Crowdfunding & The JOBS Act:

Transcription

1 Crwdfunding & The JOBS Act: A New Ptential Surce f Funding fr Startups Alan R. Singletn Singletn Law Firm, P.C. R e s e a r c h P a r k a t t h e U n i v e r s i t y f I l l i n i s S. F i r s t S t., S u i t e C h a m p a i g n, I L ( ) p h n e ( ) f a x s i n g l e t s i n g l e t n l aw f i r m. c m w w w. s i n g l e t n l aw f i r m. c m A l a n R. S i n g l e t n

2 Agenda Nnequity crwdfunding des nt invlve the sale r ffer fr sale f a security; securities laws generally dn t apply Sale r ffer fr sale f a security must either be 1. Registered (think IPO very cstly) OR 2. Exempt frm registratin Rule 506(b) f Reg D histrically cmmnly used Rule 506(c) f Reg D limited t accredited investrs -became available 9/23/13 per JOBS Act Equity Crwdfunding nt yet available 1 -cmment perid n prpsed rules set t expire 2/3/14

3 Five Levels f Equity Capital 1) ENT Entrepreneur 2) F&F Friends & Family SEC Prpsed Rules Equity Crwdfunding 3) AI Angel Investrs ( Accredited Investrs ) Rule 506(b) v. Rule 506(c) General Slicitatin 4) VC/PE Venture Capital / Private Equity 5) P/PSO Private r Public Stck Offerings 2 ENT F&F AI VC/PE P/PSO

4 Crwdfunding Crwdfunding invlves the use f the internet and scial media t raise capital, typically frm a large number f peple and in relatively small amunts per persn 3 Crwdfunding has been arund fr a few years in the frm f small dnatins fr arts and scial prjects in return fr tken rewards such as a prduct, a DVD, r a shirt Kickstarter reprtedly raises mre mney t supprt the arts than the Natinal Endwment fr the Humanities

5 Tw Types f Crwdfunding Nn-Equity Crwdfunding currently allwed 4 Equity Crwdfunding - authrized pursuant t the JOBS Act, but nt until regulatins are finalized; cmment perid n regs expires 2/3/2014

6 Crwdfunding Types Quick Glance Example Nn-Equity Crwd Participants: 1,000 Avg $ each: $25 Ttal per Deal: $10,000 $200,000 Given t Crwd: Prduct, DVD, shirt, nthing? Example Equity Crwd 5 Sharehlders: Avg $ each: $2,000 Ttal per Deal: $1,000,000 Given t Crwd: Equity (shares f stck/nte)

7 Type 1 Nn-Equity Crwdfunding Peple have been using this reward/dnatin Crwdfunding fr years This Crwdfunding is nt regulated by securities laws, and yu can ask fr as much as yu want The backers may nt receive any type f security (as defined by the law) Ppular sites include Kickstarter and Indiegg 6 While nt subject t securities laws, general cntract law and sme trt laws likely apply be sure nt t verprmise what yu can deliver

8 Kickstarter Kickstarter is the wrld s largest crwdfunding platfrm Kickstarter s missin is t help bring creative prjects t life Since Kickstarter s launch in 2009, 5.1 millin peple have pledged $861 millin, funding 51,000 creative prjects Such as films, music, stage shws, cmics, jurnalism, vide games, and fd-related prjects Peple wh back Kickstarter prjects are ffered tangible rewards and unique experiences in exchange fr their pledges Backers f an effrt t make a bk r film ften get a cpy f the finished wrk A bigger pledge t a film prject might get a backer int the premiere Kickstarter s mdel traces its rts t the subscriptin mdel f arts patrnage, where artists wuld g directly t their audiences t fund their wrk 7

9 Lcal Kickstarter Successes Os Technlgies used Kickstarter t help fund PlantLink, a system that mnitrs the water needs f yur lawn, garden and huseplants and alerts yu when they need t be watered and even waters them fr yu Os raised $96, % f its $75,000 gal Electrninks Incrprated used Kickstarter t help fund Circuit Scribe, a rllerball pen with cnductive ink that allws users t draw real, wrking circuits instantly. 8 Electrninks raised $674, % f its $85,000 gal

