www.newfinance.org

Seminar Guide

Crowdfunding in the US

4th November 2013

Fried Frank

#NewYork

7th November 2013

WeWork

#SanFrancisco

Legal Notices

Disclaimer

This document has been produced by NewFinance Innovations Ltd. and is furnished to you solely for your information and should not be construed as a solicitation or offer to buy or sell any financial instruments. No representation or warranty, expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy or completeness of the information contained herein and, accordingly, none of NewFinance Innovations Ltd.’s officers, employees or any contributing author accepts any liability whatsoever arising directly or indirectly from the use of this document. NewFinance Innovations Ltd. accepts no responsibility for the views expressed by contributors to this publication. Readers should consult their professional advisers before acting on any material within this document.

Copyright

© 2013 NewFinance Innovations Ltd.

Unauthorised use and/or duplication of this material without express and written permission from NewFinance Innovations Ltd. is strictly prohibited. Excerpts and links may be used with permission, provided that full and clear credit is given to NewFinance Innovations Ltd. with appropriate and specific direction to the original content. Please contact the Editor if you wish to use and/or duplicate this material. Our policy is to generally permit use where possible within the terms described here, but please contact us first. We are always open to invitations to collaborate and will often assist in the marketing and promotion of material that aligns with our own mission, but please ask first.

NewFinance, the NewFinance logo and all other NewFinance product or service names are Trademarks of NewFinance Innovations Ltd.

Trademark Acknowledgement

All trademarks are acknowledged as belonging to their respective companies and we do not claim to partner with or represent any third parties, except where stated.

Publisher

NewFinance Innovations Ltd. Registered in England no. 8644188

Registered office: 145-157 St John Street, London, EC1V 4PW, England

Editorial Team

Editor Research Analyst Eddie George Paula Cizek NewFinance Innovations Ltd. Mandalah Email: eddie@newfinance.org Email: paula@mandalah.com Twitter: @eddiegeorge Twitter: @paulacizek Mobile: +44 7951 613011 Mobile: +1 480 544 0550 Guest Authors are acknowledged within their respective articles

Price

Free. Enjoy.

© 2013 NewFinance Innovations Ltd. V1.0 / Page 2 of 25

Table of Contents

1 Agenda – New York 4th November, Fried Frank ....................................................................... 4

2 Agenda – San Francisco 7th November, WeWork ..................................................................... 5

3 Preface ................................................................................................................................... 6

4 US$500 and a Click: SEC Proposes “Crowdfunding” Rules for Start-Up Businesses .................. 7

5 Venture Fund vs. Venture Platform ....................................................................................... 10

6 Transforming Capital Markets with Crowdinvesting .............................................................. 12

7 Community Underwriting for Food Businesses ...................................................................... 13

8 Turning the Old Boy Network on its Head .............................................................................. 15

9 Crowdfunding: Individual Investor’s Answer to Wall Street ................................................... 17

10 Crowdfunding Resources ....................................................................................................... 19

10.1 Major US Crowdfunding Sites ................................................................................................... 19

10.2 Legislation: The Jumpstart Our Business Startups (JOBS) Act .................................................. 21

10.3 Recent Press Articles ................................................................................................................. 21

10.4 Publications and Blogs .............................................................................................................. 23

10.5 Videos and Infographics ............................................................................................................ 23

10.6 Meetups .................................................................................................................................... 24

10.7 Upcoming Conferences/Events ................................................................................................. 25

10.8 Social Media .............................................................................................................................. 25

© 2013 NewFinance Innovations Ltd. V1.0 / Page 3 of 25

1 Agenda – New York 4th November, Fried Frank

Event listing: http://www.meetup.com/newfinance/events/142833022/

6:00pm - Networking opportunities

A buffet and refreshments will be provided courtesy of our Partners

7:00pm - Welcome address and Partner messages

Eddie George, Organiser, NewFinance.org

7:10pm - Presentations

Stuart H. Gelfond is a corporate partner resident in Fried Frank's New York office. Stuart will examine recent changes to legislation and the opportunities that this presents to FinTech Entrepreneurs in the Crowdfunding space.

Greg Neufeld, Managing Partner & Founder, and Karl Antle, Managing Partner, at ValueStream Labs. Greg and Karl will explain how ValueStream Labs is using Crowdfunding to raise Capital for many of its own projects and investments. ValueStream Labs is a hybrid incubator and venture capital firm for FinTech entrepreneurs.

Sang Lee, CEO & Founder of Return on Change (RoC), an investment platform connecting high-impact startups with investors. Working with socially innovative entrepreneurs, RoC works with startups in the Tech, CleanTech, Life Sciences, EdTech, and Social Enterprises sectors. Sang is also the Executive Director of CF50, a global crowdfunding think tank, as well as a founding member of the Centre for Social Innovation.

Refreshments Break

8:30pm - Panel discussion

This will be an open question and answer session around Crowdfunding

9:00pm - Closing address

Eddie will close the Seminar as usual

9:01pm - After-party drinks

At The Growler, 55 Stone Street

Please join our Delegates, the NewFinance team and myself for follow-on drinks if you'd like to continue networking

© 2013 NewFinance Innovations Ltd. V1.0 / Page 4 of 25

2 Agenda – San Francisco 7th November, WeWork

Event listing: http://www.meetup.com/newfinance/events/142838492/

6:00pm - Networking opportunities

A buffet and refreshments will be provided courtesy of our Partners

7:00pm - Welcome address and Partner messages

Eddie George, Organiser, NewFinance.org

7:10pm - Presentations

Guillaume Lebleu, Co-Founder at Clearbon. Clearbon’s Community Finance Platform allows small businesses to raise funding and get more business from their customer community. Current pilots include Bernal Bucks and Credibles.

