The SEC Relents (somewhat) Recent Developments in exempt issues and crowdfunding

In the Beginning “The Big Crash” In the 20’s the Dow Jones Industrial Average rose sixfold, touching 381.2. Starting 1929 Dow Jones Industrial Average lost 89% of its value before finally bottoming out in July 1932. Blamed primarily on wide-spread public speculation and margin buying fueled by promotion of questionable stocks by unscrupulous issuers and advisors. 11/10/2018 Copyright Vinson & Vinson, 2016

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Securities Issue and Trading Regulation (In the beginning) Securities Act of 1933 Required registration of issues with the FTC, some exemptions for small issues Securities Exchange Act of 1934 Required the registration of stock exchanges (secondary traders), created SEC, approve stock exchange rules, regulate proxy practices and increased disclosure requirements 1938 Maloney Act Formation of a national association of brokers and dealers that would create and enforce disciplinary rules and promote just and equitable principles of trade. (FINRA) 1940 Investment Company Act Requires investment companies and advisors to register with the SEC 11/10/2018 Copyright Vinson & Vinson, 2016

Securities Law, Regulation and Enforcement Structure 11/10/2018 Copyright Vinson & Vinson, 2016

SEC Investor Protection 355 pages of investor protection “The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” - SEC 11/10/2018 Copyright Vinson & Vinson, 2016

Primary Exemptions Prior to 2007 SEC Registration and periodic reporting of public issues required. Exemptions from registration and reporting SEC Regulation D Rules 504, 505, 506 Require notification to SEC using Form D within 15 days, mostly accredited investors, with prior relationship, no mass solicitation, no “bad actors” Rule 504, “Seed Capital Exemption”, offer and sell up to $1,000,000 of their securities in any 12-month period, no investment companies, subject to state regulation, general solicitation if allowed by state of registration. Rule 505, offer and sell up to $5 million in 12-month period, unlimited “accredited” and 35 other investors, “restricted” securities, no investment companies, no general solicitation, issuer determines information release Rule 506, all issuers, no dollar cap, no general solicitation, 35 max unaccredited investors, must be “sophisticated”, restricted securities 11/10/2018 Copyright Vinson & Vinson, 2016

Primary Exemptions Prior to 2007 (cont.) Regulation A – Small public offerings Public offerings of securities that do not exceed $5 million in any 12-month period No resale restrictions Issuer must provide and file an offering document similar to prospectus Simpler and unaudited financial statements No reporting requirements until company reaches more than $10 million in assets and more than 500 shareholders Choice of three formats to prepare the offering circular Must be registered in each state offered In 1980 Massachusetts deemed the offering of Apple Computer stock to be “too risky” and did not allow its citizens to participate in the offering. 11/10/2018 Copyright Vinson & Vinson, 2016

Old Registration Exemptions Rule 504 (intrastate) Rule 505 Rule 506 Reg A Available to: Non-reporting issuers No investment companies or “bad actors” All issuers except “bad actors” Non-reporting issuer; no investment companies or “bad actors” Dollar cap: $1 million aggregate in 12 months $5 million aggregate in 12 months None Less than $5 million Restrictions on general advertising Allowed under some state registrations Yes No Restrictions on resale May sell after registration or with Rule 144 compliance Non-accredited investors No limit Up to 35, need not be “sophisticated” 35 maximum, must be “sophisticated” Public offering Prospectus required State requirements No; information must not violate anti-fraud provisions Form 1-A filed with SEC; preliminary offering circular Audited financials Certified by independent CPA Self-filing of limited information on Form 1-A 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 Some recent shocks Lehman Brothers bankruptcy Perceived investor protection crises Enron collapse – Sarbanes/Oxley Mortgage securitization bubble – Dodd/Frank Bernie Madoff Ponzi scheme Stanford Financial Group fraud Financial Crisis 2007-2008 Public perceptions of cronyism, derivatives manipulation, insider trading, etc. Too big to fail; the 1% vs. the 99% 11/10/2018 Copyright Vinson & Vinson, 2016

