Getting Ready for Crowdfunding A Legal Guide to Understanding Federal Equity Crowdfunding Regulations

NoticeGetting Ready for Crowdfunding: A Legal Guide to Understanding Federal Equity Crowdfunding Regulations is a courtesy publication provided for educational purposes. It is not a legal document nor is it intended to serve as legal advice or a legal opinion. Millyard Tech Law, PLLC, makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.

©2015byMillyardTechLaw,PLLC.Allrightsreserved.

Table of Contents

Overview 1Eligibility 3SelectinganIntermediary 4TermsoftheOffering 6InvestorRequirements 9DisclosureRequirements 10FinancialStatements 12OngoingReporting 13FilingRequirements 14Advertising 15SummaryofProcess 16PromoterCompensation 17RestrictionsonResale 18Penalties 19GlossaryofTerms 20

Overview

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Many entrepreneurs, especially in the technology sector, start their business with someexpectationthattheirideawillcapturetheattentionofventurecapitalistswhowill,inturn,make an investment that will catapult their company’s success. In reality, venturecapitalists fund less than 1% of startups and small businesses. The vast majority ofentrepreneursrelyontheirpersonalsavings,creditcards,andfriendsandfamilytolaunchtheircompanies.Congress’responsetotherealitythatsmallbusinesseshavefairlylimitedaccesstothecapitalmarketswastopasstheJumpstartOurBusinessStartups(JOBS)Actin2012 to, among other things, permit equity crowdfunding. The U.S. Securities andExchange Commission (SEC) issued Regulation Crowdfunding, the set of rules andregulationsforequitycrowdfundingin2015.RegulationCrowdfundingrulesgointoeffectonMay16,2016.What Is Crowdfunding? Crowdfunding is the practice of funding a project or venture by raising monetarycontributions froma largenumberofpeopleprimarilyover the Internet. Thereare twomaintypesofcrowdfunding:rewards-basedcrowdfundingandequitycrowdfunding.Rewards-basedcrowdfundingallowsentrepreneurs topre-sellaproductorserviceor tolaunch a business concept without incurring debt or selling equity. Supporters receiverewards, suchasdiscountsoff theproductor serviceonce it is released, inexchange forsupporting theproject now. Platforms such asKickstarter and Indiegogo are frequentlyusedforrewards-basedcrowdfundinginitiatives.Equitycrowdfundingallowsentrepreneurstosellsmallamountsofstockorotherequityintheircompaniestoraisecapital.PriortothepassageoftheJOBSAct,equitycrowdfundingwasnotpermittedunderfederalsecuritieslawsunlessdonethroughspecificexemptions,suchas incaseswhere theofferwasrestricted toresidentsof justonestate. RegulationCrowdfundingremovesthesetypesofgeographicrestrictionsandallowsbusinessestosellsecuritiesacrossstatelineswithouttherequirementofaburdensomeregistrationprocessbutonlyiftherulesofRegulationCrowdfundingarefollowed.Is Crowdfunding Exempt from Securities Laws? Yes,equitycrowdfundingwhenconductedincompliancewiththerulesunderRegulationCrowdfundingisexemptfromregistrationunderfederalsecuritieslaws.Meetingalloftherequirementsunderthefederalregulationsisimportantbecausewithoutthem,abusinesswould need to register its stock with the SEC – a very time-consuming and expensiveprocess–orriskbeingprosecutedforsellingunregisteredsecurities.

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Becausestatescanalsoregulatesalesofsecuritiesoccurringwithintheirborders,theJOBSAct specifies that states may require notice filings of an offering under RegulationCrowdfundingbutmaynot imposeanyfilingfeesasarequirementtosuchfilings,exceptforthosestateswheretheissuerhasitsprincipalplaceofbusinessoratleast50%ofthepurchasersreside.However,registrationisonlyoneaspectofsecuritieslawscompliance.The SEC and individual states always retain the right to investigate and prosecutefraudulentsecuritiesactivities.Overstatingexpectationsaboutprojectedrevenueorfailingto disclose events that could have an adverse impact on a business can leave investorsfeelingmisledso,nomatterwhat,businessesalwaysneedtobecarefulofwhatinformationtheyreleasetoinvestorsandwheninordertoavoidaccusationsoffraudormisconduct.

What Is the Process for Beginning a Crowdfunding Campaign?

Beforebeginninganyequitycrowdfundingcampaign,youwillwanttoassembleyourteamof advisors to assist you in planning. Consider seeking the advice of a small businesscounselor tohelpwithunderstandingyourcapitalneedsandupdatinganybusinessplanthat you have. You may also want to speak with your accountant as you will need todisclosefinancialstatementstopotentialinvestors.Inaddition,ifyourentityisformedasan S-corporation, you will want to make sure that the offering you undertake does notjeopardizeyourS-electionstatusintermsofthenumberofinvestorsthatbuysharesandthetypeofstockthatyousell.Youmayalsowanttoconsultwithlegalcounseltohelpwithplanningthestructureanddocumentationfortheofferingandtomakesurethatallofyourcorporategovernancedocumentsareingoodorder.

