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Roger RoyseRoyse Law Firm, PC

Palo Alto, San Francisco, Los Angelesrroyse@rroyselaw.comwww.rogerroyse.comwww.rroyselaw.comSkype: roger.royseTwitter @rroyse00

FROM KICKSTARTER TO IPO:

RAISING CAPITAL

Sources of Capital

• Savings/friends and family

• Donation-based crowdfunding (e.g. Kickstarter and Indiegogo)

• Equity-based crowdfunding

– Title III of the JOBS Act

– Funding portals

• Traditional venture capital financings

• Initial Public Offerings (IPOs)

Donation-Based Crowdfunding

• Businesses seek donations in exchange for rewards

• Kickstarter statistics:

– $1.4 billion raised

– 73,000 projects funded

– Over 7 million backers

• At the high end, some projects receive over $1 million in funding

• Rewards often constitute the product or service for which the project was raising funds

Donation-Based Crowdfunding

• Why so popular?

– No loss of equity

– Easy to set up

– Low regulatory barriers

– Can fund development/production of the product (a form of pre-sales)

• Considerations

– Sales tax obligations if shipping tangible goods

– Timing problems e.g. all the income may be received late in the year before expenses are incurred leading to large tax bills in the year of receipt

– May want to form a legal entity before commencing fundraising

– Potential legal disputes – while there is little regulation in this area, states may prosecute if they suspect fraud

Equity-Based Crowdfunding:

Title III of the JOBS Act

Exemption from Registration

• Private companies may sell up to $1 million of securities in a 12-month period

• Amount sold to a single investor in any 12-month period cannot exceed:

o The greater of $2,000 or 5% of annual income or net worth if annual income or net worth is less than $100,000; or

o 10% of annual income or net worth (up to a maximum of $100,000) if annual income or net worth is greater than $100,000

• Not yet in effect – still awaiting final regulations from the SEC

• Likely to prove expensive and overly burdensome

Equity-Based Crowdfunding:

Title III of the JOBS Act• Investment must be through an “intermediary” broker or funding portal

o Intermediary must register with the SEC

• Issuer disclosure requirements

o File business plan with SEC

o File financial statements

Audited if offering exceeds $500,000

Reviewed by an independent CPA if offering is between $100,000 and $500,000

o Annual SEC filings and annual reports

Equity-Based Crowdfunding:

Title III of the JOBS Act• Post-fundraising

o Securities cannot be resold within 12 months (unless to an accredited investor)

• Private right of action for material misstatements/personal liability

• High number of unsophisticated investors

o Fiduciary duties to all investors

o Could be a concern for VCs in future fundraisings

Equity-Based Crowdfunding:

Funding PortalsPrivate Placements• General prohibition on general solicitation of investors

• No definition of “general solicitation,” however the SEC has released two no-action letters implying that issuers can use internet funding portals to raise funds

• Access to the portal must be restricted to “accredited investors”

– Broadly, accredited investors are (a) individuals with income of more than $200,000 in each of the past two tax years or with net worth over $1 million not including their primary residence; (b) partners, officers or directors of the issuer; or (c) certain employee benefit plans and trusts.

• Can have up to 35 non-accredited investors

Publically Solicited Issuances• Issuer can advertise and publicly solicit the sale of its securities

• All eventual investors must be accredited investors

• Increased Form D reporting

Traditional Venture Capital Financings

• Typical financing process

– Negotiation of terms and signing term sheet

– Due diligence

– Draft Stock Purchase Agreements and other legal documentation

– Execute transaction documents

– Deal “closes” when investors provide funding and company provides stock certificates

– Post-closing matters such as securities filings and filing amended articles of incorporation

• Investors usually acquire preferred stock (series A, series B, etc) and insist on certain additional rights and privileges such as:

– Guaranteed board seats

– Liquidation preferences

– Anti-dilution protection

• Expensive - financing requires involvement from accountants, lawyers, and other financial advisors

Initial Public Offering

• The first sale of private company stock to the public

• Why seek an IPO?

– Raise cash

– Easier to issue more stock in the future

– Creates a liquid market for the stock which helps with stock options and other equity incentive plans for employees

• Must file a registration statement with the SEC and include:

– Financial statements

– Management structure

– Market challenges/threats

– Legal issues

• “Lock up period” for company officers and employees preventing them selling their stock for at least three months after the IPO

RoyseLink: Connecting founders with investors and service partners.

Royse University: Providing business, tax, and personal finance ideas to founders and executives.

Royse Law Legal Wizard: Offering legal document templates and more.

RoyseUniversity.com

RoyseLink.com

RoyseLaw Legal Wizard

Royse Law Incorporator: Designed to help you incorporate and structure your company in Delaware or California.

RoyseLaw Incorporator.com

www.rroyselaw.com

@RoyseLaw

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