Crowdfunding Presentation

1. Crowdfunding Offerings
Wednesday, May 16th, 2012
Speakers:
Anna Pinedo, Morrison & Foerster LLP
David Lynn, Morrison & Foerster LLP
Presentation Materials:
1. Presentation: Crowdfunding
2. The JOBS Act: Opportunities and Risks for Broker-Dealers
3. JOBS Act Summary Overview
MORRISON & FOERSTER LLP

2. May 16, 2012
David Lynn
Anna Pinedo
CROWDFUNDING
© 2011 Morrison & Foerster LLP | All Rights Reserved | mofo.com

3. The JOBS Act - Background
The “Jumpstart Our Business Startups Act,” H.R. 3606 (the “JOBS Act”), was
passed by the House of Representatives on March 8, 2012.
On March 22, 2012, the Senate passed H.R. 3606 with an amendment to
Title III (the crowdfunding exemption).
On March 27, 2012, the House of Representatives accepted the Senate’s
amendment.
On April 5, 2012, President Obama signed the JOBS Act.
The JOBS Act was the culmination of a year-long bipartisan effort in both the
House and Senate to address concerns about capital formation and unduly
burdensome SEC regulations.
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4. Crowdfunding – Background
Crowdfunding permits entrepreneurs to pool money from individuals
who have a common interest and are wiling to contribute to a
venture.
Crowdfunding may or may not involve the sale of securities.
To the extent the effort involves the sale of securities, then the
offering must be registered or must rely on an exemption.
SEC Crowdfunding Action: In the matter of Michael Migliozzi II and Brian
William Flatow, Release No, 33-9216 (June 8, 2011).
Migliozzi and Flatow established the BuyaBeerCompany.com website, and then
used Facebook and Twitter to advertise the website.
They sought pledges from participants in the crowdfunding effort, and in return
participants were told that if the $300 million necessary to purchase the Pabst
brewery was raised, the participants would receive a “crowdsourced certificate
of ownership” as well as beer of a value equal to the amount of money invested.
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5. Crowdfunding - Background
Prior to the enactment of the JOBS Act, crowdfunding advocates had
called on the SEC to consider implementing a new exemption from
registration under the federal securities laws for crowdfunding efforts.
For example, it was suggested that the SEC exempt crowdfunding
offerings of up to $100,000, with a cap on individual investments not
to exceed $100.
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6. JOBS Act - Crowdfunding
Crowdfunding
The “Crowd” Entrepreneur
Funding Portal or Broker
$$$ $$$
• An “all or none” offering.
• No limits on the number or sophistication of investors.
• Issuer information (including financial information) required.
• All offering activities must be conducted through an intermediary.
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7. JOBS Act - Crowdfunding
Title III provides an exemption that could apply to crowdfunding
offerings, to be implemented by SEC rules adopted within 270 days.
The aggregate amount sold to all investors by the issuer, including
any amount sold in reliance on the exemption during the 12-month
period preceding the date of the transaction, is not more than
$1,000,000.
The aggregate amount sold to any investor by the issuer, including
any amount sold in reliance on the exemption during the 12-month
period preceding the date of the transaction, does not exceed:
the greater of $2,000 or 5 percent of the annual income or net worth of the
investor, as applicable, if either the annual income or the net worth of the investor
is less than $100,000; or
10 percent of the annual income or net worth of an investor, as applicable, not to
exceed a maximum aggregate amount sold of $100,000, if either the annual
income or net worth of the investor is equal to or more than $100,000.
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8. JOBS Act - Crowdfunding
Information will be filed and provided to investors regarding the
issuer and offering, including financial information based on the
target amount offered.
The provision would prohibit issuers from advertising the terms of the
exempt offering, other than to provide notices directing investors to
the funding portal or broker, and would require disclosure of amounts
paid to compensate solicitors promoting the offering through the
channels of the broker or funding portal.
Issuers relying on the exemption would need to file with the SEC and
provide to investors, no less than annually, reports of the results of
operations and financial statements.
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9. JOBS Act - Crowdfunding
The transaction must be conducted through a registered broker or
“funding portal.”
Funding portals would not be subject to registration as a broker-
dealer, but would be subject to an alternative regulatory regime,
subject to SEC and FINRA authority, to be determined by rulemaking
by the SEC and FINRA.