Jump-start Our Business Startups Bill (JOBS) Signed April, 2012 Intended to make it easier for emerging businesses to access capital and thus increase employment Titles: TITLE I - REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES (Reduced disclosure for emerging growth companies) TITLE II - ACCESS TO CAPITAL FOR JOB CREATORS (Removed mass solicitation ban in Rule 506 for issues sold to accredited investors only) TITLE III – CROWDFUNDING (Crowdfunding) TITLE IV - SMALL COMPANY CAPITAL FORMATION (Modify Reg A) TITLE V - PRIVATE COMPANY FLEXIBILITY AND GROWTH (Changes to registration/de-registration requirements) TITLE VI - CAPITAL EXPANSION (Raised registration requirement to 2,000 shareholders TITLE VII - OUTREACH ON CHANGES TO THE LAW OR COMMISSION (Public comment and notification) 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 Reg D, Rule 506(b); July, 2013 The company cannot use general solicitation or advertising to market the securities; The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other “sophisticated” purchases Companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings Company must be available to answer questions by prospective purchasers Financial statements need to be certified by an independent public accountant Securities are restricted as to resale (cannot be resold for up to a year) No limit on offering size SEC, “Rule 506 of Regulation D”, https://www.sec.gov/answers/rule506.htm 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 Reg D, Rule 506(c); July, 2013 Can broadly solicit and generally advertise the offering Unlimited accredited investors, no unaccredited Issuer must take reasonable steps to verify that its investors are accredited  Reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like. Securities are restricted as to resale (cannot be resold for up to a year) No limit on offering size Must file SEC notice of issue, Form D SEC, “Rule 506 of Regulation D”, https://www.sec.gov/answers/rule506.htm 11/10/2018 Copyright Vinson & Vinson, 2016

Modified Reg A (A+ or mini-IPO) Provides exemptions allowing some companies to use mass solicitation to offer and sell their public securities without having to register, “test the waters” provision Must provide buyers of the issue with an offering document whose content is similar to the prospectus Simpler financial statements that do not have to be audited No Exchange Act reporting requirements until the company has more than $10 million in assets  and more than 500 shareholders Choice of three formats to prepare the offering circular. Tier 1 offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer, all subject to state regulation Tier 2 offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer; states’ regulations pre-empted 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 Qualifications for A+ Disqualifications: Are already SEC reporting companies and certain investment companies. Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company. Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas or other mineral rights. Have been subject to any order of the Commission under Exchange Act Section 12(j) entered within the past five years (“bad actor”). Have not filed ongoing reports required by the rules during the preceding two years. Are disqualified under the “bad actor” disqualification rules. AdditionalTier 2 requirements: Engages services from a transfer agent registered with the Commission. Reporting requirements: scaled back versions of Form 10-K, Form 10-Q and Form 8-K Is current in its annual and semiannual reporting at fiscal year-end. Has a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.  11/10/2018 Copyright Vinson & Vinson, 2016

ELIO Motors (First Under Reg A+ tier 2) Issued 2,090,000 shares @ $12/share under Reg A+ Nov. 2015 Offered direct to public on crowd- funding site StartEngine.com Campaign closed Feb. 2016 5,000 investors $17 million in proceeds Registered for trading on OTCQX On 8/19 closed $19.50, 30-day avg. Volume 4,127 Copyright Vinson & Vinson, 2016

Active Reg A+ Tier 2 Offering POMM $10M Regulation A Plus Tier 2 issue, offering on Crowdfondue. Offering 802,065 shares, 35.7% of the company (22.4% of the company on a fully diluted basis). Shares are being offered in units, at $498, each unit 40 shares at $12.47 per share. Goal: 802,065 Shares (35.7% of the company) Currently 98 investors, $796,882.88 committed. SEC notice of qualification May 24, 2016 Offering details on Crowdfondue https://crowdfondue.com/projects/12 Not exchange registered 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 SEC Reg CF Aggregate amount sold to “all investors”, may not exceed $1 M in any 12-month period. Individual investment limits in any12-month period: Investor annual income or net worth less than $100,000, the investor is limited to the greater of $2,000 or 5% of the lesser of his or her annual income or net worth. Investor annual income and net worth both greater than $100,000, limited to 10% of the lesser of annual income or net worth, to a maximum of $100,000. During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000 Transaction must be made through a broker, or through a registered “funding portal” Disclosure through filing electronic Form C on EDGAR, made public prior to the start of the offering Issuer required to provide financial statements covering the two most recently completed fiscal years or since inception 11/10/2018 Copyright Vinson & Vinson, 2016