Once you know the size and structure of your offering, you will need to select anintermediarytoconductthecrowdfundingofferings.Anintermediaryiseitherafederallyregisteredbroker or a fundingportal registeredwith the SEC. The intermediarywill beresponsibleforconductingthecrowdfundingcampaignthroughaportalorotherplatformover the Internet. Only one intermediary can be used at a time for any crowdfundingcampaignthatabusinessundertakes.

Theremainderofthisbookletexaminesthekeyaspectsofhowacrowdfundingcampaignunder Regulation Crowdfunding works so that you can work with your team ofadvisors onlaunchingyourcampaign.

Eligibility

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Equitycrowdfundingisavailabletoavarietyofbusinesses.However,therearesomebasicrequirementsthatacompanyneedstomeetinordertoengageinacrowdfundingofferingunderRegulationCrowdfunding.

v Thecompanymustbeadomesticentity(i.e.,formedasabusinessentityinanyStateorterritoryoftheUnitedStatesorintheDistrictofColumbia).

v If the company has raised money through Regulation Crowdfunding before, thebusinessmustbeincompliancewithallannualreportingrequirements.

v Thecompanymusthavebeenformedwithaspecificbusinessplanandnotsimply

forengaginginamergeroracquisitionwithanotherbusiness.

v ThecompanycannotbeareportingcompanyundertheSecuritiesExchangeActof1934.

v ThecompanycannotbeaninvestmentcompanyundertheInvestmentCompanyAct

of1940.

v Neither the company nor any director, officer, owner holding at least 20%of thebusiness, or solicitor can be the subject of any disqualifying events, includingconviction of any felony or misdemeanor involving the sale of securities or besubject to a order or court degree prohibiting that person from engaging insecuritiestransactions.

Whilenoneoftheserequirementsisparticularlyonerousordifficult,careshouldbetakenwith respect to the last bullet point as founders may not have a complete grasp of thebackgroundsandhistoriesofpeoplethattheyinvitetojointheboardorbeaninvestorandmay, by failing to ask, become associated with someone who is the subject of adisqualifyingevent. Agoodpractice is tousewhat is calleda “badactor”questionnairewhen hiring new officers, recruiting newboardmembers or taking on new investors sothatfoundersdonotunknowinglybringpeopleintotheorganizationthatcreateeligibilityproblems.

Selecting an Intermediary

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Crowdfunding campaigns offered under Regulation Crowdfunding must be conductedthroughanintermediary.AnintermediarycanbeeitherafederallyregisteredbrokerorafundingportalregisteredwiththeSEC.Fundingportalsmaynotofferinvestmentadviceorrecommendations.

Theprimaryrolesofanintermediaryareto:

v Reducetheriskoffraudtoinvestors;

v Make information available to investors about crowdfunding campaigns madeavailableontheirfundingportalorplatform;

v Provide investors with educational materials about the risk of loss of theirinvestments;

v Provide a communications channel on its portal or platform so that interestedinvestors can communicate with each other and with the representatives of thecompanymakingthecrowdfundingoffering;

v Notify the company of any investor commitments received for the crowdfundingoffering;

v Direct the collection funds from the investors and transmittal of funds to thecompanyoncethecrowdfundingofferingisclosed;and

v Provideinvestorswithconfirmationoftheclosingoftheoffering.

Anintermediaryisonlyabletoshareinformationandconductcrowdfundingtransactionsforinvestorswhohaveorestablishanaccountwiththatintermediary.Inaddition,becausefunding portals cannot offer investment advice, they may not promote particularcrowdfundingcampaigns. Instead,fundingportalsareallowedtohighlightcrowdfundingcampaignsbasedonlyuponobjectivecriteria,suchasthelocationsorindustrytypeoflivecampaignsand theprogress todateof reaching target campaignamounts, so longas thecriteriaisconsistentlyappliedtoallcampaignsonthefundingportal’splatform.

Selecting an intermediary is an important decision because a company making acrowdfunding offering cannot conduct its offering(s) usingmore than one intermediary.Forinstance,let’ssaythatacompanywantstoraisecapitaltodevelopacoolnewproductandalso topurchaseabuilding for locating itsheadquarters. If that companydecides toraise$200,000toaccomplishbothofthosegoals, itcouldtrytodosobymakingasinglecrowdfundingofferingfortheentireamountof$200,000.However,itcouldalsoconsidersplittingupthegoalsintotwoseparateofferings,hopingtoattractsupportforitscoolnew

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productfrominvestorswholikeinvestingintechnologyorarepotentialconsumersoftheproductandseparatesupportforbuyingtherealestatefrominvestorswhomaybelocatedinthetown/citywherethepropertyislocatedorlikeinvestinginrealestate.Regardlessofthe strategy employed, only one intermediary may be used by that company for allcrowdfundingofferingsthatithasopenatthesametime.