A funding portal is defined as an intermediary for exempt
crowdfunding offerings that does not:
offer investment advice or recommendations;
solicit purchases, sales, or offers to buy securities offered or displayed on its
website or portal;
compensate employees, agents, or other persons for such solicitation or based on
the sale securities displayed or referenced on its website or portal;
hold, manage, possess, or otherwise handle investor funds or securities; or
engage in other activities as the SEC may determine by rulemaking.
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10. JOBS Act - Crowdfunding
Among the requirements for exempt crowdfunding offerings would be that an
intermediary:
Registers with the SEC as a broker or a “funding portal,” as such term is defined in the
amendment;
Registers with an applicable national securities association;
Provides disclosures to investors, as well as questionnaires, regarding the level of risk involved
with the offerings;
Takes measures, including obtaining background checks and other actions that the SEC can
specify, of officers, directors, and significant shareholders;
Ensures that all offering proceeds are only provided to issuers when the amount equals or
exceeds the target offering amount, and allows for cancellation of commitments to purchase in
the offering;
Ensures that no investor in a 12-month period has invested in excess of the limit described
above in all issuers conducting exempt crowdfunding offerings;
Takes steps to protect privacy of information;
Does not compensate promoters, finders, or lead generators for providing personal identifying
information of personal investors;
Prohibits insiders from having any financial interest in an issuer using that intermediary’s
services; and
Meets any other requirements that the SEC may prescribe.
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11. JOBS Act - Crowdfunding
A purchaser in a crowdfunding offering could bring an action against
an issuer for rescission in accordance with Section 12(b) and Section
13 of the Securities Act, as if liability were created under Section
12(a)(2) of the Securities Act, in the event that there are material
misstatements or omissions in connection with the offering.
Securities sold on an exempt basis under this provision would not be
transferrable by the purchaser for a one-year period beginning on the
date of purchase, except in certain limited circumstances.
The exemption would only be available for domestic issuers that are
not reporting companies under the Exchange Act and that are not
investment companies, or as the SEC otherwise determines is
appropriate.
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12. JOBS Act - Crowdfunding
Bad actor disqualification provisions similar to those required under
Regulation A would also be required for exempt crowdfunding
offerings.
The provision pre-empts state securities laws by making exempt
crowdfunding securities “covered securities,” however, some state
enforcement authority and notice filing requirements would be
retained.
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13. Funding Portals
SEC and FINRA to adopt rules regarding registration and regulation
of funding portals.
The JOBS Act provides that state securities or “Blue Sky” laws are
pre-empted with regard to registered Funding Portals; however, pre-
emption does not extend to the laws of the state in which the
principal place of business of the registered Funding Portal is
located.
Any applicable Blue Sky law must not be in addition to, or be different from, the
requirements for registered Funding Portals established by the SEC.
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14. Broker-Dealer Basics
Most "brokers" and "dealers" must register with the SEC and join a
"self-regulatory organization," or SRO.
Section 3(a)(4)(A) of the Securities Exchange Act of 1934 (the
“Exchange Act”) generally defines a “broker" broadly as: “any person
engaged in the business of effecting transactions in securities for the
account of others.”
Unlike a “broker,” who acts as agent, a “dealer“ acts as principal.
Section 3(a)(5)(A) of the Exchange Act generally defines a "dealer"
as: “any person engaged in the business of buying and selling
securities for his own account, through a broker or otherwise.”
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15. Broker-Dealer Basics
Questions for determining if you are a broker:
Do you participate in important parts of a securities transaction, including
solicitation, negotiation, or execution of the transaction?
Does your compensation for participation in the transaction depend upon, or is it
related to, the outcome or size of the transaction or deal? Do you receive trailing
commissions, such as 12b-1 fees? Do you receive any other transaction-related
compensation?
Are you otherwise engaged in the business of effecting or facilitating securities
transactions?
Do you handle the securities or funds of others in connection with securities
transactions?
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16. Broker-Dealer Basics
Questions for determining if you are a dealer:
Do you advertise or otherwise let others know that you are in the business of
buying and selling securities?
Do you do business with the public (either retail or institutional)?
Do you make a market in, or quote prices for both purchases and sales of, one or
more securities?
Do you participate in a "selling group" or otherwise underwrite securities?
Do you provide services to investors, such as handling money and securities,
extending credit, or giving investment advice?
Do you write derivatives contracts that are securities?
