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Nutter McClennen & Fish LLP
Attorneys at Law
Six Questions on Regulation Crowdfunding:
An Early-Stage Company Perspective
 WHY should I care about regulation crowdfunding?
 WHO can engage in regulation crowdfunding?
 WHAT is regulation crowdfunding?
 WHERE can regulation crowdfunding happen?
 How are companies conducting regulation crowdfunding offerings?
 IS regulation crowdfunding right for me?
2
Six Questions on Regulation (i.e., JOBS Act) Crowdfunding
WHY should I care about regulation crowdfunding?
• To sell “securities” in the U.S. (equity, debt, hybrid), companies must:
1. Register those securities with the SEC (e.g., an IPO); or
2. Find a registration exemption.
• Problems:
1. Registration is expensive ($2.5M for IPO; $1.5M/annually for compliance).
2. Exemptions restrict who you can sell to (high net-worth individuals,
companies, etc.) and how (e.g., limits on use of social media).
• Regulation crowdfunding is a new exemption that permits the issuance of
securities to the general public (i.e., the crowd) via online crowdfunding platforms.
3
WHO can engage in regulation crowdfunding?
• May 16, 2016: SEC rules permitting regulation crowdfunding became effective
• Target Issuer: Startups and small businesses
• Who cannot engage in regulation crowdfunding:
1. Non-U.S. companies;
2. Public companies;
3. Investment companies (e.g., mutual funds);
4. Issuers with no specific business plan;
5. Bad actors (e.g., past SEC sanctions); and
6. Past crowdfunding issuers that did not comply with reporting rules
4
5
Securities Registration? Exemption?
Sales to the general
public
Kickstarter No1 N/A N/A Yes
Rule 506
Crowdfunding
Platforms
Yes No Rule 506 of
Regulation D
No (accredited
investors only)
Regulation
Crowdfunding
Platforms
Yes No
Section 4(a)(6) of the
Securities Act
Yes
1 Pledges receive no equity interests, only tangible “rewards” (e.g. t-shirt, album, credit in movie)
WHAT is regulation crowdfunding?
Examples of different “crowdfunding” models:
6
WHAT is regulation crowdfunding?
Key Features of Regulation Crowdfunding:
• Issuers may sell securities to the general public: $1 million in a 12-month period.
• Investor Limits: Individuals’ crowdfunding investments capped in any 12-month period.
• Non-Exclusive/No Integration: Issuers may simultaneously conduct offerings under
different exemptions (e.g., Rule 506(b)) provided they comply with all applicable rules.
• Crowdfunding Platforms Only: Offerings must take place on internet-based
crowdfunding platforms run by SEC-registered intermediaries (see below).
• Securities: May sell any type of security (equity, debt, hybrid); voting or non-voting.
• Resale Restrictions: 1-year holding period requirement(limited exceptions).
• Advertising Restrictions: Tombstone ads and platform communication channels.
• Disclosure/Continuous Reporting Obligations: SEC, intermediaries and investors.
7
WHAT is regulation crowdfunding?
Investor
Annual Income
Investor Net
Worth
Calculation Investment Limit
$30,000 $105,000 Greater of $2,000 or 5% of
30,000 ($1,500)
$2,000
$150,000 $80,000 Greater of $2,000 or 5% of
$80,000 ($4,000)
$4,000
$150,000 $100,000 10% of $100,000 ($10,000 $10,000
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1,200,000 $2,000,000 10% of $1.2 million ($120,000)
subject to $100,000 cap
$100,000
Investor Limits in a 12-Month Period:
• If annual income or net worth is less than $100,000, the greater of
$2,000 or 5% of the lesser of annual income or net worth
• If annul income and net worth are greater than $100,000, 10% of the
lesser of annual income or net worth up to $100,000
8
WHAT is regulation crowdfunding?
Disclosure Requirements (filed publicly on the SEC Edgar website):
• Form C: Offering Statement
• Form C-U: Progress Update
• Form C/A: Amendment to Offering Statement
• Form C-AR: Annual Report
• Form C-AR/A: Amendment to Annual Report
• Form C-TR: Termination of Reporting
9
WHERE can regulation crowdfunding happen?