Whenselectinganintermediary,considerthefollowing:

◊ Pricing. It is tooearlyyet tohaveagoodunderstandingof the typesof fees thatintermediaries will charge businesses for hosting crowdfunding campaigns.Comparison-shoppingisadvisableuntilthemarketmaturesenoughthatfeesacrossintermediariesnormalize.

◊ Registration. Donotassume that fundingportals foundon the Internethave theproper registration. Funding portals operating outside of the U.S. must beregisteredwiththeSEC.

◊ Number of Investor Accounts. Crowdfunding reliesupon lotsofpeoplemakingsmaller investments rather than a few individuals making large investments.Thereforeaccessto largenumbersofpotential investorstoviewyourcampaignisimportant.

◊ Specialization. Does the intermediary handle crowdfunding campaigns across awidearrayof industriesorhasitbecomeknownforcrowdfundingcampaignsofacertain type? For instance, if an intermediary, through its marketing efforts orotherwise,hasa largeconcentrationof investorsfromNewEnglandandyouarealocalbusinesslocatedinNewHampshire,havingaccesstoinvestorswithlocaltiesmaybeanimportantpartofyourstrategyforreachingyourcrowdfundinggoal.

◊ Broker vs. Funding Portal. Funding portals cannot give investment advice toinvestors. Is there a complexity to your business strategy that might be betterserved by having a broker available to work with investors to understand yourbusinessplanandthereforemakeyourcrowdfundingcampaignmoreinterestingtothoseinvestors?

There may be other factors to consider as well. It is still too early to predict howintermediarieswilldifferentiate themselves in themarketand toestablish themselvesaspreferred and reputable vendors of crowdfunding services. Careful evaluation of anyintermediaryisrecommended.

Terms of the Offering

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The terms that a company offers to investors as part of a crowdfunding campaign orofferingwillvarydependingonthematurityofthebusiness,itscapitalneedsandhowthecrowdfundingofferingfitswiththecompany’soverallfundingstrategy.Thecrowdfundingofferingofanexistingcompanythatisalreadygeneratingrevenuebutislookingforcapitalfor expanding its product or service offeringsmay be structured very differently from atechnologystartupthatisraisingcapitaltocoveroperatingexpensestocreateaminimumviableproduct(MVP)andthenplanstoraiseventurecapitalinvestment.Regardlessoftheexactterms,allcrowdfundingofferingsneedtoaddressthefollowingtermsintheofferingdocuments:

Target Offering Amount and Deadline

UnderRegulationCrowdfunding,anofferingmust identify thetargetdollaramounttoberaised and the deadline to reach this target amount. Companies, whether alone or with their affiliates, may not raise more than $1 million through equity crowdfunding in any 12-month period. Once a target dollar amount is set, failure to meet or exceed the targetdollaramountbytheofferingdeadlinewillresultintheterminationoftheofferingandallinvestmentcommitmentswillbecancelledandcommittedfundsreturnedtoinvestors.Forthisreason,acompanyisgoingtowanttoberealisticaboutitsabilitytoraisefundsoverwhateverdeadlineitchooses.

It is possible to accept investments in excess of the target dollar amount disclosed toinvestors.However,inordertodoso,thebusinessmustdiscloseupfrontwhetheritplansto accept over-subscriptions and the maximum dollar amount that it will accept. Thecompany will also need to disclose how over-subscriptions will be allocated amonginterestedinvestorswhocomealongafterthetargetdollaramountisreached,suchasonaprorataorafirstcome-firstservedbasis.

What Type of Security Is Being Sold

If thecompanyisacorporation, itwill likelybesellingstock. If thecompanyisa limitedliabilitycompany(LLC),itwilllikelybesellingmembershipinterestsorunits. However,itispossibletocreateclassesofstocksandmembershipintereststoallowfor,amongotherthings,votingrights,dividendandliquidationpreferencesandanti-dilutionrights.