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17. Broker-Dealer Registration
Section 15(a)(1) of the Exchange Act generally makes it unlawful for
any broker or dealer to use the mails (or any other means of
interstate commerce, such as the telephone, facsimiles, or the
Internet) to "effect any transactions in, or to induce or attempt to
induce the purchase or sale of, any security" unless that broker or
dealer is registered with the SEC in accordance with Section 15(b) of
the Exchange Act.
“Associated persons” of a broker-dealer usually do not have to
register separately with the SEC, however they must be properly
supervised by a currently registered broker-dealer.
A broker-dealer that conducts all of its business in one state does not
have to register with the SEC.
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18. Intermediary Comparison
Broker-Dealer Funding Portal
Regulatory Environment Well-established SEC To be-established SEC
and FINRA rules and FINRA rules
regarding registration regarding registration
and ongoing obligations and ongoing obligations.
Conduct of Business Handling customer funds Restrictions on activities
and securities, making traditionally considered
recommendations, to be those of a broker-
compensating for sales dealer.
of securities, etc.
Costs Significant registration Expected to be less
costs, as well as ongoing ongoing obligations, thus
compliance costs less costs involved.
Availability of Available for issuers Available for issuers
Crowdfunding Exemption using broker-dealer’s using funding portal’s
platform. platform.
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19. Client Alert.
May 14, 2012
The JOBS Act:
Opportunities and Risks for Broker-Dealers
By Hillel Cohn
In April 2012, President Obama signed the Jumpstart Our Business Startups Act (the JOBS Act) into law. The Act
focuses upon stimulating economic growth by making it easier for smaller businesses to raise capital. Among the
measures included in the JOBS Act are a number of provisions creating new opportunities for broker-dealers. Such
measures include:
x Facilitating initial public offerings by emerging growth companies (less than $1 billion of annual gross revenues);
x Increasing the ceiling for exempt public offerings under Regulation A to $50 million;
x Permitting use of general solicitation and advertising in private placements under Rule 506 if the purchasers in the
private placement are all accredited investors; and
1
x Allowing companies to raise up to $1 million through crowdfunding.
PUBLIC OFFERINGS BY EMERGING GROWTH COMPANIES
The JOBS Act facilitates public offerings by emerging growth companies by, among other things:
x Permitting pre-filing communications with institutional investors to gauge their potential interest;
x Permitting the publication of research reports about an emerging growth company that is conducting a public offering
of its common equity securities;
x Permitting a registration statement for an IPO to be filed on a confidential basis;
x Relaxing restrictions on research analysts’ participation in discussions with IPO underwriting clients;
x Prohibiting timing restrictions on distribution of post-IPO research reports and public appearances by research
analysts; and
x Paring back certain disclosure requirements for emerging growth companies.
Certainly the prospect of more public offerings by emerging growth companies presents attractive opportunities for broker-
dealers. Indeed, a significant majority of companies likely to consider an IPO will qualify as emerging growth companies
and the opportunity for pre-filing communications with institutional investors and more robust research should result in an
enhanced IPO process. It is not clear if the liberalized rules on post-IPO research reports and analyst involvement with
IPOs will apply to follow on offerings by emerging growth companies. On April 27, 2012, SIFMA wrote to FINRA urging
2
revisions to the FINRA rule governing research reports to effectively extend such provisions of the JOBS Act to any
public offering by an emerging growth company.
1
MoFo Client Alert, The JOBS Act: http://www.mofo.com/files/Uploads/Images/120326-The-JOBS-Act.pdf.
2
See NASD Rule 2711 and NYSE Rule 472.
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20. Client Alert.
Of course, new opportunities are accompanied by new risks. There is nothing in the JOBS Act which eliminates the
obligation of broker-dealers to disclose material conflicts and certain other matters which could impair the integrity of
research reports. Restrictions on research analyst compensation and the prohibition on promising favorable research
remain in place. Nor is there any relaxation of the requirements of Regulation AC, an SEC rule intended to ensure that
research reports reflect the author’s views. The fact that research reports regarding an emerging growth company will not
be considered “offers” and therefore may be distributed prior to or during a public offering by such companies, does not
eliminate the risk that such reports fail to meet FINRA standards for customer communications (NASD Rule 2210) or that
such reports run afoul of SEC Rule 10b-5.