10 Electrninks Kickstarter Vide 9

11 Lcal Kickstarter Successes UI Prfessr Deke Weaver used Kickstarter t help fund his multidisciplinary shw Wlf Weaver raised $9,378 nearly dubling his $5,000 gal Authr Jasn L. Blair used Kickstarter t help fund his bk Little Fears Nightmare Editin Blessed are the Children Blair raised $9,071 exceeding his $1,500 gal six fld 10

12 Indiegg Indiegg is a crwdfunding platfrm where peple wh want t raise mney can create fundraising campaigns t tell their stry and get the wrd ut Peple all ver the wrld are using Indiegg bth t raise mney and t cntribute t ther peples passins There is n limitatin n wh can use Indiegg as lng as ne has a valid bank accunt 11 Peple cntribute t campaigns fr many reasns, but usually it s because they want t be invlved in what the campaign is ding r because they want the perks that are part f the campaign

13 Lcal Indiegg Successes The Green Observer Magazine used Indiegg t help make it financially sustainable GOM raised $1, % f its $1,000 gal Errr Recrds used Indiegg t help fund Champaign-Urbana s nly all-ages music venue and recrd stre ER raised $3, % f its $3,000 gal Lgan Liu used Indiegg t help fund MbSens, a water pllutin sensr fr smartphnes Liu raised $5,105 meeting his $5,000 gal 12

14 Other Crwdfunding Sites Crwdfunder is the crwdfunding platfrm fr businesses, with a grwing scial netwrk f investrs, tech startups, small businesses, and scial enterprises (financially sustainable/prfitable businesses with scial impact gals) Crwdfunder ffers Crwdfunding frm individuals and angel investrs, and was a leading participant in the JOBS Act legislatin RcketHub pwers Nn-Equity Crwdfunding fr a wide variety f scial prjects Crwdrise is a Nn-Equity Crwdfunding site fr causes and charities 13 Crwdrise has attracted a cmmunity f d-gders and funds all kinds f inspiring causes and needs

15 Other Crwdfunding Type Sites Smlend is a site fr lending fr small businesses in the U.S., prviding debt-based investment funding t qualified businesses with existing peratins and revenue Appbackr is the niche cmmunity fr mbile app develpment 14 Invested.in is a Venice, CA-based cmpany that is a tp name white label sftware prvider, giving entrepreneurs the tls t get started and grw Quirky is a place fr inventrs, makers, and tinkerers t cllabrate and crwdfund with a cmmunity f ther like-minded flks

16 Crwdfunding Under the JOBS Act 15 The Jumpstart Our Business Startups (JOBS) Act f 2012 will eventually allw crwdfunding t be used fr fr-prfit enterprises Effect A startup that needs mney t expand its business can nw turn t everyday investrs Depending n what the startup chses t ffer, the investrs may receive equity (i.e., a share f wnership in the business) r debt (i.e., prviding a small lan t the business)

17 Federal Securities Regulatins Large-scale crwdfunding was nt previusly permitted under federal securities regulatins 16 In brad terms, selling an interest in ne s business is the sale f securities, and any ffer r sale f securities has t be registered with the SEC (e.g., in an IPO) r tailred t fit ne f the exemptins frm registratin, which are very narrw (and mainly fr accredited investrs, i.e., rich peple)

18 Type 2 Equity Crwdfunding Effect Equity Crwdfunding expands the friends & family level f Equity Capital Sn, in additin t friends and family, everyday peple unknwn t the entrepreneur can invest small amunts in the enterprise and receive an equity (wnership) stake in the cmpany in return Nte Equity Crwdfunding is nt currently allwed, but is expected t launch sn As Cngress directed in the JOBS Act, the SEC is in the prcess f prmulgating rules t regulate Equity Crwdfunding 17

19 Why Bther with Equity Crwdfunding? Why wuld entrepreneurs want t give up even a small amunt f the wnership in their cmpany t peple they d nt knw, wh prbably cannt help them much with advice and experience the way angel and venture capitalist investrs can? Fr sme cmpanies, crwdfunding may be the nly way t acquire the seed capital t develp their idea enugh t get t the stage where angels and venture capitalists will take ntice f them Other cmpanies may be in gegraphic areas where it is difficult fr startups t get nticed 18 Many entrepreneurs can be fund in cmmunities that have nt been well-served by traditinal banking and capital markets

