Investment Crowdfunding

Brian BeckonV.P. Cutting Edge Capital

Agenda• Types of crowdfunding• Why investment crowdfunding?• Securities law: Finding the right exemption• Legal strategies for investment crowdfunding• The DPO process• FAQs• About Cutting Edge Capital

What is Crowdfunding?

Raising small amounts from many people…

Rather than large amounts from just a few

Types of CrowdfundingDonations

Donors receive nothing in returnDonation may be tax deductibleWorks well for nonprofitsExample: DonorsChoose.org

Types of CrowdfundingRewards & pre-sales • Contributors get cool stuff• Good for small raises• Investors can’t get their money back or

any return on investment…• Even if the company does spectacularly

well!• Example:

Types of CrowdfundingPeer-to-peer lending

Typically only lend to individuals but expanding into business lending

Intermediary controls the terms

Similar to a commercial loan

Examples: Prosper, Lending Club

Types of CrowdfundingInvestment crowdfunding

A true investment: Investors can get their money back plus a return

You decide what to offer your investors

Open to accredited and non-accredited investors

Some types can be advertised (general solicitation)

Why Investment Crowdfunding?

Other sources of capital may not work• Banks require too much profit or too much

collateral• Institutional investors require too much

control or potential for hockey stick growth• Other crowdfunding methods don’t allow you

to offer the type of investment you want

Why Investment Crowdfunding?

Keep control of the offering and your company• You can offer any security you want -- debt,

equity, revenue share, etc.• You can structure it so that you can never

lose control of your company; investors have only the rights you offer them

• Once approved by the regulators, the terms are non-negotiable

Why Investment Crowdfunding?

Engage your community• Investors are great

customers• Investors are great

ambassadors

Why Investment Crowdfunding?

Contribute to healthier local economies• Keeping profits local

contributes to multiplier effect, compounding local benefit

• Hedge against global economic gyrations

Why Investment Crowdfunding?

Provide non-accredited investors with values-aligned investment opportunity• Without investment

crowdfunding, they have almost NO options

• With investment crowdfunding, they can invest locally or in values-aligned investments

• Contribute to a more equitable and democratic economy, level the playing field

Securities Law FrameworkGeneral Rule: Any investment offering must be registered or exempt from registrationMust comply at both Federal and state levelSome Federal exemptions preempt state lawRequires legal guidance

Six Legal Strategies for Investment Crowdfunding

• JOBS Act Title III exempt crowdfunding• State-specific exempt crowdfunding• Nonprofit DPO• Intrastate DPO• Rule 504 DPO• Reg A DPO (Tiers 1 and 2)

Two Other Common Strategies That Aren’t Crowdfunding

• Rule 506 offerings to accredited investors (includes many “crowdfunding” portals)

• Private offerings to friends & family

JOBS Act Title IIIExempt Crowdfunding

• Rules go in effect May 16, 2016• Requires use of intermediary (typically

charge 5-10%)• $1 million cap in 12 months• Requires CPA reviewed financials for

offerings of $100,000 to $1 million• Investors limited to $2,000 or 5% of their

net worth/annual income if under $100,000 or 10% if over $100,000

State-SpecificExempt Crowdfunding

• About 25 states have adopted state crowdfunding exemptions

• Typically with restrictions similar to Title III

• With Title III becoming effective, most are not likely to be used

Nonprofit Direct Public Offering

501(c)(3) issuers are exempt from federal registration

Also exempt from registration in most states, but a filing is usually required

California and about 7 other states do not have an exemption

Works well for a nonprofit investment fund

Intrastate Direct Public Offering

Currently no maximum raise, but SEC proposed to limit to $5 million

All investors must reside in the same state as the issuer

80% of assets in the same state

Need to register at state level

Reg D Rule 504 DPO Allows for investors from

multiple states Currently capped at $1

million, but SEC proposed to raise cap to $5 million

Must register in each state or find an exemption (like private placement)

Regulation A+ DPOTier 1:

$20 million capCan have investors in multiple statesMust register in every stateMini-registration with SEC

Tier 2 – Like Tier 1 except:$50 million capMore burdensome filingsPreempts state law

The DPO Process Compliance review and cleanup Decide on security to offer

Debt Preferred stock Common stock Revenue share

Decide on legal compliance strategy Prepare offering documents Prepare and submit application to regulators

(if needed) Work with regulators until permit is issued Launch offering and bring in investment

FAQs:Is investment crowdfunding new?• No, DPOs have been legal for decades• There’s a lot of misinformation in the

media• Surge of popularity in the 1980s: Ben &

Jerry’s, Equal Exchange; Annie’s Homegrown

• A few strategies are new: Title III, Reg A+

FAQs: Will my company become a public reporting company?

• No, it remains privately held (but Reg A+ has its own reporting requirements)

• Be sure you don’t have over 500 non-accredited equity investors or 2000 total equity investors

FAQs: Is it risky to have non-accredited investors?• No, non-accredited investors are less likely to

sue• We have not yet seen ANY example of

crowdfunding investors suing the company

Will DPO investors tell me how to run my business?• No, you remain in control• At most, investors may have a right to vote in

annual election of board

FAQs: What is investors’ exit?• Built-in exit (e.g. debt, maybe revenue share)• Redemption• Acquisition• IPO• Trading bulletin board

What ROI will investors expect?• Varies: This is not a single investment class• Generally 2% to 10%: No hockey stick• Can pay in-kind

FAQs: Who can do a DPO?• Any type of entity• Early stage or mature• Raises from $250,000 to $50 million• Any industry• Any state• Need a compelling story (but our marketing partner can help write it!)

About CECCutting Edge Capital

We help clients raise capital in alignment with their own goals

Cutting Edge CounselSpecialize in securities complianceFull service firm: Employment, IP, commercial transactions, tax, dispute resolution

CuttingEdgeX.comThe nation’s only listing site for direct public offeringsImpact investing for everyone

Q&AThank You!

Brian BeckonVice President, Cutting Edge Capi-

talbrian@cuttingedgecapital.com