Thus, with the unwinding of certain restrictions on analysts and research reports, broker-dealers will need to enforce
measures to prevent reoccurrence of the very abuses which led to the restrictions in the first place. In this regard,
investment banks will be well-served to rigorously maintain the independence of their research function and their
compliance personnel should remain alert for any actions that might compromise such independence. Written
supervisory procedures should be updated to address conduct that had been previously prohibited, such as the
publication of research reports during an IPO. Broker-dealers may eliminate or modify restrictions on research reports
and public appearances by research analysts during the “quiet period” imposed on selling group members by NASD Rule
2711 (40 days following the IPO for managers; 25 days for other underwriters and selling group members, with a further
quiet period for managers covering the period from 15 days before through 15 days after the expiration, termination, or
waiver of any lockup). Restrictions on analyst communications with investment banking clients and related chaperoning
requirements may be modified. Information barriers should be reviewed, although consideration should be given to the
importance of maintaining the independence of research personnel when modifying information barriers. It would be
prudent for broker-dealers to accompany liberalized rules with enhanced scrutiny of communications with research
personnel and stepped up testing of supervisory procedures intended to prevent improper influences on a firm’s research
department.
EXEMPT OFFERINGS UP TO $50 MILLION
The exemption for small public offerings provided by Regulation A had largely fallen into disuse given its $5 million cap.
There may be renewed interest in Regulation A offerings given the increase in the cap to $50 million. While private
placements often raise far more than $50 million in transactions under Regulation D’s Rule 506, securities issued in
Regulation A offerings are unrestricted and may be freely resold by the purchasers. Therefore, institutions that have
limitations or concerns with respect to holding restricted securities may participate in Regulation A offerings, and the
securities sold may not be subject to an illiquidity discount comparable to the discount associated with many private
placements.
Increased interest in Regulation A offerings could generate new business for investment bankers, particularly those who
work with smaller companies. However, broker-dealers will need to bear in mind that the liability provisions of Section
12(a)(2) of the Securities Act of 1933 will apply to Regulation A offerings. Under this provision, brokers can be held liable
for material misstatements and omissions in the sales process, even if the misstatements result from good faith mistakes
rather than any intention to deceive. The principal defense against a Section 12(a)(2) action is the due diligence defense:
the broker must prove that it did not know the statement was untrue or misleading and, in the exercise of reasonable care,
could not have known. Companies seeking to raise funds through Regulation A may be less mature than companies
undertaking a full IPO. Their internal controls may be less reliable and their financial reporting may be less rigorous.
Under these circumstances, broker-dealers participating in Regulation A offerings will want to proceed with care and will
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21. Client Alert.
likely impose the same diligence requirements and comfort letter procedures that they would employ in undertaking a fully
registered public offering.
REGULATION D OFFERINGS AND PRIVATE PLACEMENT PLATFORMS
While private placements under Rule 506 of Regulation D have long been a popular method for raising significant
amounts of money, the ability to seek investors through general solicitation may significantly expand use of Rule 506 as a
means of raising capital. Historically, companies have raised substantial funds from institutional investors in Rule 506
offerings, often relying on established relationships between such institutions and the issuer’s placement agent to avoid
Regulation D’s prohibition on use of advertising and general solicitation to find investors. Elimination of the prohibition on
general solicitation will likely result in Rule 506 offerings targeting a broader spectrum of potential investors. While some
companies may undertake such offerings on their own, the SEC’s prohibition on paying issuer employees for selling
3
securities may result in many issuers working through broker-dealers when undertaking a Rule 506 offering.
General solicitation and advertising is only permitted if all of the ultimate purchasers in the private placement are
accredited investors. The JOBS Act directs the SEC to adopt rules implementing this provision. Such rules must include
requirements for the issuer to take “reasonable steps” to verify that the purchasers are in fact accredited investors. It is
not clear if the SEC will determine that the widely accepted practice of obtaining detailed representations from the
prospective investors will suffice as “reasonable steps” to verify accredited investor status. Once the SEC rules are
released, broker-dealers participating in Rule 506 private placements will need to ensure their understanding of the
verification requirements.
While the verification obligation falls on the issuer, a failure to meet this obligation would likely result in the purported
private placement being deemed an unregistered public offering in violation of Section 5 of the Securities Act of 1933. In
order to avoid the potential liabilities and reputational damage associated with selling securities in violation of Section 5,
broker-dealers participating in Rule 506 offerings that employ general solicitation should independently evaluate the
adequacy of steps taken by the issuer to verify accredited investor status. Some broker-dealers may prefer to prepare
their own template for such verification efforts and require its use as a condition of the broker-dealer participating in the
private placement.