20 Why Invest in Equity Crwdfunding? The wrst reasn wuld be because yu think yu are ging t get rich and change yur life T begin with, yu can nly invest a small amunt f mney thrugh crwdfunding Regular flks are limited t $2,000 a year 19 Even the richest amng us can nly invest $100,000 Even if yu think yu ve identified the next Facebk, after further runds f financing (which will dilute yur investment) and the length f time it takes t get a cmpany t the IPO stage, a crwdfunding investment isn t ging t change yur life

21 Why Invest in Equity Crwdfunding? 20 The best reasn t make a crwdfunding investment is because yu lve the idea the entrepreneur is presenting, r yu are a fan f the prduct, r yu believe in the entrepreneur herself, and yu want t give her a sht at making it Indeed, the best reasn fr making a crwdfunding investment is t give smene else the chance t change the ther persn s life

22 The JOBS Act: Equity Crwdfunding Specifics Title III f the JOBS Act will sn allw business enterprises t raise capital thrugh crwdfunding initiatives 21 These cmpanies can raise capital frm individual investrs by ffering stck fr sale thrugh their third-party intermediaries The JOBS Act amends the Securities Act f 1933, prviding a new exemptin fr the small business frm registratin fr the ffer and sale f securities in cnnectin with crwdfunding transactins The JOBS Act will allw cmpanies t raise up t $1 millin withut having t cmply with the Securities Act s registratin requirements

23 Cngress directed the SEC t prmulgate regulatins t implement Equity Crwdfunding The SEC failed miserably in meeting Cngress deadline Octber 23, 2013 The SEC vted unanimusly t prpse rules under the JOBS Act t permit cmpanies t ffer and sell securities thrugh Equity Crwdfunding Nt S Fast 22 The SEC is currently seeking public cmment n the prpsed rules fr a 90-day perid fllwing their publicatin in the Federal Register Depending upn the tne and substance f the cmments, the SEC may mve quickly t adpt the rules as prpsed, adpt the rules with certain mdificatins based n the cmments, r re-prpse the rules fr additinal public cmment

24 SEC Prpsed Rules - Summary Cnsistent with the JOBS Act, the prpsed rules wuld, amng ther things: Limit the amunt f mney a cmpany can raise; Permit individuals t invest subject t certain threshlds; Require cmpanies t disclse certain infrmatin abut their ffers; and Create a regulatry framewrk fr the intermediaries that wuld facilitate the crwdfunding transactins 23

25 Cmpany Threshld A cmpany wuld be able t raise a maximum aggregate amunt f $1 millin thrugh crwdfunding fferings in a 12- mnth perid 24

26 Investr Threshld Investrs, ver the curse f a 12-mnth perid, wuld be permitted t invest up t: 25 $2,000 r 5% f their annual incme r net wrth, whichever is greater, if bth their annual incme and net wrth are less than $100,000 10% f their annual incme r net wrth, whichever is greater, if either their annual incme r net wrth is equal t r mre than $100,000 During the 12-mnth perid, these investrs wuld nt be able t purchase mre than $100,000 f securities thrugh crwdfunding

27 Certain cmpanies wuld nt be eligible t use the crwdfunding exemptin Ineligible cmpanies include: Nn-U.S. cmpanies; Eligibility Cmpanies that already are SEC reprting cmpanies; Certain investment cmpanies (such as hedge funds); Cmpanies that are disqualified under the prpsed disqualificatin rules; 26 Cmpanies that have failed t cmply with the annual reprting requirements in the prpsed rules; and Cmpanies that have n specific business plan r have indicated their business plan is t engage in a merger r acquisitin with an unidentified cmpany r cmpanies

28 Disclsure by Issuing Cmpanies 27 Cnsistent with Title III f the JOBS Act, the prpsed rules wuld require cmpanies cnducting a crwdfunding ffering t file certain infrmatin with the SEC, prvide it t investrs and the relevant intermediary facilitating the crwdfunding ffering, and make it available t ptential investrs

