Crowdfunding

Crowdfunding

© 2015 Colorado Startup Lawyer

Companies need $

• Companies of all sizes, in general, need to raise money. – For example: • 1) Uber – recently raised $1 billion. • 2) Apple – recently sold $6.5 billion in bonds.• 3) Oculus Rift – raised $2.4 million on Kickstarter.

Ways to Raise Funds

1) Bootstrapping2) Kickstarter & Indiegogo3) Friends and Family4) Common Equity5) Preferred Equity6) Convertible Notes7) Convertible Equity8) Crowdfunding9) Leverage, License, Sell IP

10) Contests11) Microfinance/sba loan12) Leverage Assets13) Sidework/consulting14) Product Pre-sales15) Revenue-based financing16) Strategic Alliances17) Accelerators18) Angels19) VCs

When Raising Funds, ask - is it a security?

• High-level– If you are raising money, likely you are issuing securities.

• Details:– 15 U.S.C § 77b(a)(1), states, “unless the context otherwise

requires” - “The term ‘security’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, . . .

If it is a SecurityIf it is a security, it is:• 1) Registered, or• 2) Exempt, or• 3) Illegal

If it is illegal, bad things happen:• Criminal charges• Civil penalties• Rescind the deal (money back)• Principal’s may be personally liable• Jeopardize future funding

Why not just register the security?

If it is a security, must be:• 1) Registered, or 2) Exempt, or 3) Illegal

Reason some companies do not register:• Registration doesn’t usually happen for

startups until IPO – usually involves > $1 million in legal, underwriting, and accounting costs.

Exemptions from RegistrationType Dollar

LimitManner of Offering

Issuer and Investor Requirements

Filing Requirements

Blue Sky Exemption

Section 3(a) 11 / Intrastate

None No limitation other than to maintain intrastate character of offering

Issuer and investors must be residents in state. No limitation on number.

None No

Section 4(a)(2) / Private Placement

None No general solicitation or general advertising

Investors must meet sophistication and access to information test

None No

Reg D Rule 504 $1 million within prior 12 months

No general solicitation or general advertising unless . . .

Available to non-reporting companies only that are not investment companies or blank check companies

File Form D with the Commission not later than 15 days after first sale.

No

Reg D Rule 505 $5 million within prior 12 months

No general solicitation or general advertising

Unlimited accredited investors and 35 non-accredited investors


No

Reg D Rule 506(b)

None No general solicitation or general advertising.

Unlimited accredited investors and 35 non-accredited investors that are sophisticated


Yes

Exemptions from RegistrationType Dollar Limit Manner of

OfferingIssuer and Investor Requirements

Filing Requirements

Blue Sky Exemption

Reg D Rule 506(c)

None General solicitation permitted, provided that all purchasers are accredited investors

All purchasers must be accredited


Yes

Regulation Crowdfunding*

Up to $1 million in a 12 month period

Offering must be made through a platform

Issuers that are not reporting companies, not funds, and not subject to disqualification.

Requires the preparatino of a Form C, which resembles a Form 1-A.

Yes

Pop Quiz

• Is there a family and friends exemption?

No Friends and Family Exemption!

• Unfortunately, under the U.S. securities laws, there is NO such thing as a “friends and family” exemption from registration.

• To sell shares of stock or securities in a company, the company either has to: – 1) Register the securities with the SEC (an

expensive and onerous process), or – 2) Issue the securities pursuant to a securities law

exemption.

Difficulty with Exemptions

Type Dollar Limit Manner of Offering

Issuer and Investor Requirements

Section 3(a) 11 / Intrastate Issuer and investors must be residents in state.

Section 4(a)(2) / Private Placement

Too vague - on the knowledge of the offerees and to the extent that they can fend for themselves.

Reg D Rule 504 only if the issuer complies with applicable state law that provides adequate investor protection

Reg D Rule 505 35 non-accredited investors / No general solicitation/ massive disclosure requirements for non-accredited

Rule D 506(b) 35 non-accredited investors/ HUGE disclosure requirements for non-accredited

Rule D 506(c) All must be accredited

Regulation Crowdfunding Up to $1 million in 12 months

General solicitation permitted; Advertising restrictions

May be unaccredited

In particular, the difficulty with these exemptions when raising funds from numerous people

Accredited InvestorSEC defines an accredited investor as:• Any natural person whose individual net worth, or joint net worth with

that person’s spouse, exceeds $1,000,000. – Equity value of one’s house (primary residence) is not included.– Any natural person who had an individual income in excess of $200,000 in each

of the two most recent years, or – Joint income with that person’s spouse in excess of $300,000 in each of those

years and has a reasonable expectation of reaching the same income level in the current year.

– Company insiders• Approximately only 9 million accredited investors in the United States.

The total population of the United States is roughly 322,183,000, it means that only 2.7% of the population in the US is an accredited investor.

http://www.census.gov/popclock/

Accredited Investor

AngelList limitation - Must be an accredited investor to invest

General Solicitation

SEC defined general solicitation and advertising broadly:• “Offers to any person with whom the issuer, or the

issuer’s agent, has not had a prior relationship.” Examples of general solicitation include:• (1) Advertisement, article, notice or other

communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

• (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;

Crowdfunding Exemption

In broad strokes:• The point of the slides that follow is to provide

an overview. • To put crowdfunding on your radar as a future

source of funding.


