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10/1/2014
1
Webcast Guidelines
The audience is in listen-only mode.
Please e-mail questions via the Q&A panel box.
Select audience questions will be answered during
the last five minutes of the program.
WebEx customer support: 866-229-3239
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ModeratorRon OrolSenior EditorThe Deal
Expert Panel:Marianne HudsonExecutive DirectorAngel Capital Association
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Expert Panel:Gregory J. NowakPartnerPepper Hamilton LLP
Expert Panel:Brian S. KornOf CounselPepper Hamilton LLP
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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.”
JOBS Act IPO On-Ramp
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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
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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
• 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)
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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”
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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 VarietiesType Rewards/
Donation-
Based
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 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 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
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• 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
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
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Crowdfunding vs. Other ExemptionsFeature 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
Required, must be filed
with SEC
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
Crowdfunding vs. Other ExemptionsFeature Public 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
Yes, full disclosure liability
with a knowledge exception
Yes, full disclosure liability with a
knowledge exception
Only anti-fraud liability
Shares restricted Yes, 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
No 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
• 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
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Debt Crowdfunding - Peer-to-Peer Lending
• 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
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What’s Going On Here?
• 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
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Top Legal issues in Peer-to-Peer
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AUDIENCE Q&A
Thank you for joining the webcast.
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