29 In its ffering dcuments, amng the things the cmpany wuld be required t disclse: Disclsure Requirements Infrmatin abut fficers and directrs as well as wners f 20% r mre f the cmpany; A descriptin f the cmpany s business and the use f prceeds frm the ffering; The price t the public f the securities being ffered, the target ffering amunt, the deadline t reach the target ffering amunt, and whether the cmpany will accept investments in excess f the target ffering amunt; Certain related-party transactins; 28 A descriptin f the financial cnditin f the cmpany;

30 In its ffering dcuments, amng the things the cmpany wuld be required t disclse: Disclsure Requirements 29 Financial statements f the cmpany that, depending n the amunt ffered and sld during a 12-mnth perid: shall be certified t be true and cmplete by the issuer s principal executive fficer (fr target ffering amunts f $100,000 r less); shall be reviewed by a public accuntant wh is independent f the issuer (fr target ffering amunts mre than $100,000 but less than $500,000); r shall be audited (fr target ffering amunts mre than $500,000)

31 Disclsure Requirements 30 Cmpanies wuld be required t amend the ffering dcument t reflect material changes and prvide updates n the cmpany s prgress tward reaching the target ffering amunt Cmpanies relying n the crwdfunding exemptin t ffer and sell securities wuld be required t file an annual reprt with the SEC and prvide it t investrs

32 Crwdfunding Platfrms One f the key investr prtectins fr crwdfunding is the requirement that crwdfunding transactins take place thrugh an SEC-registered intermediary, either a brker-dealer r a funding prtal 31 Under the prpsed rules, the fferings wuld be cnducted exclusively nline thrugh a platfrm perated by a registered brker r a funding prtal, which is a new type f SEC registrant

33 Requirements fr Intermediaries The prpsed rules wuld require these intermediaries t: Prvide investrs with educatinal materials; Take measures t reduce the risk f fraud; Make available infrmatin abut the issuer and the ffering; Prvide cmmunicatin channels t permit discussins abut fferings n the platfrm; and Facilitate the ffer and sale f crwdfunded securities 32

34 The prpsed rules wuld prhibit funding prtals frm: Prhibitins Offering investment advice r making recmmendatins; Sliciting purchases, sales, r ffers t buy securities ffered r displayed n its website; Impsing certain restrictins n cmpensating peple fr slicitatins; and Hlding, pssessing, r handling investr funds r securities The prpsed rules wuld prvide a safe harbr under which funding prtals can engage in certain activities cnsistent with these restrictins 33

35 Issue State Laws The SEC will make the Issuer infrmatin available t state regulatry authrities The JOBS Act des preempt state securities laws cncerning registratin, dcumentatin, and ffering requirements fr securities issued pursuant t the crwdfunding exemptin The JOBS Act des nt limit r impact states enfrcement actins cncerning fraud, deceit, r unlawful cnduct f an issuer, funding prtal, r any ther persn r entity using the exemptin States may impse fees if they are the issuers principal place f business r if mre than half the purchasers f a crwdfunding ffering are in that state 34 A funding prtal s hme state may regulate the prtal, but cannt impse rules that are different r additinal t what is required under the JOBS Act

36 Equity Crwdfunding - Benefits Outside validatin f prduct Capital raising is pened t a brader audience Equity Crwdfunding culd frmalize friends & family investments Equity Crwdfunding is a way t fund entrepreneurs utside f tech & life sciences Opprtunity fr accredited investrs t diversify prtfli Entrepreneur may retain greater cntrl f her cmpany Cnsumer prtectins prvisin requiring cmpanies raising mre than $500,000 thrugh crwdfunding t prvide audited financial statements 35

37 Equity Crwdfunding - Drawbacks Cmplexity Investr relatins may be mre difficult with high numbers f small investrs Deterrence Institutinal investrs may be less enthusiastic N angel investment because f high valuatins, big cap tables, and cncerns ver prpsed SEC rules Experts in investing in startups venture capitalists have a high failure rate (and thus need a high return n the successes) 36 Accrding t the Natinal Venture Capital Assciatin, 40% f venture capital investments fail, 40% break even, and nly 20% have a decent t high return Crwdfunding investrs are likely t lack the diversificatin f venture capitalists, meaning that crwdfunding investrs will nt have the successes t even ut the verwhelming majrity f failures Mrever, the crwd s ability t pick winners may nt be as gd as the venture capitalists, meaning an even higher rate f failure

