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3. Moderator Ron Orol Senior Editor The Deal

4. Expert Panel: Marianne Hudson Executive Director Angel Capital Association

5. Expert Panel: Gregory J. Nowak Partner Pepper Hamilton LLP

6. Expert Panel: Brian S. Korn Of Counsel Pepper Hamilton LLP

7. JOBS Act Overview Crowdfunding – online fundraising…but there’s a catch Regulation A+ - from $5mm to $50 mm Private Placement Reforms −General Solicitation relaxed – effective Sept. 23 −Enhanced verification of Accredited Investors if Soliciting “Go Public” Shareholder Thresholds Increased IPO On-Ramp and Emerging Growth Companies Relaxation on Research Restrictions Decimalization – move to $.09 tick increments? Prospective Issuer Outreach Signed into law April 5, 2012 “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”

8. JOBS Act IPO On-Ramp

9. The IPO On-Ramp Title I of the JOBS Act – Reopening American Capital Markets to Emerging Growth Companies Intended to make capital raising easier The lengthy exhaustive IPO process was perceived as impeding capital raising by smaller companies Costs and difficulties of going public, listing on an exchange and being a public reporting company are high

10. Emerging Growth Company New category of issuer: “Emerging Growth Company” −Total annual revenues of less than $1 billion (indexed for CPI every 5 years) −Has not issued more than $1 billion of non-convertible debt over the previous 3 years −Issuer is not a “large accelerated filer” under Securities Exchange Act Rule 12b-2; a large accelerated filer meets all of the following: $700 million worldwide public float (excludes affiliates) Has been subject to reporting requirements for one year Has filed at least one 10-K/20-F −EGC status carries a 5 year maximum – last day of fiscal year containing 5 th anniversary of first public equity offering −Electing EGC status is optional

11. Benefits of EGC Status – IPO Process Confidential Submissions of Registration Statement to SEC Staff until 21 days prior to launch of roadshow −Electronic EDGAR-only submission not visible to the public until S-1 is publicly filed −Can clear comments, but letters and responses will become public upon public filing of the Registration Statements “Testing the Waters” meetings (oral or written communications) are permitted with QIBs and Accredited Investors pre- or post-filing −Issuers or persons authorized by issuers −Exempt from Section 5, but still liable for statements

12. Benefits of EGC Status - Disclosure Reduced Disclosure −Excused from Sarbanes Oxley 404(b) −Executive Compensation No CD&A No mean compensation data No CEO vs. median employee pay multiple data No Say on Pay, Say When on Pay and Say on Golden Parachutes Votes (which are non- binding anyway) −Audited financials- 2 years permitted instead of 3 Selected financials – need not show more than audited years presented (2 years instead of 5) −Need not comply with new financial accounting standards (must declare at outset and cannot cherrypick or switch back and forth)

13. New Advertised Private Placement Rules

14. Private Placements – Former Law Former Private Placement Rules (Reg. D) prohibited general solicitation and general advertising −Rule 504: Up to $1 million −Rule 505: Up to $5 million, not including “bad boys” −Rule 506: Unlimited amount, limited to accredited investors or financially sophisticated investors −Blue Sky Laws Preempted only for Rule 506 offerings Individual states exempt sales to “institutional buyers”

15. New Structure of Rule 506 Regulation D Rule 506 now has two alternatives: (b) and (c) −506(b) is the traditional rule no general solicitation or advertising permitted offers and sales must be to either accredited or financially sophisticated investors up to 35 non-accredited investors permitted information requirements for non-accredited investors unlimited accredited investors permitted unlimited dollar amount of offering −506(c) is the new rule general solicitation or advertising is permitted sales must be to accredited investors only unlimited accredited investors permitted unlimited dollar amount of offering 15

16. Verification of Accredited Status The proposed new rules require the issuer to take “reasonable steps to verify” that the purchasers of the securities are accredited investors, considering the following factors: −nature of purchaser / category of accredited investor −amount and type of information issuer has concerning the purchaser −nature of offering manner in which purchaser was solicited term of the offering minimum investment amount, if any Observations: −Online activities have burden of demonstrating they are not advertising −Professional verification firms are cropping up (eg, Accredify) 16

17. Crowdfunding and Regulation A+

18. Backdrop: Current Crowdfunding Landscape – Five Varieties TypeRewards/ Donation- Based Securities to Accredited Investors (Title II) Securities to the Public (Title III) Peer-to-Peer LendingIntrastate Crowdfunding ExamplesKickstarter, Indiegogo, Rockethub, Youcaring Ourcrowd, Realty Mogul, FundersClub, AngelList, None so far; potentially a rewards or accred platform LendingClub, Prosper, Funding Circle, Zopa (UK), Ratesetter (UK), Auxmoney (Germany) Invest Georgia Exemption, Michigan Invests Locally Exemption (MILE), Maine, Kansas, Texas (pending) Securities Reg Status Not sales of “securities” Sales of securities to accredited investors through deal-specific special purpose vehicles; Intrastate rules have been enacted in GA, MI, ME and KS and are proposed in TX Sales of securities to the general public Registered borrower-payment dependent notes to the general public (25 states only) or private placements Public offerings to residents of a single state; exempt from SEC rules under Securities Act 3(a)(11) exemption/Rule 147 RegulationState-level antifraud only; not SEC- regulated SEC-regulated, no-action letters protect website solicitations from being public offerings Extensive SEC regulation; currently illegal until SEC rules are finalized SEC-registered securities, not really crowdfunding; banking regulations, not legal in several states due to blue sky restrictions; Private placements have blue sky preemption State regulated Bad Actor Disqualification Not applicableApplies for all issuers and for the crowdfunding sites themselves Not applicable under JOBS Act, but SEC has said it will apply Not applicableVaries by state 18