David Brown, CEO of FundOurCommunity, created to help people invest in their communities in a way that helps them create ownership, local knowledge, friendship and caring for their neighbour that has often disappeared in America.

Nav Athwal, Co-founder & CEO of RealtyShares, Crowdfunding for Real Estate. RealtyShares allows you to both create and manage an online property portfolio and to raise capital for your property investments through Crowdfunding.

Refreshments Break

8:30pm - Panel discussion

This will be an open question and answer session around Crowdfunding

9:00pm - Closing address

Eddie will close the Seminar as usual

9:01pm - After-party drinks

At the Mikkeller Bar, 34 Mason St

Please join our Delegates, the NewFinance team and myself for follow-on drinks if you'd like to continue networking

© 2013 NewFinance Innovations Ltd. V1.0 / Page 5 of 25

3 Preface

Eddie George, Founder and CEO, NewFinance

Hi Everyone,

This guide accompanies the NewFinance FinTech Inaugural US Seminars on the 4th and 7th November 2013 in New York and San Francisco respectively.

The Seminars follow on from our recent UK Crowdfunding Seminar on September 10th; our objective for the US Seminars is to address the US Crowdfunding scene and cross-pollenate ideas and business models from both sides of the pond.

You're probably already aware that Title II of the JOBS Act, designed to open up more investment capabilities and stimulate the new startup economy, is now in effect. You're now allowed to tell people that you're raising money. This will open up the market for Crowdfunding sites to the benefit of Entrepreneurs looking to raise funding. With significant successes already in the Rewards segment, see Kickstarter, it seems likely that Crowdfunding sites, albeit providing a more complex process than rewards, will provide an essential funding option to many new businesses and ventures.

These Seminars will explore the themes around this new opportunity.

Resources

We’ve included a wide range of resources at the end of this guide, but no doubt we’ve missed some out. Please let us know so that we can update the guide for next time.

Cheers

Eddie

© 2013 NewFinance Innovations Ltd. V1.0 / Page 6 of 25

4 US$500 and a Click: SEC Proposes “Crowdfunding” Rules for Start-Up Businesses

Stuart H. Gelfond, Corporate Partner, Fried Frank

Daniel Glazer, Corporate Partner and co-head of Fried Frank's Technology Transactions Group

Anthony D. Foti, Corporate Associate, Fried Frank

Chris Austin, Corporate Law Clerk, Fried Frank

Overview

On October 23, 2013, the U.S. Securities and Exchange Commission (SEC) proposed rules under the Jumpstart Our Business Startups (JOBS) Act1 to permit companies to offer and sell securities through “crowdfunding.” In a prior memorandum,2 we discussed the key elements of crowdfunding under the JOBS Act. Crowdfunding describes an evolving method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a multitude of projects. Title III of the JOBS Act created an exemption under the securities laws to permit this type of funding method to be used to offer and sell securities. The JOBS Act also established the foundation for a regulatory structure for this funding method. The goal of the JOBS Act is to make it easier for startups and small businesses to raise funds from a range of potential investors and provide additional investment opportunities for investors.

The proposed rules would, among other things, permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions. The full text of the proposed rules is available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf.

The SEC is seeking public comment on the proposed rules for a 90-day period following their publication in the Federal Register.

1 For a description of various important aspects of the JOBS Act, see The Jumpstart Our Business Startups Act and Its Impact on Equity Research Analysts, Fried Frank Client Memorandum, David B. Hennes & Carmen J. Lawrence, May 18, 2012; Market Practice Evolves Under the Jumpstart Our Business Startups Act, Fried Frank Client Memorandum, Valerie Ford Jacob, Andrew B. Barkan, Bonnie A. Barsamian, Daniel J. Bursky, Stuart H. Gelfond, Michael A. Levitt, Paul D. Tropp & Vasiliki B. Tsaganos, May 15, 2012; Impact of JOBS Act on Private Investment Funds, Fried Frank Client Memorandum, Jonathan S. Adler & Justin Nasatir, Apr 5, 2012; The Enactment of the Jumpstart Our Business Startups Act: Simplifying the IPO Process While Transitioning to Full Public Company Status, Fried Frank Client Memorandum, Valerie Ford Jacob, Andrew B. Barkan, Bonnie A. Barsamian, Daniel J. Bursky, Stuart H. Gelfond, David B. Hardison, Michael A. Levitt, Paul D. Tropp, Vasiliki B. Tsaganos & Anuja A. Majmudar, Apr 3, 2012.

2 http://friedfrank.com/siteFiles/Publications/6-12-2012%20-%20TOC%20Memo%20-%20Crowdfunding.pdf

© 2013 NewFinance Innovations Ltd. V1.0 / Page 7 of 25

Qualifying under the Proposed Rules

The proposed rules impose the following thresholds and limits:

• A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

• Investors, over the course of a 12-month period, would be permitted to invest up to: • $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual

income and net worth are less than $100,000. • 10% of their annual income or net worth, whichever is greater, if either their annual income

or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Not all companies would be eligible to utilize the crowdfunding exemption. Excluded companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Also, securities purchased in a crowdfunding transaction could not be resold for a period of one year. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.

Disclosure Requirements for the Issuer under the Proposed Rules

The proposed rules would require the issuer to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering and make it available to potential investors.