A companymay be inclined to issue the same type of security as the founders have tocrowdfunding investors. This is, by far, the simplest approach. However, considerationshouldbe given to thepractical effects of having a largenumberof investorswith smallpercentagesofvotingpower.Whilefoundersmightnoteverbeinjeopardyoflosingvotingcontrol,therecanbeburdensassociatedwithalargevotingclassofsecurityholdersexists.For examples, holding shareholdermeetings (and giving notice for suchmeetings) or inacting by written consent in lieu of a meeting if a company’s bylaws or operating

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agreement require action by unanimous consent may present logistical challenges thatdelaymanagement’sabilitytotakeactiononcertainbusinessinitiatives.Somecompaniesmaywanttoconsiderofferinga liquidationpreferencetocrowdfundinginvestorsasanincentiveformakingtheirinvestment.Aliquidationpreferencecouldallowthe crowdfunding investors to receive their original investments back first following thesaleordissolutionofthecompanybeforethefoundersreceivedanymoney.However,foracompanywithexisting investors, this typeofpreferencewouldneed tobeappropriatelybalancedagainst the rightsof existing investors to receive theiroriginal investmentplusanyaccrueddividends(ifany).As you can see, the structuring of the type of security offered through a crowdfundingofferingmustbecarefullyconsideredinlightofacompany’sexistingcapitalstructureandthecharterdocumentsthataddressbothcapitalstructureandgovernance.IfyourentityisformedasanS-corporation,thisisespeciallyimportant,asyouwillwanttomakesurethatyounotjeopardizeyourS-electionstatusintermsofthenumberofinvestorsandthetypeofstockthatyousell.PricingRegulationCrowdfundingrequiresthatacompanynotonlydisclosethepricepershareofthe securitiesoffered for salebut alsoadescriptionofhow those securitieswerevaluedand examples ofmethods of how such securitiesmay be valued in the future. For thisreason,pricingofcrowdfundedsecuritiesshouldbeconsideredinlightofpastfundingbythecompanyaswellasanticipatedfuturefunding. Restrictions on Transfer RegulationCrowdfundingrequiresaone-yearholdingperiodonallcrowdfundedsecuritiesbeforetheycanbetransferred.(SeeRestrictionsonResaleformoreinformation.)Ifalargenumber of investors is anticipated in a crowdfunding offering, a company may wish toconsider imposing further restrictions on the transfer of its securities so as to avoid theadministrative burden of having to record small transfers of securities on its books orrecords.Inaddition,ifacompanyhasexistinginvestors,theremayalreadyberestrictionson transfer inplace for securitiesheldby those investors. Common transfer restrictionsincludearightoffirstrefusalordragalongrightsimposedbymajorityshareholders.Arightoffirstrefusalallowsanexistinginvestortofindapurchaserforhis/hersecuritiesinacompanyandthengivesthatcompanytherighttorepurchasethosesecuritiesonthesale terms as the investor negotiated with the new purchaser. In many cases, if thecompanydeclines to exercise its option, theoption topurchase is thenpassedon to theother investors in the company. If neither the company nor the other existing investors

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electstopurchaseanyoftheofferedsecurities,theinvestorisfreetogoforwardwiththesaletothenewpurchaser.

Adragalongrightcompelsminorityshareholderstoselltheirholdingsintheeventthatabuyercomesalongandwantstopurchaseoracquirea100%interestinthecompany.Theminority shareholders must sell their interests on the same terms as those negotiatedbetweenthemajorityshareholdersandthebuyer.

Whether a company already has restrictions in place on the transfer of its securities ordecidesto imposenewrestrictionsoncrowdfundedsecurities, theserestrictionsmustbedecideduponinadvanceoftheofferinganddisclosedtopotentialinvestorsaspartoftheofferingterms.

Investor Requirements

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Investorsarelimitedintheamountthattheycaninvest incrowdfundingofferingsinany12-month period. An investor with either annual income or net worth of less than$100,000islimitedtoannuallyinvesting$2,000,or5%oftheinvestor’sannualincome/networth,whicheverisgreater.Aninvestorwithbothannualincomeandnetworthexceeding$100,000 is limited to annually investing a maximum of 10% of the investor’s annualincome/networth,subject toan investmentcapof$100,000.So forexample,an investorwithannual incomeof$50,000ayearand$105,000 innetworthwouldbesubject toaninvestmentlimitof$2,500.WarrenBuffett,havinganetworthofover$66billion,wouldbe subject to the maximum investment cap of $100,000 in any 12-month period.Regulation Crowdfunding adopts the net worth test used with certain other federalsecuritiesexemptions,meaningthataninvestor’sprimaryresidencecannotbeincludedasan asset when calculating net worth. Given these investment caps, a successfulcrowdfundingcampaignseekingalargeamountofcapitalcouldrequire100+investors.

Intermediariesareprimarilyresponsibleforverifyinginvestorqualificationstoparticipatein crowdfunding offerings. In addition to confirming the maximum amount that aninvestormayinvest,intermediariesmustalsoobtainfromeachinvestor:

v Certification that the investor has reviewed the intermediary’s educationalmaterials,understandsthatthereisahighriskoflossoftheinvestmentandisinafinancialconditiontobearthelossoftheinvestment;and

v A questionnaire completed by the investor demonstrating the investor’sunderstanding that there are restrictions on the investor’s ability to cancelparticipation in a crowdfunding offering, that the crowdfunded securitiesmay bedifficult for the investor to sell and that investment in crowdfunded securitiesshouldnotbemadeunlesstheinvestorcanaffordtolosetheentireamountofhisorherinvestment.