38 Equity Crwdfunding - Drawbacks Audited financial statements are t expensive Many startups d nt have the mney t hire lawyers r accuntants t help them The fear is that the Equity Crwdfunding rules will be s burdensme r difficult t cmply with that cmpanies will freg them and cntinue t raise mney frm accredited investrs nly Lack f knwledge leads t less investment & hurts private equity 37 Less sphisticated investrs may be mre likely t sue

39 Equity Crwdfunding - Drawbacks Ripe fr fraud 38 In the wrst situatin, the entrepreneur culd take the mney and run Even withut utright fraud, nce the mney cmes in, there is n versight, s entrepreneurs can fritter it away n their wn expenses Mst cmpanies will prbably sidestep the review/audit f their financial statements by simply raising less than $100,000

40 Rule 506 f Regulatin D Under the Securities Act f 1933, a cmpany seeking t raise capital by selling its securities must register the securities with the SEC r find an exemptin frm the registratin requirements Mst f the exemptins frm registratin prhibit cmpanies frm engaging in general slicitatin r general advertising that is, advertising in newspapers r n the Internet amng ther things in cnnectin with securities fferings Private fferings that qualify under Rule 506 f Regulatin D are exempt frm registratin under the Securities Act f 1933 because they d nt invlve a public ffering Rule 506 f Regulatin D is the mst widely-used exemptin frm registratin 39

41 Rule 506(b) Exemptin In an ffering that qualifies fr the Rule 506(b) exemptin, an issuer may raise an unlimited amunt f capital frm an unlimited number f accredited investrs and up t 35 nn-accredited investrs 40 Under SEC rules, accredited investrs are individuals wh meet certain minimum incme r net wrth levels, r certain institutins such as trusts, crpratins, r charitable rganizatins that meet certain minimum asset levels

42 Rule 506(b) Exemptin Standards 41 The cmpany cannt use general slicitatin r advertising t market the securities; General slicitatin includes advertisements published in newspapers and magazines, public websites, cmmunicatins bradcasted ver televisin and radi, and seminars where attendees have been invited by general slicitatin r general advertising In additin, the use f an unrestricted, and therefre publicly available, website cnstitutes general slicitatin The slicitatin must be an ffer f securities, but slicitatins that cnditin the market fr an ffering f securities may be cnsidered t be ffers

43 Rule 506(b) Exemptin Standards 42 The cmpany may sell its securities t an unlimited number f accredited investrs and up t 35 ther purchases; All the nn-accredited investrs, either alne r with a purchaser representative, must be sphisticated that is, they must have sufficient knwledge and experience in financial and business matters t make them capable f evaluating the merits and risks f the prspective investment

44 Rule 506(b) Exemptin Standards 43 Cmpanies must decide what infrmatin t give t accredited investrs, s lng as it des nt vilate the antifraud prhibitins f the federal securities laws; But cmpanies must give nn-accredited investrs disclsure dcuments that are generally the same as thse used in registered fferings; the increased csts assciated with allwing nnaccredited investrs t invest means that many cmpanies chse nt t sell t nnaccrediteds If a cmpany prvides infrmatin t accredited investrs, it must make this infrmatin available t nn-accredited investrs as well

45 Rule 506(b) Exemptin Standards 44 The cmpany must be available t answer questins by prspective purchasers; and Purchasers receive restricted securities, meaning that the securities cannt be sld fr at least a year withut registering them

46 Cmpanies Must File a Frm D While cmpanies using the Rule 506(b) exemptin d nt have t register their securities and usually d nt have t file reprts with the SEC, they must file what is knwn as a Frm D after they first sell their securities 45 Frm D is a brief ntice that includes the names and addresses f the cmpany s wners and stck prmters, but cntains little ther infrmatin abut the cmpany