Among other things, an issuer would be required to disclose the following in an offering document:

• a description of the company’s business and the use of proceeds from the offering; • the price to the public of the securities being offered, the target offering amount, the

deadline to reach the target offering amount and whether the company will accept investments in excess of the target offering amount;

• certain related-party transactions; • information about officers and directors, as well as owners of 20% or more of the company; • a description of the financial condition of the company; and • financial statements of the company that, depending on the amount offered and sold during

a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Companies would be required to amend the offering document to reflect any material changes and provide updates on the company’s progress toward reaching the target offering amount.

Also, companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.

© 2013 NewFinance Innovations Ltd. V1.0 / Page 8 of 25

Crowdfunding Intermediaries

Crowdfunding transactions must take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. The offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.

The proposed rules would require these intermediaries to:

• make information available about the issuer and the offering; • provide investors with educational materials; • take measures to reduce the risk of fraud; • provide communication channels to permit discussions about offerings on the platform; and • facilitate the offer and sale of crowdfunded securities.

The proposed rules would prohibit funding portals from:

• soliciting purchases, sales or offers to buy securities offered or displayed on its website; • offering investment advice or making recommendations; • imposing certain restrictions on compensating people for solicitations; and • holding, possessing or handling investor funds or securities.

The proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.

This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its contents. If you have any questions about the contents of this memorandum, please call your regular Fried

Frank contact.

Fried Frank represents many of the markets’ most influential players. Their client base includes multinational Fortune 500 companies, leading financial institutions and investment firms, and entrepreneurial companies across all sectors. They offer high-calibre advice across a range of practice areas, combining technical expertise and an unparalleled grasp of the nuanced commercial and regulatory environment in which their clients operate.

© 2013 NewFinance Innovations Ltd. V1.0 / Page 9 of 25

5 Venture Fund vs. Venture Platform

The emergence of capital marketplaces and the impact of web platforms on the fund management model

Karl Antle, Managing Partner at ValueStream Labs

The recent progress of venture platforms like AngelList have sparked many polarizing discussions in the private equity and venture capital communities about software eating away at the fund investment model and progressing up to larger growth equity and buyout funds.

To date, the web has served two key functions in the B2B space – enabling networks of individuals and data to connect to each other more efficiently, and reducing costs through productivity gains for repetitive activities.

If we take a look at the four basic activities of any fund manager – from seed stage to leveraged buyout – they are generally:

1. Raise capital from LPs 2. Originate investment opportunities 3. Structure the deals 4. Manage the investment through to liquidity (hopefully)

So let’s look at how these two functions of the web affects each of these 4 activities for fund managers:

Raise capital

Pretty similar process across funds – likely impact is that the web will enable funds looking to raise capital to connect to more and smaller individual pools. Traditionally funds have gone after large pools of capital (e.g., family offices, pensions, insurance companies), as raising capital is a time-consuming process and the prize needs to be sufficiently large to invest in building a relationship with any one institution. The web will change this by opening fund capital raising to many small investors.

Originate investment opportunities

As shown by AngelList, the Web can much more efficiently introduce the many companies seeking small seed investments to angel investors.

Though both the number of investment opportunities and their degrees of risk have decreased by the Venture stage, the Web continues to play an important research and analysis role. Take a look at what Paul Singh is doing at Dashboard.io to see how benchmarking data is going to change the Venture game.

By the growth stage, deal sizes are large enough that intermediaries (bankers) are involved to help the company procure financing to scale, meaning the Web’s discovery capabilities are less valuable. It may help reduce cost by replacing human networks with digital ones, but it won’t have quite the impact as in earlier stage investing.

Finally, in the Buyout phase, creative thinking drives deal origination (how do I take a company with X value and perform a series of actions to get a 3X return). As these actions are bespoke for every deal (e.g. leveraged buyout, roll up strategy) it will be difficult for web applications to find a natural fit.

© 2013 NewFinance Innovations Ltd. V1.0 / Page 10 of 25

Structuring the deals

Seed investments are pretty standard, and have been made even more standardized through documents such as series seed. Financing these rounds could easily be incorporated into a web application. Venture begins to get more complicated – as much as entrepreneurs would like to standardize this practice; it’s likely to remain bespoke for the near future. In theory though, the venture community could decide on some standard legal structures similar to how the Investment Banks developed the ISDA contract around OTC derivative contracts. Growth and buyout transactions will remain bespoke given the high level of deal complexity.

Managing the investments

Investment management predominantly revolves around communication. In the seed stage, facilitating informal communication between a company and its many angels and/or strategic investors is a very useful role to play for the web. In venture deals, there is some potential for the emergence of “Venture platforms” to provide an opportunity to change the current process. Growth and buyout deals rely on several team members communicating with a company. Often these discussions are highly strategic or complex in nature, meaning a web based communication platform may be a more difficult medium. An intranet-type of solution has potential, but it is unlikely to be highly disruptive.

Where the web may find a place in later stage private equity investing however is in facilitating on-going communication with LPs. The first investment funds were essentially black boxes – money went in and came out (hopefully more of it!). Over time, the market has made steady strides towards transparency. This transparency provides an incredible benefit to LPs when evaluating overall risk positions, as well as evaluating where LPs choose to invest (or reinvest).

Below is a heat map of where we see the most powerful disruption. This heat map will translate into tangible systemic changes to the private investing marketplace.

