Securities Crowdfunding for Intermediaries

1

Securities Crowdfunding for IntermediariesCROWDFUNDING 2016 SERIES

Premier date: May 11, 2016

Premier Date: May 11, 2016

Securities Crowdfunding For Intermediaries

crowdfunding 2016 series

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS


4

meet the facultyPANELISTS

Alex Davie Riggs Davie PLCJordan Fishfeld PeerRealtySara Hanks CrowdCheck

MODERATOR Dave Freedman Financial journalist and author

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™


Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

http://www.financialpoise.com/


about this webinarWhether you want to launch a new crowdfunding platform or improve/expand the one you already operate, this webinar will help you compete in the fast-evolving securities crowdfunding marketplace. Our experts will explain how intermediaries earn revenue in both equity and debt crowdfunding, and what the typical costs and risks are. We will cover the fundamental differences between the various kinds of equity offering platforms: traditional Regulation D offerings, Title II Rule 506(c) deals using general solicitation, Title III portals (seed-stage “true crowdfunding” deals open to all investors), Title IV offerings (Regulation A+ “mini-IPOs”), and intrastate securities exemptions in 26+ states. We will also speculate on the legal and technological innovations that we might see over the next few years in the nascent securities crowdfunding industry.

about this seriesIn 2015, the securities crowdfunding galaxy expanded at warp speed, threatening to collide with larger, stodgier galaxies and disrupt whole solar systems.

Title IV of the Jumpstart Our Business Startups Act, launched in the summer of 2015, created Regulation A+ (also known as the mini-IPO). Then the SEC issued final rules under Title III of the JOBS Act, finally opening up equity crowdfunding for all (including non-accredited) investors. The market of potential investors thus went from less than 10 million to more than 100 million Americans. In this webinar series, some of the USA’s top crowdfunding experts explore the expanding securities crowdfunding galaxy.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 7

episodes in this series

EPISODE #1 Crowdfunding from the Investors Perspective

3/9/2016

EPISODE #2 Crowdfunding from the Start-Up’s Perspective

4/13/2016

EPISODE #3 Securities Crowdfunding for Intermediaries 5/11/2016Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo



Securities-based CrowdfundingUsing a broad definition of crowdfunding, we include the following five kinds of securities-based crowdfunding (all are open to non-accredited investors except Reg D offerings):

• Peer-to-peer lending (P2P), a.k.a. marketplace lending• Regulation D offerings, Rule 506(c) accredited investors only• Intrastate securities exemptions (now in 26 states and DC)*• Title III securities crowdfunding (will launch May 16, 2016)**• Title IV Regulation A+ “mini-IPOs” (launched in June 2015)

* Intermediary platform required in AZ, IN, IA, KY, MN, MS, NJ, TX, WI** Intermediary platform required for all Title III offerings


Debt-based CrowdfundingDebt-based crowdfunding emerged as a for-profit investment vehicle in 2006 in the USA, and a year earlier in the UK. Peer-to-peer (P2P) lending platforms were the earliest form of debt-based crowdfunding. P2P lets borrowers apply for unsecured loans and, if accepted by the platform, borrow money from “the crowd,” then pay it back with interest. More recently P2P has been called marketplace lending because institutional investors are overwhelming individual investors on many P2P platforms.

P2P platforms take a percentage of the loan amounts (a one-time charge) from the borrower and a loan servicing fee (either a fixed annual fee or a one-time percentage of the loan amount) from investors. The application process is free for borrowers. Investors earn interest on each loan (or package of similar loans), assuming the borrowers make timely payments.

Regulation D offering platforms, which emerged in 2011 in the USA, list both debt and equity offerings. So debt-based crowdfunding now includes P2P and Reg D platforms, and will soon (May 2016) include Title III funding portals.