Disclosure Requirements

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Inordertoengageinacrowdfundingoffering,thereareanumberofdisclosuresthatmustbemade to both investors and the intermediary. Thesedisclosureswill alsoneed to befiledwiththeSEC.Therequireddisclosuresinclude:

v Basic Company Information – Includes name; entity type; physical address;website; names of directors and officers with description of their businessexperienceoverthepast3yearsandthenumberofyearsinwhicheachpersonhasheldtheirpositionwiththecompany;namesofanyownersholding20%ormoreofthevotingsecuritiesofthecompany;and,thecurrentnumberofemployees.

v Offering Details – Includes the target offering amount and deadline (includingdetailsaboutover-subscriptions);adescriptionofthepurposeandintendeduseofthe crowdfunding proceeds; a discussion of the material factors that make aninvestment in the issuer risky; thepricingof the crowdfundedsecurities; and, themethodfordeterminingtheprice.

v Process for Making/Cancelling an Investment Commitment – Includes a

description of the process to complete the transaction or cancel an investmentcommitment.Thisprocessmustaddressthefollowing:

◊ Investors may cancel an investment commitment until 48 hours prior to the

deadlineforclosingthecrowdfundingcampaign.

◊ The intermediary must notify investors when the target offering amount hasbeenmet.

◊ If a company reaches its target offering amount early, then it may close the

campaignearlyifitprovidesatleast5businessdaysnoticetoinvestorsandtheSEC.

◊ If an investor does not cancel an investment commitment before the 48-hour

periodpriortotheclosingdeadline,theirfundswillbereleasedupontheclosingoftheoffering.

◊ Ifthecompanymakesamaterialchangetoitsdisclosurematerials,aninvestor

must reconfirmhisorher commitmentor the investment commitmentwillbecancelledandtheinvestor’smoneyreturned.

v Ownership and Capital Structure – Includes a description of the crowdfundedsecurities andeachother classof securityof the company, includingvoting rightsand how the crowdfunded securities may be diluted or limited in the future,disclosureofanyoptionsheldbyprincipalshareholders;and,adescriptionofhow

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thecrowdfundedsecuritiesarebeingvaluedaswellasmethodsofhowtheymaybevalued in the future. Any material debt of the company must also be disclosed,includingprincipalowed,interestrateandmaturitydate.

v Risks to Purchasers – Includes a description of risks to purchasers relating tominorityownership in thecompanyandtherisksassociatedwith futurecompanyactionifthecompanyissuesadditionalsecuritiesorsellsthebusiness.

v Restrictions on Transfer – Includes adescriptionof the restrictionson transfer,

includingtheone-yearholdingperiodrequiredunderRegulationCrowdfunding.

v Intermediary’s Financial Interest in the Offering – Includes the identityof theintermediary; and, the amountof compensation tobepaid to the intermediaryoranyotherarrangementbetweentheintermediaryandthecompany.

v Past Offerings – Includesadescriptionofanyexemptofferingsconductedwithin

thepast3years,includingthedateoftheoffering,thetypeofsecuritiesexemptionrelied upon, the type of securities, the amount of securities sold and the use ofproceeds.

v Financial Condition – Includesadiscussionof the company’s financial condition,

including liquidity, capital resources and historical results of operation. If thecompany has no prior operating history, the discussion should identify financialmilestones and operational, liquidity and other challenges that the companyanticipates.

v Updates and Reporting – Includes periodic updates on the progress of the

crowdfundingcampaign,whereonthecompany’swebsiteinvestorswillbeabletofund the company’s annual report and whether the company has ever failed tocomplywithitsongoingreportingrequirementsunderRegulationCrowdfunding.

Financial Statements

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FinancialstatementsmustalsobeincludedwiththedisclosuresrequiredunderRegulationCrowdfunding. The type of financial statements required depends upon the amount ofmoneybeingraisedthroughthecrowdfundingcampaign.

v Offerings raising $100,000 or less. The companymust disclose the amount oftotal income, taxable income and total tax, as reported on the federal income taxreturns filed by the company for the most recently completed year and providemanagementpreparedfinancialstatements,bothofwhichmustbecertifiedasbeingtruebytheprincipalexecutiveofficerofthecompany.However,ifthecompanyhaseither reviewed or audited financial statements by an independent publicaccountant, the company must provide those reviewed or audited statementsinsteadofthetaxreturnandmanagementpreparedinformation.

v Offerings raising more than $100,000 but no more than $500,000. Thecompanymustdisclosereviewed financialstatements froman independentpublicaccountant.However,ifthecompanyhasauditedfinancialstatements,theauditedfinancialstatementsmustbedisclosedinsteadofthereviewedfinancialstatements.

v Offerings raising more than $500,000. The company must disclose auditedfinancialstatements. However, ifthecompanyisraisinglessthan$1,000,000,andthisisitsfirstcrowdfundingoffering,itmayprovidereviewedfinancialstatementsinstead.