Seed < $1MM

Venture £1-10MM

Growth $10-50MM

Buyout > $50MM

1. Raise Capital

2. Originate

3. Structure

4. Manage

It’s clear that software and the web will have varying levels of impact on the private market investment model. As web technology creeps further up the food chain, investors and entrepreneurs alike should expect to see platforms focusing on different elements of the investment process.

Karl is the Managing Partner at ValueStream Labs and has significant experience advising and launching innovative financial services companies and projects across the US, Europe, the Middle East, and East Asia, most recently as a senior member of Oliver Wyman’s Financial Services and Private Equity groups. karl@valuestreamlabs.com ValueStream Labs newsletter and blog: http://valuestreamlabs.com/blog

© 2013 NewFinance Innovations Ltd. V1.0 / Page 11 of 25

6 Transforming Capital Markets with Crowdinvesting

Sang Lee, CEO & Founder of Return on Change

Crowdfunding has been one of most hotly watched as well as debated topics over the last several years. A global phenomenon, it was hailed as the entrance of a new age of funding (and now finance) that could potentially bring the world out of its stagnant and post-recessionary state. Currently best known in the realm of donations and perks based funding, countless social issues as well as products have been funded with the power of the crowd. In the advent of this massive potential there has been recent legislative push in various regions to allow for crowdinvesting on the internet, or the crowdfunding of securities as opposed to a donations or perks based transaction.

With some of the recent explosive changes in financial regulation throughout the world, crowdinvesting will become a primary conduit of capital formation for startup companies. Traditionally, venture capitalists, corporations and high net worth angels have dominated the field of startup investing. As technology has increased the connectivity of people while simultaneously decreasing information asymmetry, it only makes sense that the community becomes more and more active within the early stage financing industry.

In addition to tapping a tremendous potential pool of capital, the crowd brings other elements of business development to the table including validation of a business model or product by a large number of individuals prior to investing large sums of capital into development. This has been one of the most powerful risks of startup investing and with the crowd being involved at an early stage, we can effectively mitigate the risk associated with customer development to a large extent.

Crowdinvesting not only bring tremendous opportunity to early stage businesses, but to potential investors as well. Especially in the United States, the large majority of accredited investors are (a) unaware that they even qualify as an accredited investor and (b) have not been given the opportunity to access deal flow in potentially highly lucrative investment opportunities. By bringing deal flow access online, the opportunities that are present to investors will increase exponentially.

Even amidst all this opportunity, there are many potential naysayers that raise points regarding the ‘higher’ potential for fraud and the sophistication that is required in order to make ‘intelligent’ investment choices. While startup investing is not without its risks, these two primary points that are raised over and over again and highly over sensationalized and are largely mitigated with the proper utilization of technology as well as using the crowd as its own filtration mechanism. In Australia, where early stage investing for the broader community has been permitted, there have been zero instances of fraud in its significant history and funding success.

Crowdfunding as an overarching concept of large quantities of individuals funding collectively is an exciting concept that is taking its next phase in maturity with the entrance of crowdinvesting. Crowdinvesting will transform the capital markets and also put power back into the hands of retail investors as to what type of companies and innovations are proliferated to benefit both themselves as well as future generations. However, in order to ensure the creation of a sustainable marketplace, all industry players as well as the market participants need to take prudent steps to both prevent fraud as well as attempt to ensure that only those deserving of funding receive it. If you see something, say something!

Sang Lee is the CEO and founder of Return on Change. He is a recovering investment banker who strives to use his background in finance for good. His mission is to bring the fundamentals back into the world of early stage investing. sang.lee@returnonchange.com

© 2013 NewFinance Innovations Ltd. V1.0 / Page 12 of 25

7 Community Underwriting for Food Businesses

Arno Hesse, Co-Founder, Credibles

Crowdfunding is to banks what YouTube is to Hollywood. The “long tail” of crowdfunding has enabled many business successes that wouldn’t have passed the filters and capacity of financial institutions. It is a fundamentally different model of underwriting, especially in food and agriculture.

Why is a bank loan for a small food business as rare as a warm evening in San Francisco? Low-visibility fog has something to do with it. A few years back, when I worked in Retail Banking, small businesses were among the customers my group focused on. Through many conversations with lenders and underwriters, I came to realize why most banks don’t like to lend to small businesses in food and agriculture: from the perspective of a bank office, these businesses appear damn hard to understand and underwrite.

Community members, on the other hand, are not only closer to a business’ Market (they are part of it!); they are also revenue-generating participants, not just its observing actuaries.

Restaurants have a reputation of rarely achieving profitability, or even surviving the first years. How should the bank underwriter know if the borrowing restaurant entrepreneur is a hit and miss in its market? People who live in the restaurant’s community are its customers and hear what reputation they have. Furthermore, they can be its customers and influence its revenues.

For Farms, the underwriter needs to travel far to get a first-hand perspective, for what is often not a substantial loan. The community is typically closer and a eating customer.

Food producers and processors do get some acceptance from banks, mostly when they use industrial equipment and commercial space that has resale value as collateral. Handmade food by small artisanal producers is often out of luck.

Banks will task their underwriters only to spend time on loans where the size and risk of the loan is expected to produce interest income that exceeds the underwriting cost.

The economics of crowdfunding calculate differently:

Donation-based crowdfunding campaigns don’t expect a return in the first place. Very often, they are passion-driven impulse decisions that involve only small amounts per funder. Quick decisions with small checks. The “risk” is the disappointment when the cause is not successful.