Marketplace Lending (P2P & P2B)Lending Club, the largest P2P platform in the USA, launched in 2007 and went public in 2014. • As of 9/30/15, Lending Club had issued loans totaling $13.4 billion.• The top two purposes reported by borrowers on Lending Club were refinancing (49%) and

credit card payoff (19%). Reported loans for “business” purposes amounted to only 1%.• Interest charged to borrowers by Lending Club ranged from 7.72% (Grade A) to 23.5% (Grade

G) – on loans issued before January 30, 2014. (Source: https://www.lendingclub.com/info/demand-and-credit-profile.action)

Kabbage (kabbageplatform.com) is a P2B lending platform, i.e., peer-to-business. Based in Atlanta, it launched in 2011.• Kabbage says it has loaned more than $1 billion to over 50,000 businesses.• Borrowers must be in business at least 1 year. Can apply to borrow $2k to $100k for 6 or 12

months. • Monthly interest rate 1.5% to 12%. Origination fee $1,200 (for 6 months) or $2,100 (for 12

months).• Kabbage makes loans through Celtic Bank, a Utah-chartered industrial bank (member FDIC).

http://www.kabbageplatform.com/

Equity CrowdfundingOfferings that Are Popularly Known as ‘Equity Crowdfunding’

Online Launch Raise Limit in

1 Year Investor Status Investment Limit

CF Intermediary Required?

Reg A+ Tier 1 2015 $20 million All investors No limit No

Reg A+ Tier 2 2015 $50 million All investors Depends on income/worth No

Reg D Rule 506(c) 2013 No limit Accredited only No limit NoIntrastate Equity Crowdfunding

2013 (Georgia was first)

Ranges $1m to $4m All investors Depends on

income/worthVaries with

stateTitle III Equity Crowdfunding2 2016 $1 million All investors Depends on

income/worthYes: online

portals1

1. Issuers must use either non-broker-dealer funding portals or broker-dealer platforms, both of which must be registered with the SEC and FINRA.2. This is “true” equity crowdfunding, in the parlance of crowdfunding professionals, governed by Title III of the JOBS Act and Regulation CF.

Note that Reg D Rule 506(b) is not included in this table, although 506(b) offerings may be listed on a Reg D offering platform. Because the issuer must have a “substantive, pre-existing relationship” with each investor, we do not consider such investors to be a “crowd.”


Crowdfunding Securities

• Straight debt• Straight equity (preferred stock, LLC

shares, etc.)• Convertible debt (starts as debt, converts to

equity in certain circumstances)


Regulation D, Rule 506As a result of Title II of the JOBS Act, the SEC split Rule 506 into two parts.

• “Traditional” private offerings under Rule 506(b) may not use general solicitation. Off-platform, up to 35 non-accredited investors may participate. On Internet-based offering platforms, only accredited may participate, companies must have substantive pre-existing relationships with investors, and investors can self-certify their accredited status. [This is not crowdfunding.]

• Rule 506(c) removes the ban on general solicitation and advertising. That is, issuers can publicize details of their offerings outside of the platform where the offering is listed. Only accredited investors may participate, and issuers must take “reasonable steps” to verify their AI status. [We do call this crowdfunding, although accredited investors are not exactly “the crowd.”]


First 2 Years of General SolicitationRule 506(c) permits general solicitation for Regulation D offerings. Only accredited investors may participate. In the first two years of general solicitation (Sept 23, 2013, through Sept. 23, 2015):

1. About 9% of Reg D offerings used the Rule 506(c) exemption. [source: Offerboard]

2. Roughly 100,000 accredited investors participated in private capital markets for the first time. That’s a ~50% increase over the number of AIs who participated each year before 2013. [Doug Ellenoff]

3. The SEC reported at least $10 billion in 506(c) activity in the first year, and rapidly increasing amounts since. Rule 506(c) offerings are not required to be listed on web-based platforms. [Charles Sidman]

4. On the 18 major equity offering platforms tracked by Crowdnetic, 6,063 distinct 506(c) offerings recorded capital commitments of approx. $870 million. [Crowdnetic is the source for #4 thru #7]

5. The sectors with the highest number of successful 506(c) offerings tracked by Crowdnetic were services, technology, financial, consumer goods, and healthcare (out of 8 sectors total). The sectors with the highest success rates were financial, energy, healthcare, materials, and commerce & industry. The industries with the highest recorded capital commitments were real estate and oil & gas (out of 10 industries total).