Financialstatementsmustincludebalancesheets,statementsofincome,statementsofcashflows,statementsofchangesinstockholders’equityandnotestothefinancialstatements.Theymustcoverthetwomostrecentlycompletedfiscalyearsofthecompanyortheperiodsinceformation(ifshorter).AllfinancialstatementsmustbepreparedinaccordancewithU.S.GAAP.

Ongoing Reporting

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Oncethecrowdfundingofferingisclosed,thecompanyhasanongoingobligationtomakeannual reports to the SEC and its investors. Reporting to the SECmust bedoneon SECFormC(availableontheSECwebsite).Theannualreporttoinvestorsmustbepostedonthe company’s website. The annual report must include updated disclosures about thecompany’s location, number of employees, risk factors that may the investment risky,changesincapitalstructure,currentindebtedness,anyadditionalexemptofferings,relatedparty transactions and whether the company remains in compliance with the reportingrequirementsunderRegulationCrowdfunding.

Financial statementswill need to be includedwith the annual report. If a company hasundertakentohavereviewedorauditedfinancialstatementspreparedsincetheclosingofitscrowdfundingoffering,itmustprovidethereviewedorauditedstatements.

Annualreportingmustcontinueuntiloneofthefollowingoccurs:

v ThecompanybecomesareportingcompanyundertheSecuritiesExchangeAct;

v Thecompanyhas filedat leastoneannual reportunderRegulationCrowdfundingandhasfewerthan300shareholders;

v ThecompanyhasfiledannualreportsunderRegulationCrowdfundingforatleast3yearsandhastotalassetsoflessthan$10million;

v Thecompanyrepurchasesallofthecrowdfundedsecuritiesfrominvestors;or

v Thecompanyliquidatesordissolvesitsbusiness.

Filing Requirements

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Thereare anumberof filing requirements forofferingsunderRegulationCrowdfunding.AllfilingsmustbemadeelectronicallythroughtheSEC’sEDGARfilingsystem.AttachmentsmustbeinPDFformat.

v FormC:Offering Statement–This is theformthatcompaniesmust filewiththeSEC and provide to investors and the intermediaryprior to sale of crowdfundedsecurities. Form C must be accompanied by an attachment that contains all thedisclosure information requiredunderRegulationCrowdfunding. TheSEChas anoptional Question and Answer Format for an Offering Statement that a companymayuseforitsdisclosures.

v Form C: Amendment – Any material changes, additions or updates to thecompany’s business or the crowdfunding offering must be disclosed to investorsandtheintermediaryandfiledwiththeSEConthisform.Iftheamendmentreflectsamaterialchange,additionorupdate, thecompanymustcheck thebox indicatingthatinvestorsmustreconfirmtheirinvestmentcommitments.Failuretoreconfirmwithin5businessdaysbyaninvestorresultsincancellationofhisorherinvestmentcommitment.

v FormC:ProgressUpdate–Thisformisusedtodiscloseprogressinmeetingthe

targetofferingamountinacrowdfundingcampaign.Anupdateformisrequiredtobe filed no later than 5 business days after a company reaches 50% of its targetamountandafterreaching100%ofitstargetamount.Progressupdatesdonothavetofilediftheintermediarymakespubliclyavailableonitsplatformfrequentupdatesregarding the progress of a company in meeting its target offering amount.However, a final update report must be filed with the SEC to disclose the totalamountofsecuritiessoldbynolaterthan5businessdaysaftertheofferingcloses.

v FormC:AnnualReport–AnnualreportsmustbefiledonthisformwiththeSECby

nolaterthan120daysaftertheendofthefiscalyearcoveredbythereport.

v Form C: Termination – If a company is eligible to terminate its reportingobligationswiththeSEC,thecompanymustfilethisformwithin5businessdaysofbecomingeligibletoterminateitsreportingobligations.

Becausestatescanalsoregulatesalesofsecuritiesoccurringwithintheirborders,theJOBSAct specifies that states may require notice filings of an offering under RegulationCrowdfundingbutmaynot imposeanyfilingfeesasarequirementtosuchfilings,exceptforthosestateswherethecompanyhasitsprincipalplaceofbusinessoratleast50%ofthecrowdfundingpurchasersreside.Companiesthereforeneedtostayinformedonthefilingrequirements in each state where an investor resides and make appropriate filingsaccordingly.