• Crowdfunding Platforms: Regulation crowdfunding may only take place on internet
platforms operated by an SEC-registered “broker” or “funding portal”
• Offerings may only occur on one internet platform at a time
• Key Feature of Crowdfunding Platforms:
 Investors must open accounts with platforms  Investors must consent to electronic delivery
 Intermediary has due diligence obligations as
to both issuers and investors
 Form C information must be published on
platform for at least 21 days before sale
 Communication channels (required)  Several compensation options (including
securities sold in offering)
 Funding portals may not solicit purchasers or
handle investor funds
 Must provide status updates: Progress,
completion, cancellation or reconfirmations
 Educational Materials must be provided to investors by intermediaries (e.g., platform mechanics,
investing process, risk factors, investment limits, cancellation rights, etc.)
10
HOW are companies conducting regulation crowdfunding offerings?
Statistics: Regulation Crowdfunding Offerings
May 16, 2016 – December 31, 2016
Lowest Highest Average
Offering Duration 8 days 452 days (1.2 years) 140 days
Target Offering $10,000 $1,000,000 $105,383
Maximum Offering $25,000 $1,000,000 $642,030
Age of Issuer 6 days 15 years 863 days (2.4 years)
Minimum Investment $1 or no reported
minimum
$25,000 $444
• Types of Securities Offered:
• Common Stock: 29%
• Agreements for Future Equity (includes SAFEs and crowd SAFEs): 28%
• Debt: 20%
• Other (including Convertible Debt, LLC Units, Preferred Stock, and Class A
Shares): 23%
11
IS regulation crowdfunding right for me?
The door is opened – but . . .
•Disclosure and reporting obligations
•Compliance costs
•Liability for “material” misstatements or omissions
•Size of investment pool (Exchange Act reporting)
•Non-price terms
•Effect on subsequent financings

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Questions on regulation crowdfunding nutter

  • 1. Nutter McClennen & Fish LLP Attorneys at Law Six Questions on Regulation Crowdfunding: An Early-Stage Company Perspective
  • 2.  WHY should I care about regulation crowdfunding?  WHO can engage in regulation crowdfunding?  WHAT is regulation crowdfunding?  WHERE can regulation crowdfunding happen?  How are companies conducting regulation crowdfunding offerings?  IS regulation crowdfunding right for me? 2 Six Questions on Regulation (i.e., JOBS Act) Crowdfunding
  • 3. WHY should I care about regulation crowdfunding? • To sell “securities” in the U.S. (equity, debt, hybrid), companies must: 1. Register those securities with the SEC (e.g., an IPO); or 2. Find a registration exemption. • Problems: 1. Registration is expensive ($2.5M for IPO; $1.5M/annually for compliance). 2. Exemptions restrict who you can sell to (high net-worth individuals, companies, etc.) and how (e.g., limits on use of social media). • Regulation crowdfunding is a new exemption that permits the issuance of securities to the general public (i.e., the crowd) via online crowdfunding platforms. 3
  • 4. WHO can engage in regulation crowdfunding? • May 16, 2016: SEC rules permitting regulation crowdfunding became effective • Target Issuer: Startups and small businesses • Who cannot engage in regulation crowdfunding: 1. Non-U.S. companies; 2. Public companies; 3. Investment companies (e.g., mutual funds); 4. Issuers with no specific business plan; 5. Bad actors (e.g., past SEC sanctions); and 6. Past crowdfunding issuers that did not comply with reporting rules 4
  • 5. 5 Securities Registration? Exemption? Sales to the general public Kickstarter No1 N/A N/A Yes Rule 506 Crowdfunding Platforms Yes No Rule 506 of Regulation D No (accredited investors only) Regulation Crowdfunding Platforms Yes No Section 4(a)(6) of the Securities Act Yes 1 Pledges receive no equity interests, only tangible “rewards” (e.g. t-shirt, album, credit in movie) WHAT is regulation crowdfunding? Examples of different “crowdfunding” models:
  • 6. 6 WHAT is regulation crowdfunding? Key Features of Regulation Crowdfunding: • Issuers may sell securities to the general public: $1 million in a 12-month period. • Investor Limits: Individuals’ crowdfunding investments capped in any 12-month period. • Non-Exclusive/No Integration: Issuers may simultaneously conduct offerings under different exemptions (e.g., Rule 506(b)) provided they comply with all applicable rules. • Crowdfunding Platforms Only: Offerings must take place on internet-based crowdfunding platforms run by SEC-registered intermediaries (see below). • Securities: May sell any type of security (equity, debt, hybrid); voting or non-voting. • Resale Restrictions: 1-year holding period requirement(limited exceptions). • Advertising Restrictions: Tombstone ads and platform communication channels. • Disclosure/Continuous Reporting Obligations: SEC, intermediaries and investors.