• What we will discuss:– When it goes live– What it is exactly– Compliance requirements:• Not as simple as posting your company on the portal!• This is not a Craigslist ad.• You will need professional guidance.

Question

• When does crowdfunding go live (i.e., when can you raise money with it)?– A) Right now– B) May 16, 2016– C) May 16, 2017– D) Not yet decided

Effective date

May 16, 2016 – Equity Crowdfunding goes live

Crowdfunding Exemption – what is it?

Question:• What is the main difference between the

Crowdfunding Exemption and Kickstarter and Indiegogo?

Crowdfunding EquityAnswer - Equity

Types of Crowdfunding

There are different types of crowdfunding1. Rewards/Product pre-purchase– Kickstarter, indiegogo

2. Donation Crowdfunding– gofundme

3. Lending Crowdfunding– Lending Club

4. Equity Crowdfunding* (aka section 4(a)(6) of the Securities Act).

Crowdfunding Exemption – some details

Conduit • All transactions covered by the new rules must be conducted

through an SEC-registered conduit.• Examples of portals:– Crowdfunder– Offerboard – CircleUp – SeedInvest– Agfunder– MicroVentures

Crowdfunding Exemption – some details – funding portal

Funding Portal example


Amount of money that can be raised• It allows private companies to raise up to $1 million within 12

months.

Individual investments• Annual incomes or a net worth less than $100,000 – can invest

– a maximum of 5% of their yearly income or net worth, or – up to $2,000, if that's greater.

• Those with higher incomes can invest up to 10%.

Crowdfunding Exemption – some details - compliance

PART 227— Regulation Crowdfunding, general rules and regulations• Subpart A – General • *Subpart B – Requirements for Issuers• Subpart C – Requirements for Intermediaries• Subpart D – Funding Portal Regulation• Subpart E – Miscellaneous Provisions


PART 227—REGULATION CROWDFUNDING, GENERAL RULES AND REGULATIONS • Subpart B – Requirements for Issuers– 227.201 - Disclosure requirements.– 227.202 - Ongoing reporting requirements.– 227.203 - Filing requirements and form.– 227.204 - Advertising.– 227.205 - Promoter compensation.


Subpart B – Requirements for Issuers• Disclosure requirements: (a)- (y)• Some of these disclosures are straight-forward:

– (a) The name, legal status (including its form of organization, jurisdiction in which it is organized and date of organization), physical address and website of the issuer.

– (e) The current number of employees of the issuer. • A little more complex

– (d) A description of the business of the issuer and the anticipated business plan of the issuer.

• Complex– (f) A discussion of the material factors that make an investment in the issuer

speculative or risky.– (s) A discussion of the issuer’s financial condition, including, to the extent material,

liquidity, capital resources and historical results of operations.– (t) some financial reporting.


Disclosure requirements of 227.201(t) broken into three tiers based on size of offering:– 1) $100,000 or less, – 2) more than $100,000, but not more than $500,000, and – 3) and issuers offering more than $500,000.

Kieran McCarthy

Really think we should include more detail on the initial and ongoing requirements. That's the whole point of the presentation. I just think one simple slide for <$100k, one simple slide for <$500, and one simple slide for <$1mm


Offerings of $100,00 or less, must disclose:• 1) Amount of total income, taxable income and total tax, or

the equivalent line items, as reported on the federal income tax returns filed by the issuer for the most recently completed year (if any).

• 2) Principal executive officer of the issuer must certify it.

If financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead


Offerings greater $100,000 less than $500,000:– Financial statements reviewed by independent

public accountant. – If have audited financial statements, must provide

those instead.


Offerings more than $500,000, must disclose:•Financial statements audited by independent public accountant.


PART 227—REGULATION CROWDFUNDING, GENERAL RULES AND REGULATIONS • Subpart B – Requirements for Issuers– 227.201 - Disclosure requirements.– 227.202 - Ongoing reporting requirements.– 227.203 - Filing requirements and form.– 227.204 - Advertising.– 227.205 - Promoter compensation.


227.202 - Ongoing reporting requirements – •Action - must file with the Commission & post on the issuer’s website.•What: • 1) An annual report, and• 2) Financial statements, either: certified, review or

audited in a fashion similar to before.


• There are advertising limitations. You must:– 1) direct investors to the intermediary’s platform, and – 2) include no more than the following information:• A) A statement that the issuer is conducting an offering

pursuant to the Crowdfunding Exemption.• B) The name of the intermediary through which the

offering is being conducted and a link directing the potential investor to the intermediary’s platform;• C) The terms of the offering; and• D) Factual information about the legal identity and

business location of the issuer.


Exciting– Has the possibility of raising money from

numerous people, outside of VCs and accredited investors.

– Can harness the power of the internet – social media (get the word out).

Presentation in a nutshell1) All startup securities offerings must be exempt or they are illegal!

2) Equity Crowdfunding goes live May 16, 2016

Consider whether it would be a useful funding mechanism and if yes, be aware of the compliance requirements prior to using it that should be discussed with a lawyer.

Crowdfunding

Small Business & Entrepreneurship

Transcript of Crowdfunding