tate Lehnhof Israelsen, LP and should in no way be relied upon or construed as legal advice. For specific information on particular factual situations, an opinion of legal counsel should be sought. 11