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Moderator
Ron Orol
Senior Editor
The Deal
Expert Panel:
Marianne Hudson
Executive Director
Angel Capital Association
Expert Panel:
Gregory J. Nowak
Partner
Pepper Hamilton LLP
Expert Panel:
Brian S. Korn
Of Counsel
Pepper Hamilton LLP
JOBS Act Overview
“To increase American job creation and economic growth by improving access to the public capital markets for
emerging growth companies.”
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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
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“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
JOBS Act IPO On-Ramp
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
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 5th
anniversary of first public equity offering
− Electing EGC status is optional
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
Benefits of EGC Status - Disclosure
• Reduced Disclosure
− Excused from Sarbanes Oxley 404(b)
− Executive Compensation
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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 nonbinding 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)
New Advertised Private Placement Rules
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”
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
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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)
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Crowdfunding and Regulation A+
Backdrop: Current Crowdfunding Landscape – Five Varieties
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Type
Rewards/
DonationBased
Securities to Accredited
Investors (Title II)
Securities to
the Public (Title
III)
Peer-to-Peer Lending
Intrastate Crowdfunding
Examples
Kickstarter,
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
Regulation
State-level
antifraud only;
not SECregulated
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 applicable
Applies for all issuers and for
the crowdfunding sites
themselves
Not applicable
under JOBS Act,
but SEC has
said it will apply
Not applicable
Varies by state
Public Crowdfunding Background
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Capital
Raising
Online
While
Deterring
Fraud and
Unethical
NonDisclosure
• 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
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
Crowdfunding vs. Other Exemptions
Feature
Public Crowdfunding (Title
III)
Maximum Total $1 million per 12 month
Raised
period
Number of
Investors
Unlimited but subject to
maximum total raised
Investment Per Restricted by income/net
Investor
worth
Investor
Disclosure
Required, must be filed with
SEC
Intermediary
Required
Yes – broker/dealer or
funding portal
Subject to
ongoing SEC
reporting
following raise
Yes, at least annually,
possibly more frequently
Regulation A+
(Tier 1)
Regulation A+
(Tier 2)
Private Placements Including Title
II Crowdfunding (Regulation D Rule
506 (b/c))
Unlimited
$5 million per 12 month
period; including up to $1.5
million for selling
shareholders
Unrestricted
$50 million per 12 month period;
including up to $15 million for selling
shareholders
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Unlimited accredited investors; up to
35 non-accredited investors unless
soliciting (if soliciting- 0 non-accreds)
Unrestricted
Restricted by income/net worth
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Unrestricted
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Required, must be filed
with SEC
Required, must be filed with SEC
Unrestricted
No
No
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No; as long as exit report
is filed not later than 30
calendar days after
termination or completion
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Yes; audited financials filed annually;
annual, semi-annual, current reporting
required
May file exit report, so long as issuer
meets certain qualifications
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Not required if all accredited investors;
Form D filing proposed
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No
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No
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Crowdfunding vs. Other Exemptions
Feature
Public Crowdfunding
Disclosure Liability Yes, full disclosure
liability with a
knowledge exception
Shares restricted
Yes, for one year
State Filing
Possibly, depends on
future rules by state
Advertising and
Not allowed
general solicitation
Can public cos.,
foreign issuers,
investment
companies and
exempt inv.
companies issue
No
Regulation A+
(Tier 1)
Regulation A+
(Tier 2)
Yes, full disclosure liability
with a knowledge exception
Yes, full disclosure liability with a
knowledge exception
No
No
Private Placements
(Regulation D Rule 506 (b/c))
Only anti-fraud liability
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Yes, for public companies most
can sell under Rule 144 after six
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months
Not exempt from state
Exempt from state securities law
Usually no if only offering to
securities law registration
registration and qualification if sold accredited investors
and qualification
to “qualified purchasers,” defined
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to include all offerees in a
Regulation A offering and all
purchasers in a Tier 2 offering
"Testing the waters"
"Testing the waters" permitted
Allowed if sales are made only
permitted before filing;
before filing; general solicitation
to accredited investors and
general solicitation permitted permitted after qualification
issuer takes reasonable steps to
after qualification
verify accredited status
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Yes, but limited
Yes, but limited
Yes
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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)
Crowdfunding Requirements
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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
Debt Crowdfunding - Peer-to-Peer Lending
Peer-to-Peer Lending
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What is Peer-to-Peer Lending?
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Is it legal?
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What are the risks for borrowers, lenders?
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What is the legal status of the loans?
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Can the loans be resold?
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Is this a form of crowdfunding?
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Why aren’t big banks intervening?
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Institutional vs. Retail Investors
What’s Going On Here?
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Top Legal issues in Peer-to-Peer
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Neither LendingClub nor Prosper are banks
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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
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Bank regulatory “lite” applies – Platforms must comply with consumer finance credit, privacy and autodeduction laws, but……
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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
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AUDIENCE Q&A
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