Campaigns that fund the go-to-market are successful when they reach a critical mass. The funders are also the customers. Their commitment creates the market that only a crowd can create.

Crowdfunded payments to a business, either to be repaid in cash (e.g. Kiva ZIP) or in-kind (e.g. Credibles), involve community intelligence in what we call Community Underwriting.

Especially when the repayments are in products and services (edible credits), the funders are part of the market. They have first-hand and social insights about the business. The tastebuds are involved in the underwriting. You wouldn’t pre-pay a business whose food you’re not a fan of. Once community members fund a business, it is in their best interest to become an even more loyal customers and bring their friends and family along. Imagine a bank underwriter getting that involved

© 2013 NewFinance Innovations Ltd. V1.0 / Page 13 of 25

… In our early pilots, we have seen customers frequent a business 2x-4x as often once they prepaid the business.

Community underwriting can create its own self-fulfilling (positive) prophecies because the community members are not just assessing the market (like an outside banker), they are dynamic participants. (Sometimes, we will even see community insiders place a bad bet.) With the growing crowdfunding trend though, communities can influence which of their enterprises they want to be successful – which ones they want to underwrite as a community and rally behind.

Getting funded Bank Underwriting Community Underwriting

Who decides Loan underwriter, often remote from community

Many members of community

Entrepreneur’s prep Loan application with paperwork

Build fanbase with good products and community engagement

Decision criteria Algorithm formula, based on industry, geography, credit score

Social reputation of owner. Approval by tastebuds.

Loan amount Few large amounts Many small amounts

Mitigate risks Claim on collateral. (things with resale value)

Support the business by promoting it among friends and family

After funding Collect loan payments. Cross-sell other services.

Even more loyal customers; eat edible credits.

Arno Hesse is a Co-founder of Credibles, the social venture Clearbon and the local rewards currency Bernal Bucks in San Francisco. A founding member for Slow Money, Arno is a coordinator of its Northern California region and invests in local ventures in the San Francisco Bay Area food system.

@ahesse

© 2013 NewFinance Innovations Ltd. V1.0 / Page 14 of 25

8 Turning the Old Boy Network on its Head

David Brown, CEO of FundOurCommunity

Crowdfunding is either an old form of small business investment or the newest depending on whether it is online or not. Gathering a group of people together to pool their funds and start a business has happened within extended families or communities for many centuries. In the 1700's the Irish Loan Fund was initiated by Jonathan Swift (1) providing loans to low income families as a way to reduce poverty. Over time this evolved whereby governments & organizations tried to help small businesses with different programs and different forms of community lending took hold with various levels of success.

In the US, crowdfunding has already begun to have a growing and likely positive effect for entrepreneurs while causing potential headaches for established venture capitalists. The Silicon Valley venture capitalist is an "old boy network" that attempts to portray itself as something different. It isn't easy to get meetings with the big VC's and it isn't easy to get anyone to take you seriously unless you know someone that knows someone that can make an introduction for you thereby getting you in the door. There is an unwritten code of how to do things that tilts the deck. Sure they will "accept" your business plan or pitch deck and then that gets thrown into a stack with 100+ others that came in that day. Then a new college grad has to sift through the 100 plans in a week or less and bring a chosen few with the requisite hockey stick growth, in the "me to industries" with a slight twist, to the partners to review. Do you think one of these guys is going to bring something wacky or unproven to a partner if they don't know the space well? Bottom line, if you know a partner or have the right "introductions" your plan magically appears on the top of the stack or a partner reviews it in person. Bingo now you have a fighting chance to get funded!

Crowdfunding has the potential to turn the old boy network on its head and change how seed, angel and perhaps A round funding takes place based on its ability to democratize a raise. Prior to the Jobs Act(s) you needed to be an "accredited investor" as noted under the US Securities act of 1933 (2) with a net worth exceeding $1million (excluding your house value) or with spouses earning a combined $500K per annum for at least 2 years etc., etc.,.

This securities act was created during the great depression as a reaction to Black Tuesday/Crash of '29. It was created to protect rather than hinder those with modest means of investment capital that had in many instances placed their entire life savings in the stock market and paid the price when it crashed. Fast forward 70 years and to many it now acts as a barrier to non-millionaires, creating an elitist, entitled investment class. With the top 1% of the US owning a disproportionate share of US domestic wealth finding startup capital is harder than ever before. Because it is in far fewer hands today, the old boy network which is generally risk averse and focused on maintaining wealth rather than spreading it around reduces overall investment opportunities and startup diversification. All in all the act of '33 was a well intentioned and good law at the time, protecting those without the requisite investment knowledge required to diversify their portfolio and to mitigate risk. But now....

Crowdfunding is opening the doors to entrepreneurs that likely would have never have had a chance. VC's always say they want companies with disruptive technologies but then they don't know how to value them, nor do they always want to take the risk that their investors are paying them to take on these outliers. Look at Google - how many investors do you think would have been willing to bet on an online encyclopedia or librarian at the time? Doesn't that already exist? It took out of the box investment thinking to make that happen just like so many other ideas that seemed ahead of their time. Crowdfunding democratizes the investment process as the people investing in

© 2013 NewFinance Innovations Ltd. V1.0 / Page 15 of 25

these startups aren't investment guru's that will turn over every stone, look for me to similarities and fight for the lowest valuation and highest return.