47 The JOBS Act The JOBS Act required the SEC t adpt rules amending existing exemptins frm registratin under the Securities Act f 1933 and creating new exemptins that permit issuers f securities t raise capital withut SEC registratin On July 10, 2013, the SEC adpted amendments t Rule 506 f Regulatin D and Rule 144A under the Securities Act t implement the requirements f the JOBS Act The amendments became effective n September 23,

48 Under Rule 506(c), issuers can ffer securities thrugh means f general slicitatin, prvided that: All purchasers in the ffering are accredited investrs ; The issuer takes reasnable steps t verify their accredited investr status; and Certain ther cnditins in Regulatin D are satisfied Under Rule 506(c) there is n restrictin n wh an issuer can slicit, but an issuer faces restrictins n wh is permitted t purchase its securities The SEC Adpted Rule 506(c) 47 In ther wrds, anyne can be slicited, s lng as each ultimate purchaser is an accredited investr

49 An accredited investr includes a natural persn wh: Earned incme that exceeded $200,000 (r $300,000 tgether with a spuse) in each f the prir tw years, and reasnably expects the same fr the current year; r Accredited Investrs Has a net wrth ver $1 millin, either alne r tgether with a spuse (excluding the value f the persn s primary residence) An accredited investr may als be an entity such as a bank, partnership, crpratin, nnprfit, r trust, when the entity satisfies certain criteria 48

50 Reasnable Steps The JOBS Act requires that issuers wishing t engage in general slicitatin take reasnable steps t verify the accredited investr status f purchasers 49 Rule 506(c) sets frth a principles-based methd f verificatin which requires an bjective determinatin by the issuer (r thse acting n its behalf) as t whether the steps taken are reasnable in the cntext f the particular facts and circumstances f each purchaser and transactin

51 Amng the factrs that an issuer shuld cnsider under this principles-based methd are: Reasnable Steps The nature f the purchaser and the type f accredited investr that the purchaser claims t be; 50 The amunt and type f infrmatin that the issuer has abut the purchaser; and The nature f the ffering, such as the manner in which the purchaser was slicited t participate in the ffering, and the terms f the ffering, such as a minimum investment amunt

52 In additin t this flexible, principles-based methd, Rule 506(c) includes a nn-exclusive list f verificatin methds that issuers may use, but are nt required t use, when seeking greater certainty that they satisfy the verificatin requirement with respect t natural persn purchasers This nn-exclusive list f verificatin methds cnsists f: Verificatin Methds 51 Incme Test Verificatin based n incme, by reviewing cpies f any IRS frm that reprts incme, such as Frm W-2, Frm 1099, Schedule K-1 f Frm 1065, and a filed Frm 1040

53 Verificatin Methds 52 Net Wrth Test Verificatin n net wrth, by reviewing specific types f dcumentatin dated within the prir three mnths, such as bank statements, brkerage statements, certificates f depsit, tax assessments and a credit reprt frm at least ne f the natinwide cnsumer reprting agencies, and btaining a written representatin frm the investr Third-Party Verificatin A written cnfirmatin frm a registered brker-dealer, an SEC-registered investment adviser, a licensed attrney r a certified public accuntant stating that such persn r entity has taken reasnable steps t verify that the purchaser is an accredited investr within the last three mnths and has determined that such purchaser is an accredited investr Previus Purchaser A methd fr verifying the accredited investr status f persns wh had invested in the issuer s Rule 506(b) ffering as an accredited investr befre September 23, 2013 and remain investrs f the issuer

54 Rule 506(b) Exemptin Still Available 53 Rule 506(b) remains unchanged fllwing the adptin f Rule 506(c) and cntinues t be available fr issuers that wish t cnduct a Rule 506 ffering withut the use f general slicitatin r that d nt wish t limit sales f securities in the ffering t accredited investrs

55 506(b) v. 506(c) Exemptins 54 Rule 506(b) N general slicitatin Self-certificatin f accredited status is allwed (N additinal verificatin requirements) Issuer may sell t accredited investrs and up t 35 nnaccredited investrs Rule 506(c) General slicitatin allwed Self-certificatin is nt necessarily allwed (Issuer must take reasnable steps t verify accredited status) Issuer may nly sell t accredited investrs An ffering can change frm 506(b) t 506(c), but nt the ther way arund