Broker-dealers participating in a general solicitation with respect to a Rule 506 offering will also need to consider whether
their conduct complies with FINRA requirements governing communications with the public. General solicitation materials
4
will most likely constitute sales literature under NASD Rule 2210 and, depending on the method of dissemination, may
also constitute an advertisement under the same rule. Broker-dealers will need to ensure that use of general solicitation
materials complies with the approval, record keeping and content standards set forth in Rule 2210. The contents of any
general solicitation materials will also need to be reviewed in order to determine if they could be construed as a
“recommendation” to purchase the subject securities. Under applicable case law and regulatory requirements, a broker-
dealer may not recommend an investment unless the broker-dealer has a reasonable basis to determine that the
5
recommended investment is suitable for the investor. “Recommendation” has been broadly construed to include a
“suggestion” that a customer take action. See FINRA Notice to Members 11-02 for a discussion of what constitutes a
recommendation. The fact that a general solicitation by its nature is not tailored to any individual customer argues against
3
See SEC Rule 3a4-1 promulgated under the Securities Exchange act of 1934.
4
To be replaced by FINRA Rule 2210.
5
See, e.g., SEC v. Hanley, 415 F. 2d 589 (2d. Cir. 1969), FINRA Rule 2111 and FINRA Notice to Members 10-22.
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22. Client Alert.
a conclusion that the communication constitutes a recommendation. Nonetheless, broker-dealers should review the
contents of any general solicitation materials to ensure that no portion could be construed as a recommendation.
The JOBS Act includes a provision which may impact the role of broker-dealers in Rule 506 offerings. The Act provides
that certain platforms which are intended to facilitate private placements need not register as broker-dealers. Such
platforms may provide an Internet portal or other mechanism facilitating the offer and sale of securities in a Rule 506
transaction. In addition, the platforms may provide certain ancillary services such as conducting diligence or providing
standardized deal documents. In order to avoid broker-dealer registration, neither the platform nor its associated persons
may be compensated based on the sale of securities, nor may they receive separate compensation for investment advice.
In addition, they may not hold customer funds or securities and none of their associated persons may be subject to
statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934.
The JOBS Act provision on Rule 506 platforms represents to some extent a codification of SEC no action letters on
matching systems. In this regard, the SEC Staff has historically considered whether or not the matching system receives
transaction-based or contingent compensation, provides advice, participates in negotiations, or handles customer funds
6
and securities in determining if the matching system must register as a broker-dealer. In its analysis, the SEC has
consistently emphasized the centrality of transaction-based compensation as a key factor in determining whether or not a
matching system would need to register as a broker-dealer. The JOBS Act provision requires that the Rule 506 platform
and associated persons receive “no compensation in connection with the purchase or sale” of a security. This language
appears to be consistent with the SEC Staff’s broad interpretation of transaction-based compensation and encompasses
any fee linked to securities transactions, even if the fee is not calculated as a percentage of the value of the securities
transactions. Thus, even an “items processed” fee may run afoul of the prohibition and Rule 506 platforms will likely need
to utilize subscription fees, membership fees, and other forms of compensation that are not linked to actual securities
transactions.
It should be noted that the JOBS Act does not include a provision pre-empting state law with respect to broker-dealer
registration as it may relate to private placement platforms. Thus, any Rule 506 platform, particularly one which facilitates
transactions with retail investors, will need to consider whether the nature of its operations might trigger the broker-dealer
registration requirements in the states where it operates.
CROWDFUNDING
The JOBS Act permits private companies to raise up to $1 million in a 12-month period through crowdfunding. Securities
sold in such transactions will be deemed restricted securities. In order to qualify for this exemption, the transaction must
be effected through an intermediary, who may be a registered broker-dealer or a “funding portal.” Issuers, as well as any
person who offers or sells securities in a crowdfunding transaction, are subject to potential liability based on the Section
12(a)(2) standards discussed above.
A “funding portal” is a new legal category for intermediaries added by the JOBS Act. Funding portals must register with
the SEC, but are not subject to the full regulatory scheme applicable to registered broker-dealers. Funding portals must
also be members of a national securities association; at this time it is not clear if FINRA will establish a membership
category for funding portals or if a new national securities association will be formed for funding portals. The JOBS Act
pre-empts state regulation of funding portals.