Crowdfunders like the idea of the individual startup in some fashion. They don't expect a 100X return, nor do they expect that 9 of their 10 investments will fail - and hopefully quickly (which may lead to other problems to address in a separate article). It could be they know the space well, they think it hits a market they think is underserved or that the entrepreneurs have the right skills to make it happen. The initial money still maybe the Friends, family and fools but more likely it is people who think you have a great idea, think you can do it and want to invest in a "ride" that might pay off handsomely down the line. 1,000's of companies that would not have been invested in before will be. Those that should survive likely will. I guarantee that crowdfunding will create companies of significant value that traditional VC's would never have invested in. It is going to happen and the reason is crowdfunding.

Bottom line. Crowdfunding scares the heck out of venture capitalists and angel groups because they no longer will have all the best choices coming to them without much competition. No longer will they be able to dictate the terms of the deal as they have in the past, with so many startups desperate for cash. Historically speaking, If you question this go and ask successful CEO's that exited with a decent amount of cash whether or not they would want to invest their own money or go back to VC to start their next company? 90% of the time they don't want VC's in the mix and this shouldn't be surprising. Aligning a VC or Angel portfolio's ten year investment cycle and a startup's growth cycle is challenging at best.

Crowdfunding will democratize entrepreneurial funding and lead to greater and more diversified businesses than the old network would ever have been willing to finance. I say bring on crowdfunding! Let’s invest in the wacky as well as great ideas and the best will make a difference in our collective future, with or without the traditional VC and angel network. There will be just as many failures as there were before crowdfunding but there are going to be some absolutely awesome companies that never would have been created without it. I can't wait to see what crowdfunding brings. It is going to be an exciting and wild ride!

David Brown is the CEO of FundOurCommunity. David has 20 years in marketing, strategic planning and building domestic & international businesses at Ernst & Young, Dun & Bradstreet, the Australian Government & startups. He has worked with 100's of startups, brought the big picture down to the day to day startup fight and founded a successful international business incubator. david@fundourcommunity.com

© 2013 NewFinance Innovations Ltd. V1.0 / Page 16 of 25

9 Crowdfunding: Individual Investor’s Answer to Wall Street

Nav Athwal, Co-founder & CEO of RealtyShares

This article originally appeared on June 26, 2013 in Crowd Chronicles and The Soho Loft under the title “Crowdfunding: Individual Investor’s Answer to Wall Street.”

In 2012, billionaire investor Warren Buffet was quoted on CNBC as saying: “If I had a way of buying a couple-hundred-thousand single-family homes, I would load up on them. It’s a very attractive asset class now. I could buy them at distressed prices and find renters.”

Whether spurred by Warren Buffet’s wise words or merely because they saw the potential first-hand, investors piled in by the thousands in 2012 to purchase distressed bank-owned homes, rent them out, and earn high cash yields while simultaneously taking advantage of built-in appreciation and tax benefits. And the biggest player in this feeding frenzy? Not surprisingly, it was mostly Wall Street and other institutional investors that took advantage of this opportunity, crowding out the individual investors that could not compete with these deep-pocketed, all-cash buyers.

Accordingly, what was once a mom-and-pop business quickly became a Wall Street Wonderland. In markets such as Florida and Las Vegas, institutional investors—who are bidding on hundreds of homes a day—account for as much as 70% of home sales. Individual, even high-net-worth investors, are finding it hard to compete with these cash-infused behemoths. Ironically, prior to the housing crash institutional and Wall-Street investors rarely looked twice at single-family homes as an investment option, largely because of the slow returns and fractured and time-consuming management involved. However, with prices distressed, rents stabilizing, and more renters in the market, this asset class has become very attractive and Institutions have lined up in droves. Many tax-paying citizens are outraged by what they call a “sick irony,” since these institutions now seek to gain by scooping up the spoils of their own misdeeds, which resulted in the housing crash in the first place.

The result of this influx is increasing home prices in the parts of the country most affected by the housing crash. In the last year alone home prices have risen by as much as 23% in Phoenix, 20% in Las Vegas, 17% in Los Angeles, and 11% in San Jose, according to the Case-Shiller home-price indexes. Nationally, prices are up more than 8% year over year. As a result, investors have turned away from markets such as Arizona and California, where prices have been pushed too high to maintain the yields to which investors have become accustomed. Instead investors are increasing their focus on the Southeast and Midwest. With home prices that remain 29% below their 2006 peak, and rising demand for rentals among home buyers who can’t qualify for a mortgage, opportunities in these markets are still abundant.

Thus, while there are still opportunities for investors to buy rental homes that generate a healthy return on investment, Wall Street is once again edging out the individual investor that is restricted by location and lacks the quick-mover advantage and economies of scale of their institutional counterpart. For example, the Blackstone Group is gobbling up properties by the thousands in places like Florida and Georgia and Los Angeles-based Colony Capital, which has approximately 10,000 single-family rental homes in its portfolio and was previously focused on opportunities in the West, is now shifting its attention to other regions where opportunities are more abundant.

As a founder of RealtyShares (www.realtyshares.com), one of only a few companies currently crowdfunding real-estate investments online, I’m a firm believer that crowdfunding is the individual investor’s answer to Wall Street. Although crowdfunding has been around for almost a decade, until recently most successful crowdfunding campaigns have been donation- and/or reward-based, with sites like Kickstarter leading the way. However, over the past year, not only has crowdfunding

© 2013 NewFinance Innovations Ltd. V1.0 / Page 17 of 25

emerged as a multi-billion-dollar industry, but investment crowdfunding has begun to revolutionize the way individual investors invest. With platforms like CircleUp, Fundersclub, and Mosaic already gaining traction, investment crowdfunding is expected to drive everything from startups to consumer goods, small businesses, and even alternative energy. But real-estate investing and its potential to shake up Wall Street’s Wonderland will be its most disruptive application.