56 The rules are highly cmplex If a Startup relies n Rule 506(c): Prblematic fr Startups? Startup must file Advance Frm D 15 days prir t the event Startup must file materials by day f use and include legends n materials Legends lnger than a tweet If Startup fails t file, it is ut f cmpliance 55 Startup can nly cure nce, and it must ccur within 30 days If nt cured, Startup may nt again use Rule 506 fr ne year

57 The SEC Adpted Rule 506(d) 56 Rule 506(d) Bad Actr Disqualificatin An ffering is disqualified frm relying n Rule 506(b) and 506(c) f Regulatin D if the issuer r any ther persn cvered by Rule 506(d) has a relevant criminal cnvictin, regulatry r curt rder, r ther disqualifying event that ccurred n r after September 23, 2013, the effective date f the rule amendments Rule 506(e) Fr disqualifying events that ccurred befre September 23, 2013, issuers may still rely n Rule 506, but will have t cmply with certain disclsure prvisins

58 The Reach f Rule 506(d) Rules 506(d) and (e) apply t BOTH 506(b) and 506(c) Exemptins 57 Because Rule 506 f Regulatin D is the mst widely-used exemptin frm registratin, these new rules may very well cause significant added due diligence n securities market participants and likely embarrassing revelatins, as well as certain persns being de fact barred frm significant capital markets invlvement

59 Cvered Persns Under Rule 506(d) The issuer, including its predecessrs and affiliated issuers Issuer s directrs, general partners, and managing members Issuer s executive fficers and ther fficers that participate in the ffering 20% beneficial wners f the issuer, calculated n the basis f ttal vting pwer Prmters cnnected t the issuer The fund s investment manager and its principals (fr pled investment fund issuers) Persns cmpensated fr sliciting investrs, including their directrs, general partners, and managing members 58

60 Disqualifying Events Certain criminal cnvictins; Certain curt injunctins and restraining rders; Final rders f certain state and federal regulatrs; Certain SEC disciplinary rders; Certain SEC cease-and-desist rders; SEC stp rders and rders suspending the Regulatin A exemptin; Suspensin r expulsin frm membership in a self-regulatry rganizatin (SRO) r frm assciatin with an SRO member; and U.S. Pstal Service false representatin rders 59

61 Rule 506(c) v. Equity Crwdfunding 60 Limitatin n Offering Size Limitatin n Number f Investrs Nne Rule 506(c) Nne (as lng as all are accredited) Equity Crwdfunding $1 millin during any 12-mnth perid Nne technically, but there is an utside limit because f the cmbinatin f the ffering size limit Advertising Allwed Yes N cmpanies cannt advertise; they can nly refer peple t prtals

62 Rule 506(c) v. Equity Crwdfunding 61 Specific Disclsure Requirements Third Party Intermediary Required Onging SEC Reprting Rule 506(c) Nne required, but subject t anti-fraud requirements N N Equity Crwdfunding Yes very specific, detailed disclsure requirements; als subject t anti-fraud requirements Yes Issuers must g thrugh a brkerdealer r registered funding prtal Yes

63 Hw Shuld Startups Raise Mney? Best Practices The best and easiest way fr a startup t raise mney is: T rely upn federal securities Rule 506(b); Nt generally slicit r generally advertise yur ffering; Wrk frm cntact t cntact, with peple yu knw; and Only take mney frm accredited investrs Why nt generally slicit? Ptential investrs may be reluctant t share their persnal financial infrmatin Why nly accredited investrs? 62 Raising mney frm nn-accredited investrs invlves a lt mre cmplexity and expense

64 Crwdfunding & The JOBS Act: A New Ptential Surce f Funding fr Startups Alan R. Singletn Singletn Law Firm, P.C. R e s e a r c h P a r k a t t h e U n i v e r s i t y f I l l i n i s S. F i r s t S t., S u i t e C h a m p a i g n, I L ( ) p h n e ( ) f a x s i n g l e t s i n g l e t n l aw f i r m. c m w w w. s i n g l e t n l aw f i r m. c m A l a n R. S i n g l e t n