6
See, e.g., Progressive Technology, Inc., 2000 WL 1508655 (Oct. 11, 2000); Stock Power, Inc., 1998 WL 423019 (July 24, 1998); Angel Capital
Electronic Network, 1996 WL 636094 (Oct. 25, 1996).
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23. Client Alert.
A funding portal is defined in the JOBS Act as any person acting as an intermediary in a crowdfunding transaction who:
x Does not offer investment advice or recommendations;
x Does not solicit the purchase or sale of securities;
x Does not compensate its employees based on the sale of securities;
x Does not hold customer funds or securities; and
x Does not engage in such other activity as the SEC may by rule prohibit.
A funding portal, like a Rule 506 platform, cannot be paid for providing investment advice or effecting transactions in
securities. In addition, the funding portal may not pay others to refer potential investors. Thus, there are rather significant
constraints on the business model for funding portals.
Under the JOBS Act, all intermediaries in crowdfunding transactions, whether or not registered as broker-dealers, are
required to discharge significant duties, including:
x Providing disclosure to prospective investors regarding the risks of investment and such other matters as the SEC
might deem appropriate;
x Ensuring that each investor
o Reviews investor education materials as the SEC deems appropriate,
o Affirms his understanding of the risk of total loss,
o Answers questions demonstrating an understanding of the risks of investing in startups,
o Answers questions demonstrating an understanding of the risks of illiquid investments, and
o Answers questions demonstrating an understanding of such other matters as the SEC might deem
appropriate;
x Taking measures to reduce the risk of fraud, including conducting background checks on the managers of the issuer;
x Ensuring that offering proceeds are not released to the issuer until the minimum offering requirements have been met;
x Making such efforts as the SEC may deem appropriate to ascertain if the investors in the crowdfunding are complying
with the maximum limitations on their investments in such opportunities; and
x Protecting the privacy of customer information.
Note the inherent difficulty in some of these tasks, such as “ensuring” that investors have reviewed appropriate investor
education materials. In addition, efforts to ascertain if investors have complied with the limitations on the maximum
amount which they may invest will be complicated by the fact that such limitations vary based upon an investor’s income
7
and net worth and investors often fail to update such information. Consider also the costs involved in “reducing the risk
of fraud” by the issuer and discharging the other obligations of intermediaries.
7
The maximum amount which an investor may purchase through crowdfunding transactions in any 12-month period shall not exceed: (i) the greater of
$2000 or 5% of the investor’s net worth or annual income if either the net worth or annual income is less than $100,000, or (ii) 10% of the investor’s net
worth or annual income if either the net worth or annual income is greater than $100,000.
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24. Client Alert.
Given the $1 million limit for crowdfunding transactions and the significant responsibilities imposed on intermediaries, it is
not at all clear that broker-dealers or funding portals will find this to be an attractive business opportunity. Even if the
intermediary pre-qualifies a pool of prospective investors, maintaining up to date information on such investors and
monitoring their total investment in crowdfunding transactions, some of which may be effected through other
intermediaries, will not be simple.
The prospects may be particularly problematic for funding portals. Under the JOBS Act, they have the same obligations
as broker-dealers when acting as intermediaries for crowdfunding transactions. This will require them to retain and train
personnel who can conduct diligence on issuers, manage a disclosure process, and obtain current information about
prospective investors. Compliance and legal personnel will likely be essential for a funding portal to carry out its statutory
obligations. Moreover, funding portals will be subject to an as-yet-undetermined regulatory regime to be imposed by the
SEC and a national securities association and will be exposed to investor claims to the extent they offer and sell securities
by means of any false or misleading statements. Given the prohibition on receipt of transaction-based compensation, it
may be difficult for funding portals to develop an economically viable model for servicing crowdfunding transactions.
Much may depend upon the SEC regulations governing the obligations of intermediaries in crowdfunding transactions.
However, it was in part a result of lobbying by the SEC that significant obligations were imposed on intermediaries in
crowdfunding transactions. As a result, it is unlikely the SEC will adopt rules which materially reduce the potential
compliance burden for crowdfunding intermediaries. Considering the costs of such compliance, it may be difficult to find
reputable firms willing to participate in crowdfunding transactions as intermediaries.
Contact:
Hillel T. Cohn
(213) 892-5251
hcohn@mofo.com
About Morrison & Foerster:
We are Morrison & Foerster—a global firm of exceptional credentials in many areas. Our clients include some of the
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while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar
outcome.