David Drake, founder and chairman of LDJ Capital and its subsidiary, The Soho Loft, an event-driven financial media company at the forefront of the crowdfunding work in the United States and globally, had insights into this when he wrote in Forbes about “Crowdfunding’s Latest Invasion: Real Estate.” He believes that “an avalanche of investors, big and small, will herald the new financial markets, as broken systems are patched up and revitalized with new innovations spurred by online automation that allows for speedy access to high-quality information and fulfillment of transactions. Real estate is set to benefit from all of these as it spawns global investments and deconstructs international laws and regulations.”

Despite being trillions of dollars in size, real estate is inefficient and difficult to access. That is the very reason that Wall Street can continue to amass portfolios of single-family homes that yield double- digit returns by the tens of thousands, while the individual investor can only stand by and watch. However, by utilizing technology and focusing on transparency and efficiency, investment crowdfunding can connect individual investors almost instantaneously to real-estate investments in geographies and markets that they otherwise could not access.

At RealtyShares, for example, we are currently focused on single-family-home opportunities in Atlanta, Florida, and Jackson, the very same geographic markets on which Wall Street is honed in. We are teaming with seasoned investment managers in these locations, with a first-mover advantage that lets them compete with Wall Street.

We are in the midst of a very powerful transition in the real-estate investment space and Crowdfunding may well emerge as the individual investor’s solution to the faceless private-equity investor.

Nav Athwal is the Co-founder & CEO of RealtyShares. Nav has worked as a Real Estate and Land Use Attorney and led some of the largest mixed-use residential, commercial and renewable energy real estate projects in California on behalf of National and International Clients. Nav was named a 2013 Northern California Rising Star Lawyer, is a lecturer on real estate law and investing at UC Berkeley and graduated from UC Berkeley Law School in 2010 as the Class Valedictorian. nav@realtyshares.com

© 2013 NewFinance Innovations Ltd. V1.0 / Page 18 of 25

10 Crowdfunding Resources

10.1 Major US Crowdfunding Sites

Crowdfunding can be divided into three categories:

● Rewards-based, in which contributors receive a good or service in exchange for their money. A subset of this is purely donation-based, in which people give to charitable causes for philanthropic reasons.

● Equity-based, in which contributors gain ownership in the startup or company. In the U.S., this form of crowdfunding is currently limited to accredited investors.

● Debt-based, in which contributors receive interest on a personal or business loan.

Name URL Description

Rewards-Based

ArtistShare https://www.artistshare.com/v4/

One of the first crowdfunding sites, this platform lets fans support their favorite musicians in exchange for recordings or special events.

Kickstarter http://www.kickstarter.com Platform for creative projects including music, film, video games, and products; projects must meet fundraising goal or receive nothing.

IndieGogo http://www.indiegogo.com

Platform for any project, from art to community building to personal donations. Projects are allowed to keep whatever they can raise.

RocketHub http://www.rockethub.com/ Platform for any project, from scientific research to small business. Partnered with A&E for Project Startup.

Donation-Based

GoFundMe http://www.gofundme.com Charitable giving to any cause,

© 2013 NewFinance Innovations Ltd. V1.0 / Page 19 of 25

including individuals.

DonorsChoose www.donorschoose.org Fulfill teachers’ requests for their classrooms.

Microryza www.microryza.com Help fund scientific research and receive updates on results.

Equity-Based

RockThePost http://www.rockthepost.com Startup review and investing for angel investors.

RealtyMogul http://www.realtymogul.com Own shares in investment properties.

CircleUp http://www.circleup.com Invest in consumer and retail companies.

Return on Change http://www.returnonchange.com

Focused on high-impact/social entrepreneurship startups.

AngelList http://www.angellist.com Invest in directly in startups, or contribute to incubators or syndicates led by well-known investors.

Debt-Based

Lending Club http://www.lendingclub.com Peer-to-peer investing; plan to offer small business lending soon.

Prosper http://www.prosper.com Peer-to-peer investing platform.

Upstart http://www.upstart.com/ Truly personal investing: backers give lump sum to a person in change for percentage of income over 5 or 10 years.

© 2013 NewFinance Innovations Ltd. V1.0 / Page 20 of 25

10.2 Legislation: The Jumpstart Our Business Startups (JOBS) Act

Name URL

SEC JOBS Act Spotlight http://www.sec.gov/spotlight/jobs-act.shtml

Public Comments on SEC Regulatory Initiatives Under the JOBS Act

http://www.sec.gov/spotlight/jobsactcomments.shtml

10.3 Recent Press Articles

Title Publication URL Date

JOBS Act

A Year Late, S.E.C. Weighs in With 585 Pages of Crowdfunding Rules

New York Times http://boss.blogs.nytimes.com/2013/10/28/a-year-late-s-e-c-weighs-in-with-585-pages-of-crowdfunding-rules/?_r=0

10/28/13

JOBS Act Title III: Investment Being Democratized, Moving Online

Forbes http://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/

10/23/13

Legal Issues

Crowdfunding: Potential Legal Disaster Waiting To Happen

Forbes http://www.forbes.com/sites/ericsavitz/2012/10/22/crowdfunding-potential-legal-disaster-waiting-to-happen/

