Crowdfunding Regulations SummaryMaintained by Kevin Laws (klaws@angel.co) at AngelList (http://angel.co)

October 23, 2013

This is a quick overview of key points in the SEC’s proposed rules onCrowdfunding (http://www.sec.gov/rules/proposed/2013/33-9470.pdf). It’s not acomplete guide - anything that seems “logical”, I’ve excluded (e.g., “investorreceives a receipt”). Comments about things I’ve missed or misinterpreted arewelcome.

Overview:

Companies will be able to “crowdfund” up to $1M in any 12-month period fromunaccredited investors using one intermediary – either an Internet FundingPlatform (registered with FINRA) or a Broker/Dealer with an Internet site. Theycan raise money at the same time from other sources (e.g., AngelList) withoutissues.

Any investor can invest from $2K to $100K in a 12-month period. The 12-monthinvestment limit is based on the greater of annual income or assets - 5% of thatamount if less than $100K (but never less than $2K), 10% if greater than $100K(but never more than $100K). The investors will self-certify to their income, assets,and other investments (plus intermediaries must use evidence of activity on theirown platform).

Disclosures (must also be filed electronically with the SEC):

● Resumes of company principals for the last 3 years, including whetherthey’re currently working elsewhere

● How much is the minimum to close the round, maximum that will beaccepted (and what will happen if maximum is exceeded), and date of close.

● Number of employees● Business plan (quick paragraphs or slide decks are OK for early stage)● Income tax return of the company for most recent year (if any)● US GAAP financials & CEO discussion of the company financial condition

o <$100K raised, can be sworn to by the CEOo $100K-$500K must be certified by a CPAo >$500K must be audited

● High level cap table, including terms of any other class of security● Detailed use of proceeds (if there are multiple options, discuss how

management will choose between them, etc.)● Full discussion of risks, including risks associated with other classes of

stock, dilutive issuances, etc.● Every 5 days, notify the SEC electronically of any progress towards raise

Ongoing Responsibilities of the Company:

● Update investors and the SEC (electronically) with financials (to the samestandard as that required for the raise) and company status every year untilacquisition, public, or go out of business

● Must maintain the ownership records (ownership transfers, addresses, etc.)- can outsource this to another service.

● Can’t be an investment company (i.e., no funds, special purpose vehicles,etc.)

Offering:

● Both unaccredited and accredited investors can participate, but are subjectto the same rules. Alternatively, companies can raise a separate accreditedinvestor round at the same time (the regular way).

● Can discuss publicly, but only to admit that the fundraising exists and pointpeople at the platform

● Anybody compensated by the company in any way (interpreted broadly)must disclose that when talking about the company (which they can only doon the platform if it’s related to fundraising)

● Price of the security can be left blank as long as method for pricing isdisclosed (e.g., auctions allowed)

● Must be up for at least 21 days before close● Investors may cancel an investment anytime up to 48 hours prior to close● Can be resold to accredited investors (but not to other unaccrediteds)● Doesn’t count towards the 2,000 shareholder limit (even if resold)● Everybody must pass bad-actor checks by the intermediary, including

anybody with more than 20% ownership● On costs, SEC estimates about $10,000 in costs for the company doing the

crowdfunding (legal, form preparation, ec.) plus about $15,000 per year(including the first year) for companies with CPAs/auditors reviewing thefinancials (>$100K raised).

● The SEC estimates that funding portals will charge roughly 10% of theraised amount on top of those expenses.

● The SEC doesn’t include the bad actor checks costs in that, which are alsorequired (and must be verified by the intermediary) - from the bad actorregs, though, they estimate another $1,200 plus 11 hours of time from thecompany (call it ~$2,500 overall).

Intermediary (Funding Portal or Broker):

● Register with FINRA as either a Broker Dealer or Funding Portal (using a“form Funding Portal” which is similar to the full Broker-Dealerregistration). However, they leave open that the industry could self-organizeanother entity to handle registration for Funding Portals.

● Verify that the company has a way to accurately track cap table (owneraddresses, transfers, etc.)

● Educate investors, and run them through a questionnaire proving they’ve

been educated – pretty broad, including all risks● Disclose how much they are compensated on each deal● File issuer materials with the SEC● Expect occasional visits from the SEC or FINRA to inspect premises,

operations, platforms, and records● Keep records of everything● Intermediaries are considered issuers for the purposes of liability (errors,

omissions, or fraud on the part of the issuer)● SEC estimates $770K to set up a broker and $270K a year to maintain that

status. SEC estimates $417K to set up a funding portal and $90K a yearthereafter. (Note: this sounds pretty low to me given liability and otherissues - they’d need E&O / D&O insurance in those estimates and probablymore development costs than they include)

Funding Portal-Specific:

● Must accept any company onto the platform that fits pre-set objectivecriteria (e.g., “companies in San Francisco” or “Restaurants”) and isn’tsuspected of fraud. Cannot use subjective assessments of companies todecide who to take (the SEC considers this “investment advice orrecommendation” which is banned by the JOBS Act).

● Cannot take an equity stake in the company. This includes taking equity forthe crowdfunding services – must take only cash. This includes any directoror officer of the company (i.e., can’t invest on their own platform).

● Can’t touch the money as a funding portal (must have a bank or otherescrow-like agent sit between the investor and the company).

● Funding portals appear to be able to take transaction-based compensationwithout having to register as broker-dealers.

● Cannot pay anybody for lists of investors (shall not “compensate promoters,finders, or lead generators for providing…personally identifyinginformation of any potential investor”). Can advertise.

● Advertising the platform, providing search functions, advising issuers,paying for customer referrals (but not lead lists), highlighting and displayingofferings, and limiting offerings objectively or based on fraud can all bedone without running afoul of other laws (general solicitation, etc.)

● Must have a “Fidelity Bond” of $100K (insurance against dishonest acts byemployees)

● Can highlight (top of sort, feature, etc.) offerings by objective criteria only(how close they are to close, momentum, etc.) but not subjective criteria(any opinion about the deal). These criteria must be published andexplained clearly in advance. Unclear whether an outsider’s subjectivecriteria can be used as one of your objective criteria (e.g., crowd ratings?)

● Must provide ways for the investors to communicate with each other andwith the company – in public. Only registered members can comment, butthe comments and responses must be available publicly (not behind login).

The portal cannot moderate or comment itself other than enforcing rules.Unclear what to do about spam.

● Can advise issuers on terms and presentation materials (form, not content)