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25. JOBS Act—Summary Overview
April 2012
EMERGING GROWTH
COMPANIES (ECGS)
Qualifying as an ECG EGC defined as an issuer with total gross revenues of less than $1b
Disqualification as an ECG EGC until the earliest of:
(A) last day of the fiscal year during which issuer’s total gross revenues exceed $1b; or
(B) five years from IPO; or
(C) the date on which issuer has sold more than $1b in non-convertible debt, or
(D) date on which issuer becomes a large accelerated filer (public float of $750m)
IPOs by ECGs Confidential submission available
Must file publicly at least 21 days prior to roadshow
2 years audited financials required (instead of 3)
May elect to rely on scaled disclosures available to smaller public companies (such as for exec comp)
May engage in testing the waters with QIBs and IAIs
Ongoing Disclosures/Governance May opt into voluntary disclosures
Requirements
Subject to phase-in for say-on-pay
Subject to phase-in for any PCAOB mandatory rotation or modified audit report requirement
Exempt from Sec 404 attestation (but subject to internal control requirement and to CEO/CFO
certification requirement)
Not required to adopt FASB standards until broadly applicable to private companies
Page 1 of 4

26. RESEARCH REPORTS
Permitted communications Research report on EGC not an “offer”
Research report on ECG not subject to quiet period or lock-up period restrictions
Distribution participants may publish research before commencement, during, or post offering
Conflicts/separation/disclosures Reports subject to required conflicts disclosures and certifications
Modifies separation/chaperoning requirements in connection with certain activities for EGCs
REGULATION D
Rule 506 Offerings General advertising/general solicitation permitted provided that the issuer verifies purchasers are all AIs.
BROKER-DEALER
REGISTRATION
Platforms/Matching Services Not required to register as broker-dealers solely as a result of participation or involvement in Rule 506
offerings that use general solicitation or general advertisement, provided that platform does not receive
transaction-based compensation, handle customer funds or securities or participate in documentation
REGULATION A
Eligible issuer Non-reporting issuer with principal place of business in Canada or the United States
Offering threshold $50m in issuer’s securities in a 12-month period. SEC required to review threshold and report on threshold to
Congress
Status of securities Covered securities for NSMIA if either:
Listed/traded on a securities exchange; or
Sold through a registered broker-dealer
Liability Subject to Sec 12(a)(2) liability
Other Conditions The SEC is empowered to impose additional conditions, including, a requirement to file annual audited
financial statements
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27. EXCHANGE ACT THRESHOLD
Issuer not a bank or bank holding Becomes subject to reporting within 120 days after last day of fiscal year ended in which issuer had:
company
Total assets in excess of $10m, and
A class of equity securities (other than exempted securities) held of record by either: (1) 2,000
persons, or (2) 500 persons not AIs
Issuer is a bank or bank holding Becomes subject to reporting within 120 days after last day of fiscal year ended in which issuer had:
company
Total assets in excess of $10m, and
A class of equity securities (other than exempted securities) held of record by 2,000 persons
May deregister if class of equity securities held of record by fewer than 1,200 persons
Held of record Excludes: securities held by persons who received the securities pursuant to an employee compensation plan
in transactions exempt from Section 5 registration requirements
REQUIRED STUDIES
Decimalization SEC, within 90 days of enactment; SEC also must consider within 180 days of enactment any
recommendations regarding the minimum trading increments for EGCs
Regulation S-K SEC, within 180 days of enactment, must report to Congress on its review of S-K and its recommendations
concerning changes to S-K requirements for EGCs to simplify burdens
Blue Sky Laws and Regulation A Comptroller General, within 3 months of enactment, must report to Congress on its study of the impact of blue
sky laws on Regulation A offerings
Sec 12 SEC Enforcement Authority SEC, within 120 days of enactment, must report to Congress on its assessment regarding additional
enforcement tools that may be needed for it to enforce anti-evasion provision in Sec 12(b)(3)
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28. SHAREHOLDER TRIGGERS
Companies other than banks and Banks and BHCs
BHCs
Total assets at fiscal year end that $10 million $10 million
trigger reporting requirement if
shareholder trigger is breached
Total number of holders of record 2,000 holders of record 2,000 holders of record
that trigger reporting OR
500 non-accredited holders of
record
Total number of holders of record 300 or fewer holders of record 1,200 or fewer holders of record
to exit reporting
Effectiveness Immediately effective At the end of the issuer’s first fiscal
year following enactment of the JOBS
Act
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