19. Comprises Title III of the JOBS Act Originated from two perceived needs: −that smaller retail investors did not have access to early stage investment opportunities −that start-up companies did not have adequate access to available capital, particularly online capital raising Adds exemption from SEC registration for crowdfunding transactions in the form of new Section 4(6) of the Securities Act Public Crowdfunding Background Capital Raising Online While Deterring Fraud and Unethical Non- Disclosure

20. Issuers Not Eligible to Crowdfund Non-US companies Public reporting companies (only required filers are excluded, not “voluntary filers”) Investment companies, including companies excluded from the definition of Investment Company by 3(b) or 3(c) of the Investment Company Act of 1940, including: −Mutual Funds −Private Equity Funds −Asset Management Vehicles −Business Development Companies

21. Crowdfunding vs. Other Exemptions Feature Public Crowdfunding (Title III) Regulation A+ (Tier 1) Regulation A+ (Tier 2) Private Placements Including Title II Crowdfunding (Regulation D Rule 506 (b/c)) Maximum Total Raised $1 million per 12 month period $5 million per 12 month period; including up to $1.5 million for selling shareholders $50 million per 12 month period; including up to $15 million for selling shareholders Unlimited  Number of Investors Unlimited but subject to maximum total raised Unrestricted  Unrestricted  Unlimited accredited investors; up to 35 non-accredited investors unless soliciting (if soliciting- 0 non-accreds)  Investment Per Investor Restricted by income/net worth Unrestricted  Restricted by income/net worth Unrestricted  Investor Disclosure Required, must be filed with SEC Not required if all accredited investors; Form D filing proposed  Intermediary Required Yes – broker/dealer or funding portal No  No  No  Subject to ongoing SEC reporting following raise Yes, at least annually, possibly more frequently No; as long as exit report is filed not later than 30 calendar days after termination or completion Yes; audited financials filed annually; annual, semi-annual, current reporting required May file exit report, so long as issuer meets certain qualifications No 

22. Crowdfunding vs. Other Exemptions FeaturePublic Crowdfunding Regulation A+ (Tier 1) Regulation A+ (Tier 2) Private Placements (Regulation D Rule 506 (b/c)) Disclosure Liability Yes, full disclosure liability with a knowledge exception Only anti-fraud liability  Shares restrictedYes, for one year No  No  Yes, for public companies most can sell under Rule 144 after six months State Filing Possibly, depends on future rules by state Not exempt from state securities law registration and qualification Exempt from state securities law registration and qualification if sold to “qualified purchasers,” defined to include all offerees in a Regulation A offering and all purchasers in a Tier 2 offering Usually no if only offering to accredited investors  Advertising and general solicitation Not allowed "Testing the waters" permitted before filing; general solicitation permitted after qualification  "Testing the waters" permitted before filing; general solicitation permitted after qualification  Allowed if sales are made only to accredited investors and issuer takes reasonable steps to verify accredited status Can public cos., foreign issuers, investment companies and exempt inv. companies issue NoYes, but limited Yes 

23. Crowdfunding Requirements Investment limitations (per trailing 12 month period) −Company: Can receive up to $1 million −Investor: Less than $100K: greater of $2,000 or 5% of annual income or net worth $100K or more: 10% of annual income or net worth Must be conducted through broker or “funding portal” Must file with the SEC and provide to broker/funding portal and investors extensive disclosure, including tax returns ($100K or less), reviewed financial statements ($100K-$500K) or audited financial statement (>$500K)

24. Crowdfunding Requirements Must not advertise except to direct investors to broker/portal Must not pay promoters except as SEC allows Must file annual or more frequent reports with the SEC Prospectus liability for disclosures with knowledge out 1 year holding period on shares sold except to issuer, accredited investor, family member or through registered offering Crowdfunded shares do not count towards the 2,000 shareholder rule to force a company public, but see above re SEC reporting

25. Debt Crowdfunding - Peer-to-Peer Lending

26. What is Peer-to-Peer Lending? Is it legal? What are the risks for borrowers, lenders? What is the legal status of the loans? Can the loans be resold? Is this a form of crowdfunding? Why aren’t big banks intervening? Institutional vs. Retail Investors Peer-to-Peer Lending 26

27. 27 What’s Going On Here?

28. Neither LendingClub nor Prosper are banks −Peer-to-peer lending sites facilitate loans to consumers from WebBank, a Utah-chartered state industrial bank −WebBank allows interest rate to be “portable” −WebBank sets credit terms, extends credit and holds loan for 1 day −Both LC and Prosper have been in business over 5 years Battles have been waged in each state to arrive at this point −Platforms retain servicing rights and service loan −$$ is not FDIC or SIPC insured Bank regulatory “lite” applies – Platforms must comply with consumer finance credit, privacy and auto- deduction laws, but…… −Exempt from 23A and 23B affiliate rules* −Exempt from regulatory capital rules* −Exempt from too big to fail, living wills, Volcker −Will big banks start to care at some point, and then what happens? Borrower may not pay and Lender cannot sue Borrower −Lender has limited ability compared to traditional lending −Limited recourse to enforce loan −Collection fees will exceed recovery 28 Top Legal issues in Peer-to-Peer

29. AUDIENCE Q&A

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