Advertising

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Lettingtheworldknowthatyourcompanyhasacrowdfundingcampaignwillbecriticallyimportant to thecampaign’s success.However,RegulationCrowdfundingdoesset limitsonwhatcompaniescancommunicatetopotentialinvestors.

Companiesmay issuenoticesorannouncementsofacrowdfundingcampaignas longasthosenoticesmeetthefollowingrequirements:

v Thenoticemaycontainthebasictermsoftheoffering(e.g.,typeofsecuritiesbeingsold,targetofferingamount,pricing);

v Thenoticemustidentifythenameoftheintermediarythroughwhichtheofferingisbeingmadeandcontainalinktotheintermediary’splatform;and

v Thenoticemustcontainthenameofthecompany, itsaddress,phonenumberandwebsite, theemailaddressofacompanyrepresentative,andabriefdescriptionofthebusiness.

Anyformofadvertisementbeyondthegeneralnoticediscussedaboveisnotpermitted.

Because of this restriction on advertising, companies must be very careful aboutcommunicationsmadetopotentialinvestors. Anyinquiriesreceiveddirectlybycompanyrepresentatives should be directed to the intermediary platform hosting the company’soffering materials and investors should be encouraged to post their questions on theplatform.Byfailingtousetheplatformandrespondingtoindividualinquiriesbyemailorothermeans, a company could be deemed to be advertising to or soliciting a particularinvestorinviolationofRegulationCrowdfundingandriskenforcementactionbytheSEC.When responding to an investor question on the intermediary platform, companyrepresentatives must identify themselves as being affiliated with the company on allcommunications.

Summary of Process

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PriortoGoLive

• PrepareDisclosures&FileFormCwithSEC• ReleaseCrowdfundingAnnouncementtoPublic

DuringCampaign

• Amendments:Ifmaterialchangestothecompanyortheofferingoccur,>ileFormC:AmendmenttoadviseSECandinvestorsofchangeswithin5businessdaysofchangeoccuring• Receiveregularsupdatesastocommitmentsandcancellationsfromintermediary• ProgressUpdates:Eitherregularupdatingthroughcrowdfundingplatformor>ilingFormC:ProgressUpdatewithin5businessdaysofreaching50%goal

CampaignClose

• 48-HoursBeforeOfferingDeadline:Allinvestmentcommitmentsarenon-cancellable• Closing:Intermediaryfacilitatestransferoffundstocompany;companyissuessecuritiestoinvestors;>ileFormC:ProgressUpdatewithin5businessdays

Post-Closing

• 120DaysAfterYearEnd:FileFormC:AnnualReportwithSECandpostoncompanywebsite• ReportingTerminationEventOccurs:FileFormC:TerminationwithSECwithin5businessdays

Promoter Compensation

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Acompanyengaginginacrowdfundingofferingmaycompensatesomeonetopromoteitscampaign through the communication channels provided on an intermediary’s platform.This can be a person specifically hired to promote the offering or an employee who isundertaking the promotional activities on behalf of the company. If such a promoter isengaged,thecompanymusttakereasonablestepstomakesurethatanycommunicationsmadebythatpromoterclearlydisclosesthatheorshehasormayreceivecompensationasaresultofsuchpromotionalactivities.Allactivitiesofthepromotermustbedonethroughthe intermediary’s platform and no other form of advertising or promotion by thepromoterispermitted.

Restrictions on Resale

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Regulation Crowdfunding requires that anyone purchasing crowdfunded securities holdthose securities for at least one year before they can be sold or transferred unless thecrowdfundedsecuritiesaretransferred:

v Backtothecompanythatissuedthesecurities;

v Toanaccreditedinvestor;

v AspartofaregisteredofferingwiththeSEC;

v Toamemberofthefamilyofthepurchaser;

v Toatrustcreatedforthebenefitofthepurchaserorhis/herfamily;or

v Inconnectionwiththedeathordivorceofthepurchaser.

Oncethisone-yearperiodhaslapsed,apurchasermaytransfertheirsecuritiestoanyoneunless the securities are otherwise contractually limited. The SEC currently plans toconductastudyofthesecondarymarketthatdevelopsforcrowdfundedsecuritiesoverthenextthreeyearstodeterminewhatadditionalregulationsmayberequiredfortheresaleofcrowdfundedsecurities.

Penalties

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The rules and requirements under Regulation Crowdfunding were intended to strike abalance between providing businesses with greater access to capital and protectinginvestorsfromfraudulentinvestmentscams.TheSECtakesitsjobofprotectingthepublicfrom investment fraud and frequently brings enforcement actions against those whoviolatefederalsecuritieslaws.

CommonviolationsthatmayleadtoSECinvestigationsinclude:

v Misrepresentationoromissionofimportantinformationaboutsecurities;

v Stealingcustomers'fundsorsecurities;

v Sellingunregisteredsecurities.

