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Osborn | McDerby LLP Presents Crowdfunding Land

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Stephen Osborn

on 19 July 2013

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Transcript of Osborn | McDerby LLP Presents Crowdfunding Land

18 Century
Irish Loan Fund
th
and Investment Clubs
Angel Networks
Crowdfunding:
Today's Trending Topic

Crowdfunding
Methods of
Rewards
Donation
Debt
Equity
Kickstarter
IndieGoGo
GoFundMe
Peer-to-Peer (i.e., Prosper)
Microlending (i.e., Kiva)
Legal in Oz 2005
Legal in UK 2010
Not Legal in US (yet)
Technology
Permits Advertising for Private Financings
Changes to Rule 506 Safe Harbor
Legalizes Equity Crowdfunding
Crowdfund Act
Changes to Rule 506
Permits advertising and solicitation of investment opportunities, provided the issuer
verifies
that the purchasers are “accredited investors”
Extends exemption from broker-dealer requirements for capital funding platforms under certain
conditions
but not before the end of
2013
Crowdfunding
may
be legal in your lifetime
506 Timeline
Crowdfunding
Timeline
Jul. 4, 2012
SEC Regulations on
Aug. 29, 2012
SEC Proposed Regulations
http://www.sec.gov/rules/proposed/2012/33-9354.pdf
on Rule 506
Released
changes to Rule 506
Due
Sept. 28, 2012
Comments to SEC Proposed
http://www.sec.gov/comments/s7-07-12/s70712.shtml
Regulations on Rule 506
Due
Q1 2013
SEC Final Regulations
on Rule 506
Expected
Dec. 31, 2012
SEC Regulations
on Crowdfund Act
Due
Q1 2013
SEC Proposed Regulations
on Crowdfund Act
Expected
Q4 2013
SEC Final Regulations
on Crowdfund Act
Expected
Q4 2013
on Crowdfund Act
Expected
SEC Proposal Permitting Advertising in Rule 506 Private Financing
Issuers may advertise their offering provided only accredited investors invest in the offering.
The proposed rules require
“reasonable steps”
to verify that the purchasers are accredited investors, rather than the current
“reasonable belief”
standard.
"Reasonable steps"
would be an objective determination, based on the particular facts and circumstances of each transaction.
Proposal suggests factors such as:
1.
Nature of the purchaser and type of accredited investor the purchaser claims to be.
2.
3.
4.
Amount and type of information the issuer has about a purchaser.
Nature of the offering, such as the manner in which
the purchaser was solicited (mass media, internet or
pre-screened data base of wealthy clients of broker dealer).
Terms of the offering, such as a large minimum investment amount.
SEC Proposal Reads:

"[W]e anticipate that many practices currently used by issuers
[to establish reasonable belief] in connection with existing Rule 506 offerings would satisfy the verification requirement proposed for offerings pursuant to [New] Rule 506(c)."
Kickstarter Stats – 2.5 years
$350M pledged by 2.5M people
30,000 projects – 2/3 < $10K Raised
Intermediaries must:
Intermediary Requirements
Limited to raising
$1 million
in any 12 month period
Register with the SEC
Disclose a business plan and use of the funds
List the officers and directors of the company and all shareholders with more than 20% of outstanding shares
List the target offering amount, price of the securities and
method for determining the price
Company Requirements
Financial statements Audited by an independent CPA
Financial statements Reviewed by an independent CPA
Financial statements signed off by executive officer
Most current tax return
Depending on the size of the raise, companies will have to disclose certain financial information:
10 percent of annual income or net worth, up to a maximum of $100,000, if the annual income or net worth of the investor is greater than $100,000
The greater of $2,000 or 5 percent of annual income or net worth, if the annual income or net worth of the investor is less than $100,000;
Investors are limited one their investment potential based on their net worth:
Investor Requirements
Current SEC requirement
: Comply with SEC reporting provisions at 500 shareholders
Under the JOBS Act
: Comply with SEC reporting provisions at 2,000 investors (excluding employees) or 500 unaccredited investors
Investors from crowdfunding do not count toward either of these limits

Transfer restrictions
: Shares will be restricted to a one-year holding period before they can re-sold
Shareholder Limits and
Transfer Restrictions
$0-$100,000
Sharona has a net worth of $150,000.
She can invest up to $15,000 ($150,000 x 10%).
Example:
Ramon earns $75,000/year. He can invest up to $3,750 ($75,000 x 5%).
Example:
For Equity Crowdfunding, Companies must use the services of an intermediary that is either a broker or a "funding portal".
Intermediaries are also required to provide disclosures to investors, manage offering proceeds, verify investor limits, not compensate unregistered finders, meet other requirements prescribed by SEC and FINRA.
1. Register with the SEC as a -
a) broker/dealer or;
b) funding portal

2. Obtain membership in a registered national securities
organization, currently FINRA is the only choice
Crowdfunding
Success Rate is Low (i.e., 43% on Kickstarter)
Promotion of Offer is Key – Professional Video is Standard
Be Prepared to Fill Orders
Don’t Fall into the Product Trap – Focus on Building a Business
Quick Tips
Rewards-based Crowdfunding Can Work
Not a Store
: Kickstarter made key changes in September 2012 to listing requirements, including presenting risks and challenges and providing prototypes, not simulations.
Pebble Watches raised $10M on Kickstarter
Rule 506 is the most popular securities law exemption for private financing
JOBS Act changes:
+
Distribution
$100,000 -
$500,000
$500,000 -
$1,000,000
Traditional Financing
+
Comments to SEC Proposal
Verification steps should go well beyond those needed for “mere” reasonable belief.
Equate reasonable steps to current reasonable belief standard
From Practitioners:
From Regulators and Consumer Advocates:
* Not a single comment from a major Silicon Valley law firm
Not Legal in US (yet)
+
JOBS Act of 2012
Up to $100,000
> $100,000
FINRA Regulations
JOBS Act Timeline
Passed Apr. 5, 2012
Rocket Hub
StartSomeGood
Causes.com
Consider Pre-Selling Products on your Own Website (i.e., Leap Motion, Lockitron) to raise awareness and funding opportunities.
Full transcript