6. 69% of 506(c) offerings tracked by Crowdnetic were equity, 20% were convertible debt, 9% were straight debt. The rest included revenue share, royalty, real estate, and SAFE.

7. Although equity was the most frequently used security type, it had a low success rate (21%). The securities types with the highest success rate were real estate (81%) and revenue share & royalty (63%). Convertible debt’s success rate was 36%, straight debt 31%. SAFE was the lowest (15%).


Title IV: Regulation A+

Title IV of the JOBS Act of 2012 expands the moribund Regulation A exemption by increasing the raise limit from $5 to $50 million. Non-accredited investors could participate in Reg A offerings before 2012, and they still can under Title IV but with certain limits.

In addition to the expanded raise limit, Title IV preempts blue sky review (i.e., no need for approval by every state in which the offering is made) for “Tier 2” offerings. Blue sky review is still required for “Tier 1” offerings under $20 million.

Non-accredited investors in Tier 2 offerings are limited (on an annual basis) to 10 percent of their income or net worth, whichever is greater. All investors can invest an unlimited amount in Tier 1 offerings.


Title IV: Regulation A+

Issuers of Reg A+ offerings are allowed to “test the waters,” measuring potential interest by investors, before undertaking the obligations of an offering.

Reg A+ is nicknamed the “mini-IPO,” as issuers are required to go through a scaled-down registration process and file a prospectus-like document called an “offering circular” with the SEC.

The benefits of Reg A+ for seed-stage and startup companies seem limited mainly because Tier 1 offerings up to $20 million still require blue sky review and compliance, which can be costly and time-consuming, in addition to the SEC filing process.


Title III CrowdfundingTitle III of the JOBS Act, along with SEC rules issued in 2015, establish the following structure for equity crowdfunding, which will launch in May 2016:

• Issuers may raise up to $1 million in a 12-month period. (Congress may increase that limit.) Issuers may concurrently raise capital in Reg D and Reg A+ offerings (known as parallel offerings).

• Yearly investment limits for investors depend on their net worth and income – range from $2,000 to $100,000.

• For raises above $500,000 issuers must show audited financial statements, except for first-time Title III issuers.

• Issuers must list offerings on intermediaries known as funding portals and broker-dealer platforms.

• Portals and platforms may use objective and subjective criteria for accepting/rejecting applications submitted by issuers.

• Portals and platforms must provide communication channels that let investors engage in (a) discussions with each other, and (b) Q&A with issuers.

• Each investor buys shares in the issuer directly. Portals may not aggregate investors into single-purpose funds or special-purpose vehicles.


Title III CrowdfundingAdditional Rules for Intermediaries, Part 1

• Portals and platforms must register with the SEC and the Financial Industry Regulatory Authority (FINRA).

• Funding portals that are not broker-dealers may not offer investment advice or make recommendations to, or solicit investments from, individual investors.

• Intermediaries must provide “investor education” content on their portals that helps investors understand, among other things, the risks of investing in private equity, including loss and illiquidity.

• Intermediaries may provide search functions, allowing investors to find offerings based solely on objective criteria.

• If issuers or their representatives participate in discussions (for the purpose of responding to investors’ questions), they must at all times identify themselves as issuers or engaging in discussion on behalf of issuers.

• Intermediaries may decide whether investors who participate in discussions must do under their registered (real) names or may do so under aliases.

• To reduce fraud, intermediaries must conduct background checks on officers, directors, and 20 percent equity holders of each issuer, and must disqualify an issuer if one of its officers, directors, or “participants” (such as promoters) in the offering is a bad actor.

• Intermediaries must have a “reasonable basis for believing” that the issuers listed on their portals have complied with their disclosure and registration requirements, and have established accurate record-keeping systems to keep track of their investors the securities purchased by investors.


Title III CrowdfundingAdditional Rules for Intermediaries, Part 2• Depending on the facts and circumstances, an intermediary may potentially be liable in an offering where there is a

fraudulent or intentionally misleading statement made by an issuer.

• Intermediaries must disclose to investors how they will be compensated by issuers in connection with offerings and sales made on their portals. They may accept a range of compensation, including flat fees, commission, and equity interest. Intermediaries should not receive any fees or compensation directly from investors.