FailingtoobservealloftherequirementsunderRegulationCrowdfunding,includingfailingto make accurate disclosures to investors, can result in loss of the exemption fromregistration. In essence, it results in the company having sold unregistered securities.Should the SEC bring an enforcement action against a company selling unregisteredsecurities, remedies sought by the SEC would likely include: a court order, called aninjunction,thatprohibitsanyfurtheractsorpracticesthatviolatethelaworSECrules,civilmonetarypenalties,orthereturnofillegalprofitsfromthesaleofthesecurities.TheSECcouldalsoseektohaveacourtbarorsuspendan individual fromservingasacorporateofficerordirectorofanycompany in the future.Apersonwhoviolates thecourt'sordermaybefoundincontemptandcanbesubjecttoadditionalfinesorimprisonment.

NotallfailurestocomplywiththerequirementsofRegulationCrowdfundingmayresultinSECaction.Insignificantdeviationsfromtheregulationsthatweremadebyacompanyingood faith and in a reasonable attempt to comply will not invalidate the crowdfundingexemption upon which the company sold its securities. There is no specific test fordeterminingwhatismaterialandwhatisinsignificantsoacompanyshouldbevigilantinfollowingtherequirementsofRegulationCrowdfundingtothebestofitsability.

Glossary of Terms

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AccreditedInvestor–Termusedforasophisticatedinvestorthatmeetsacertainincomeornetworth test under federal securities laws. Accredited investors canbe individuals,businessesortrusts.Foranindividual,anaccreditedinvestormusthaveanannualincomeofatleast$200,000(or$300,000ifinvestingjointlywithaspouse)ineachofthelasttwoyears and expect to reasonablymaintain the same level of income, or havenetworth inexcessof$1,000,000. Forabusinessor trust,anaccredited investormusthaveassets inexcessof$5,000,000.Capital Structure – A mix of a company's long-term debt, specific short-term debt,commonequityandpreferredequity.Thecapitalstructure ishowabusiness finances itsoveralloperationsandgrowthbyusingdifferentsourcesoffunds.Charter Documents – The set of legal documents that provides for the creation andgovernanceofanentity. Foracorporation, thiswill includetheArticlesof Incorporationandbylaws. Fora limitedliabilitycompany,thiswill includetheCertificateofFormationandoperatingagreement.Dividend–Aportionofacorporation’sprofitspaidtoshareholdersofsomeorallclassesofstockbaseduponprorataownershipamongtheshareholders.Equity–Astockoranyothersecurityrepresentinganownershipinterestinacompany.FundingPortal –Acrowdfundingintermediarythatdoesnot:(i)offerinvestmentadviceor recommendations; (ii) solicit purchases, sales, or offers to buy securities offered ordisplayedon itswebsiteorportal; (iii) compensateemployees,agents,orotherspersonsfor such solicitation or based on the sale of securities displayed or referenced on itswebsite or portal; (iv) hold, manage, possess, or otherwise handle investor funds orsecurities;or(v)engageinsuchotheractivitiesastheSEC,byrule,determinesappropriate.GAAP or ‘Generally Accepted Accounting Principles’ – The common set of accountingprinciples, standards and procedures that companies use to compile their financialstatements.Intermediary–EitherafederallyregisteredbrokerorafundingportalregisteredwiththeSEC for the purposes of facilitating crowdfunding transaction pursuant to RegulationCrowdfunding.Issuer–Acompanythatissellingitsstockorothersecuritiestoinvestors.Net Worth – The amount by which an individual’s or a company’s assets exceeds itsliabilities.

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Offering–Thesaleofsecuritiesbyacompany.SEC–TheacronymfortheU.S.SecuritiesandExchangeCommission.Security – A legal instrument that represents an ownership position, a creditorrelationshiporafuturerighttoownershipofacompany.Securitiesaregenerallydividedintotwoclasses:debtandequity.Debtsecuritiesincludesuchinstrumentsasconvertiblepromissorynotes.Equitysecuritiesincludestock,membershipunitsandstockoptions.Subscription–Alegalcommitmentbyaninvestortopurchasesoon-to-beissuedsecuritiesbeingofferedbyacompany.

About Millyard Tech Law

Millyard Tech Law is aboutique law firm that serves as legal counsel to entrepreneursandcompanies in the business of innovation. We work withcompanies across a broadspectrumofindustriesthatarelookingtobringinnovationtotheirbusinesssector.Thisranges from assisting clients with formation, capital raising and day-to-day commercialtransactions to working with clients to develop creative solutions to business and legalissues that arise in the course of sourcing, financing and closing complex strategictransactions.Foradditionalinformation,pleasecontact:

MillyardTechLaw,PLLC44TechnologyWayNashua,NH03060

(603)589-9037

www.millyardtechlaw.com