10/22/12

Impact on Venture Capital

Crowdfunding vs. seed funding: All money is

Venture Beat http://venturebeat.com/2013/06/24/crowdf

6/24/13

© 2013 NewFinance Innovations Ltd. V1.0 / Page 21 of 25

not created equal unding-vs-seed-funding-all-money-is-not-created-equal/

Why Equity Crowdfunding Isn't a Threat to Venture Capital

Entrepreneur http://www.entrepreneur.com/article/228738

10/7/13

How we skipped the VCs, crowdfunded our Series A — and raised nearly $2M online

GigaOM http://gigaom.com/2013/10/20/how-we-skipped-the-vcs-crowdfunded-our-series-a-and-raised-nearly-2m/

10/20/13

P2P Lending

Here Come LendingClub's Small Business Loans

Business Week http://www.businessweek.com/articles/2013-10-16/here-come-lendingclubs-small-business-loans

10/16/13

Investor Demand Stronger Than Ever at Lending Club and Prosper

Lend Academy http://www.lendacademy.com/invest-demand-stronger-than-ever-at-lending-club-and-prosper/

7/26/13

Case Studies

Pebble Sold 275K Units Through Kickstarter And Pre-Orders, Tops 1M Watch Apps Downloaded

TechCrunch http://techcrunch.com/2013/07/11/pebble-sold-275k-units-through-kickstarter-and-pre-orders-tops-1m-watch-apps-downloaded/

7/11/13

Why People Get Annoyed at Celebrities on Kickstarter (And Why They Probably Shouldn’t)

Wired http://www.wired.com/underwire/2013/04/zach-braff-kickstarter/

4/30//13

© 2013 NewFinance Innovations Ltd. V1.0 / Page 22 of 25

Broken promise: Double Fine's 'Broken Age' Kickstarter mess

Engadget http://www.engadget.com/2013/07/03/double-fine-kickstarter-debacle/

7/3/13

Crowdfunding for Real Estate: Buy a Slice of a Skyscraper

Businessweek http://www.businessweek.com/articles/2013-01-24/crowdfunding-for-real-estate-buy-a-slice-of-a-skyscraper

1/24/13

10.4 Publications and Blogs

Name URL Description

Crowdfund Insider http://www.crowdfundinsider.com/

Blog

Crowdfund Beat http://crowdfundbeat.com/ Blog

Excerpt from the 2013CF Crowdfunding Industry Report

http://www.crowdsourcing.org/editorial/2013cf-the-crowdfunding-industry-report/25107?utm_source=website&utm_medium=text&utm_content=LP+bottom&utm_campaign=2013CF+Launch

Industry Report

Crowdsourcing http://www.crowdsourcing.org/ Blog

LendAcademy http://www.lendacademy.com Blog

10.5 Videos and Infographics

Title Source URL

Crowdfunding 101 General Assembly & The Crowdfunding Professional Association

http://vimeo.com/49040917

© 2013 NewFinance Innovations Ltd. V1.0 / Page 23 of 25

The JOBS Act and Crowdfunding (Infographic)

Fundable & EarnMBA.com http://www.businessnewsdaily.com/3104-jobs-act-explanation.html

Indiegogo’s 12 Best Crowdfunding Pitch Videos for 2012

IndieGoGo http://www.crowdfundinsider.com/2012/12/6844-indiegogos-12-best-crowdfunding-pitch-videos-for-2012/

Startups May See Boost From New Crowdfunding Rules

Wall Street Journal http://live.wsj.com/video/startups-may-see-boost-from-new-crowdfunding-rules/590C62A7-B2E8-4225-9D58-2A7FB4437BC7.html#!590C62A7-B2E8-4225-9D58-2A7FB4437BC7

10.6 Meetups

Name URL # of Members Next Event

Equity and Debt Crowdfunding (NY)

http://www.meetup.com/Equity-Crowdfunding/

317 Nov. 6

Peer to Peer Lending (Online Direct Lending) (NY & SF)

http://www.meetup.com/Peer-to-Peer-Lending-P2P/

356 Nov. 12 (SF)

Dec. 10 (NY)

NY Crowdfunds http://www.meetup.com/Crowdfunding-Meetup-NYC-Division/

83 TBD; typically quarterly

IndieGoGo (SF) http://www.meetup.com/indiegogo/

904 TBD

SF Crowdfunding Meetup

http://www.meetup.com/Crowdfunding-Meetup/

355 TBD

© 2013 NewFinance Innovations Ltd. V1.0 / Page 24 of 25

10.7 Upcoming Conferences/Events

Name Description Date and Location URL

Crowdfunding Weekend

Hackathon for startups interested in putting together a crowdfunding campaign

Nov. 2013, Hawaii (locations rotate throughout the year)

http://www.crowdfundingweekend.org/

International Crowdfunding Film Festival

Artists, film makers, and video game creators share best practices and results of campaigns

Dec. 2013, San Francisco

http://crowdfundfilmsociety.com

Silicon Valley Meets Crowdfunders

Expo for industry leaders and investors

April 2014, Palo Alto http://www.svcrowdfundbeat.com/index.html

10.8 Social Media

Twitter Handle Bio # of Followers

@Jamie_Hart_ Head of Investor Research and Crowdfunding at the Pitch Clinic

34,986

@crowdfundnews News and updates on the industry

13,666

@jsandlund Founder of CrowdCafe 1,079

@ryanfeit Founder of SeedInvest 1,539

@douglasellenoff Founder of law firm representing security crowdfunding industry

139

© 2013 NewFinance Innovations Ltd. V1.0 / Page 25 of 25