• Intermediaries may accept equity in an issuer only as compensation for listing and other services that portals normally provide to issuers. Intermediaries may not take a financial interest (i.e., may not purchase equity) in addition to such compensation. If they take equity as compensation, it must be at the same price and under the same terms as offered to individual investors in the same offering.

• An intermediary may rely on investors’ representations regarding their compliance with annual investment limits, based on income and net worth.

• Funding portals may advertise their own existence in public media, including social media. They may identify specific issuers and/or offerings in their ads as long as (1) they use objective criteria for deciding which issuers or offerings to advertise, (2) those criteria result in a varied selection of issuers or offerings, and (3) the ads do not implicitly endorse one issuer or offering over others. Portals are prohibited from receiving special or additional compensation for identifying or highlighting particular issues or offerings in their ads.

This list is not comprehensive. For a more thorough discussion of Title III and SEC rules, see CrowdCheck’s memo of Nov. 2015: http://bit.ly/1XE8c44.


http://bit.ly/1XE8c44

Intrastate Equity CrowdfundingIntrastate securities exemptions allow all investors, including non-accredited, to invest in startups and private companies that are based in their state. As of February 2016, here are the states that have enacted (through legislation) or promulgated (through regulation) intrastate securities exemptions:

• These states have broad intrastate securities exemptions that allow, but do not require, offerings to be listed on crowdfunding portals: Alabama, Colorado, District of Columbia, Florida, Georgia, Illinois, Kansas, Maine, Massachusetts, Michigan, Montana, Oregon, South Carolina, Tennessee, Vermont, Virginia, Washington.

• The following states have narrow intrastate crowdfunding exemptions that require offerings to be made on crowdfunding portals: Arizona, Indiana, Iowa, Kentucky, Minnesota, Mississippi, New Jersey, Texas, Wisconsin.

For details on each state (including raise limits and investment limits) see http://www.freedman-chicago.com/ec4i/Intrastate-Securities-Exemptions.pdf


http://www.freedman-chicago.com/ec4i/Intrastate-Securities-Exemptions.pdf


Financing Options for StartupsOption Advantages DisadvantagesOFF-PLATFORM Commercial loans Community-oriented, build relationship with lender Must have reliable cash flow and/or collateralAngel investors Strategic investors, negotiable deal terms (vs. CF) Angels may be hard to find in smaller citiesVenture capital Smart money, bigger pile of capital VCs usually want fast growth, management

control; focus on tech, healthcareON-PLATFORM Rewards-based CF Not regulated by SEC, huge audience Mainly arts, entertainment, gadgetsPeer-to-peer (marketplace) lending

Fast approval, lower interest rates than banks for unsecured loans

Funding limit often less than $35k; repayment period 3-5 years

Regulation A+ “Mini-IPO” raises up to $50 million without blue sky review (Tier 2), test the waters

Requires SEC filing (“offering circular”) & approval

Regulation D, Rule 506(b) Traditional “quiet deals,” companies must have substantive pre-existing relationships with investors, accredited investors can self-certify on-platform

No general solicitation

Regulation D, Rule 506(c) General solicitation OK Issuer must verify accredited investor statusTitle III (Reg CF) Attract many affinity investors, including unlimited

non-accreditedRaise limit $1 million, expensive reporting requirements, crowded capitalization table

Intrastate Raise limits higher than Title III in 16 states ($4 million in IL)

In-state investors only

More About The Faculty D

[email protected] FREEDMAN

David M. Freedman has worked as a journalist since 1978, primarily in the fields of business, law, and personal finance. He has served on the editorial staff of The Value Examiner (NACVA) since 2005, focusing on business valuation and forensic accounting, and has written extensively for Accredited Investor Markets (AIMkts.com). Dave is a coauthor of Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms (Wiley & Sons, 2015). He is also the editor of Financial Poise’s newest website, Crowdfunding Investor (www.crowdfunding-investor.com).


http://www.crowdfunding-investor.com/


ALEX [email protected]

Alexander J. Davie is a corporate and securities attorney in Nashville, Tennessee. Many businesses look to Alex as their outside “general counsel” for day-to-day legal needs as well as their trusted adviser on high-stakes transactions such as capital raising, partnership buyouts and disputes, technology transactions, and mergers and acquisitions. His first goal is to provide clients with responsive service and candid and decisive legal advice for the difficult choices they often face. Alex frequently works with technology companies, including startups and emerging growth companies, and with private investment funds such as private equity, venture capital, and hedge funds.