  • 7. 7 WHAT is regulation crowdfunding? Investor Annual Income Investor Net Worth Calculation Investment Limit $30,000 $105,000 Greater of $2,000 or 5% of 30,000 ($1,500) $2,000 $150,000 $80,000 Greater of $2,000 or 5% of $80,000 ($4,000) $4,000 $150,000 $100,000 10% of $100,000 ($10,000 $10,000 $200,000 $900,000 10% of $200,000 ($20,000) $20,000 $1,200,000 $2,000,000 10% of $1.2 million ($120,000) subject to $100,000 cap $100,000 Investor Limits in a 12-Month Period: • If annual income or net worth is less than $100,000, the greater of $2,000 or 5% of the lesser of annual income or net worth • If annul income and net worth are greater than $100,000, 10% of the lesser of annual income or net worth up to $100,000
  • 8. 8 WHAT is regulation crowdfunding? Disclosure Requirements (filed publicly on the SEC Edgar website): • Form C: Offering Statement • Form C-U: Progress Update • Form C/A: Amendment to Offering Statement • Form C-AR: Annual Report • Form C-AR/A: Amendment to Annual Report • Form C-TR: Termination of Reporting
  • 9. 9 WHERE can regulation crowdfunding happen? • Crowdfunding Platforms: Regulation crowdfunding may only take place on internet platforms operated by an SEC-registered “broker” or “funding portal” • Offerings may only occur on one internet platform at a time • Key Feature of Crowdfunding Platforms:  Investors must open accounts with platforms  Investors must consent to electronic delivery  Intermediary has due diligence obligations as to both issuers and investors  Form C information must be published on platform for at least 21 days before sale  Communication channels (required)  Several compensation options (including securities sold in offering)  Funding portals may not solicit purchasers or handle investor funds  Must provide status updates: Progress, completion, cancellation or reconfirmations  Educational Materials must be provided to investors by intermediaries (e.g., platform mechanics, investing process, risk factors, investment limits, cancellation rights, etc.)
  • 10. 10 HOW are companies conducting regulation crowdfunding offerings? Statistics: Regulation Crowdfunding Offerings May 16, 2016 – December 31, 2016 Lowest Highest Average Offering Duration 8 days 452 days (1.2 years) 140 days Target Offering $10,000 $1,000,000 $105,383 Maximum Offering $25,000 $1,000,000 $642,030 Age of Issuer 6 days 15 years 863 days (2.4 years) Minimum Investment $1 or no reported minimum $25,000 $444 • Types of Securities Offered: • Common Stock: 29% • Agreements for Future Equity (includes SAFEs and crowd SAFEs): 28% • Debt: 20% • Other (including Convertible Debt, LLC Units, Preferred Stock, and Class A Shares): 23%
  • 11. 11 IS regulation crowdfunding right for me? The door is opened – but . . . •Disclosure and reporting obligations •Compliance costs •Liability for “material” misstatements or omissions •Size of investment pool (Exchange Act reporting) •Non-price terms •Effect on subsequent financings

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