1. Crowdfunding Overview

2. Investor Protection vs Capital Raising

3. Crowdfunding  Era of legalizing things that prior generations thought were bad ideas  The gateway to crowdfunding = beer

4. Crowdfunding  New registration exemption under Section 4 of the Securities Act  Intended to allow capital raising –from a large number of people –with relatively small investment amounts –typically through the internet and social media  No final rules yet; no stated deadline for final rules either

5. Exemption  May not exceed $1 million in any 12 month period  Limited purchases per investor: –greater of $2,000 or 5% of annual income or net worth (if investor annual income or net worth is below $100,000) –10% of the annual income or net worth of the investor, up to a maximum of $100,000  Sales conducted through registered broker or funding portal; limited advertising or promotion  Specific disclosure requirements

6. Intermediaries  Must register with the SEC and applicable self-regulatory organization (FINRA)  Provide disclosure required by SEC  Ensure investors review disclosure materials and confirm their understanding of investment risk  Take certain measures to reduce the risk of fraud, including limited background checks on officers, directors and 20% shareholders  Allow 21 day review period  Ensure offering and investor minimums  Protect privacy of investors

7. Funding Portals  May not: –Offer investment advice –Solicit purchases, sales or offers –Compensate employees, agents or others for solicitation or based on the sale of securities –hold, manage, possess or otherwise handle investor funds

8. Disclosure  Directors, officers and 20% owners  Business plan  Financial condition –income tax return for last year and financial statements certified by PEO (for offers of $100,000 or less) –financial statements reviewed by independent public accountant (for offers of $500,000 or less) –audited financial statements (for offers over $500,000)  Use of Proceeds

9. Disclosure (continued)  Target offering amount and deadline  Ownership and capital structure of the issuer –terms of offer and terms of other classes of issuer securities –rights of principal shareholders and impact on purchasers of securities being offered –information regarding shareholders owning more than 20% of any class of the issuer’s securities –current and future valuation methodology  Annual financial statements and reports of results of operations

10. Restricted Securities  Securities purchased in crowdfunding offering may not be transferred for one year, unless transferred: –to the issuer –to an accredited investor –pursuant to a registration statement –to a family member in connection with death or divorce  Securities sold in crowdfunding offering will be considered “covered securities” exempt from blue sky registration requirements

11. Public Co. threshold exemption  Securities acquired in crowdfunding offerings will not count towards the determination of whether a company is a “public” company by virtue of having 2,000 shareholders of record (or 500 unaccredited shareholders)

12. Things to think about  Thoughtful initial structure and internal controls are important (act like a public company)  Shareholder Agreements and other reasonable restrictions should be considered  Anticipate annual meetings and other shareholder communications  Some VCs think this is a good litmus test for emerging companies who will seek VC financing  Will VCs and similar types of investors effectively “regulate” the negative space