JORDAN FISHFELD

Jordan Fishfeld is the founder and CEO of PeerRealty. He focuses on the development of strategic partnerships with investors, sponsors, and developers, while ensuring all deals are strong and viable. With over eight years of investing, development and sales experience in the real estate industry, Jordan understands the benefits of strong and tangible assets.

Prior to founding PeerRealty, Jordan worked as a finance attorney for Katten Muchin Rosenman, LLP, where he assisted on more than $1 billion worth of syndicated loan transactions. Before graduate school, Jordan worked as a law clerk for a New York based real estate firm, representing lenders for properties valued at over $45 million. Jordan holds Bachelor of Arts in Political Science and Bachelor of Science in Business Administration degrees from the University of Florida. He also received Master of Business Administration and Juris Doctorate degrees from the University of Miami, where he graduated magna cum laude.

[email protected]


mailto:[email protected]



SARA [email protected]

Sara Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck provides due diligence and compliance services for online alternative securities offerings. Its services help entrepreneurs and project sponsors through the disclosure and due diligence process, give investors the information they need to make an informed investment decision and avoid fraud, and help intermediaries avoid liability.

Sara’s prior position was general counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Before that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission, and as chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process.

Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Advisory Council on Small and Emerging Companies. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, army wife, skier, cyclist, gardener, and animal lover.

mailto:[email protected]

BMC Group’s SmartRoom™ is an award-winning virtual data room to manage M&A due diligence, financial transactions, and legal documents, and for sharing confidential corporate information in an ultra-secure online workspace. The solution offers simple, intuitive navigation with greater support at a lower cost.

Visit www.bmcgroup.com27

http://www.bmcgroup.com/

Visit www.eisneramper.comEisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.

28

http://www.eisneramper.com/

Published in June 2015

More information at http://www.ec4i.com

Image reproduced with permission of John Wiley & Sons

29

http://www.ec4i.com/

The JOBS Act & the accredited investor:

What every accredited investor should know before investing in

alternative assets

Now available on iTunes, Amazon and

Kindle

30


www.financialpoisewebinars.com

http://www.financialpoisewebinars.com/


50,000 +Weekly

newslettersubscribers

15,000 +website Visitors

per month

10,000 +webinar

attendees per year

business owners & executives

Attorneys Accountants Bankers Business brokers Consultants Commercial lenders debt traders Developers Entrepreneurs

high net worth investors

32


http://www.accreditedinvestormarkets.com/

http://commercialbankruptcyalternatives.com/

http://commercialbankruptcyinvestor.com/

http://commercialbankruptcylitigation.com/

http://www.businesstransitionandexitplanning.com/

http://www.chamberwise.org/

http://www.dailydac.com/


50,000+ WEEKLY NEWSLETTER SUBSCRIBERS15,000+ MONTHLY WEBSITE VISITORS10,000+ YEARLY WEBINAR ATTENDEES

PODCASTS, E-BOOKS AND MORE

educating various constituents

about risks & rewards involving financially

distressed businesses

educating investors

about optionsbeyond

publicly traded securities

educating business owners

& executives

33


http://www.dailydac.com/

http://commercialbankruptcylitigation.com/

http://commercialbankruptcyalternatives.com/

http://www.commercialbankruptcyinvestor.com/

http://www.businesstransitionandexitplanning.com/



http://www.aimkts.com/




About Financial Poise™ DailyDAC, LLC, d/b/a Financial Poise™ provides continuing education to business owners and executives, investors, and their respective trusted

advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other

subjects of interest to these audiences.


The ChamberWise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable

member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well.

www.chamberwise.org



Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

Securities Crowdfunding for Intermediaries

Education

Transcript of Securities Crowdfunding for Intermediaries