Restrictions on Issuers under CF No non-U.S. companies Companies that are disqualified under Regulation Crowdfunding disqualification rules (modeled on, and substantially similar to, the Rule 506(d) “bad actor” rules under Regulation D) No investment companies or private funds No companies that are reporting companies under the Securities Exchange Act of 1934, as amended No companies that are delinquent in filing the ongoing reports required by Regulation Crowdfunding No companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies May only use one intermediary for an issue  Cap of $1 million in any trailing 12 months 11/10/2018 Copyright Vinson & Vinson, 2016

Requirements of CF Portals Portals must register with SEC (Form “Funding Portal”) and join FINRA Periodic FINRA compliance examinations Prohibited acts Offering investment advice or making recommendations Soliciting purchases, sales or offers to buy securities offered or displayed on their platforms; Compensating promoters and other persons for solicitations or based on the sale of securities Holding, possessing, or handling investor funds or securities Portals must: Abide by a list of disclosure and fraud-prevention requirements Conduct basic diligence regarding issuers Comply with FINRA regulations for portals Costs of startup estimated from $50K to $250K Must report specific events within 30 days and must report gross revenue annually 11/10/2018 Copyright Vinson & Vinson, 2016

Several Types of Crowdfunding Donation-based crowdfunding – GoFundMe, HelpersUnite, Crowdrise the crowd gives money or some other resource because they want to support the cause; receives nothing in return Reward-based crowdfunding - Fundable, KickStarter, Indiegogo the crowd gives money to a business in exchange for a “reward,” typically the product or service that that particular company produces Equity-based crowdfunding – CircleUp, MicroVentures, StartEngine, Crowdfondue the company sells some or all of its shares to the members of the crowd Debt crowdfunding – SoMoLend, Kiva, FundingCircle the company borrows money from the crowd under a loan contract 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 506b 506c Reg A+ Tier 1 Reg A+ Tier 2 Reg CF Available now Yes Max to raise No cap <$20M $20-50M $1M Crowdfunding No Unaccredited investors Up to 35 No sales to unaccredited investors Up to 10% of annual income or net worth Registration Form D Full registration Form 1-A Form C State Registration Depends on state Coordinated state review SEC Review Several weeks Several Weeks 21 days Annual Audit/Financial Reports Certified by the principal executive Estimated Cost $25-75K $25-50K $50-75K $75-150K $5-25K Investor accreditation Self Issuer verified Suitable for Seed, scale, growth Growth Seed, scale Source: Crowdfund Intermediary Regulatory Advocates 11/10/2018 Copyright Vinson & Vinson, 2016

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Copyright Vinson & Vinson, 2016 FINRA Licenses Series 7 General Securities Representative Examination corporate stocks and bonds rights warrants real estate investment trusts (REITs) collateralized mortgage obligations (CMOs) municipal securities options-equity, index, and foreign currency investment company products/variable contracts direct participation programs exchange traded funds (ETFs) Series 62 Corporate Securities Limited Representative Examination REITs Series 79 Investment Banking Examination Debt and equity offerings (private placement or public offering) Mergers and acquisitions Tender offers Financial restructurings Asset sales Divestitures or other corporate reorganizations Business combination transactions 11/10/2018 Copyright Vinson & Vinson, 2016

Copyright Vinson & Vinson, 2016 Thank you www.vinsonandvinson.com Securities offered through Independent Investment Bankers Corp. a broker-dealer, Member FINRA/SIPC. Vinson & Vinson, LLC, is not affiliated with Independent Investment Bankers Corp.  To check the credentials and background of your investment advisor, go to FINRA Brokercheck.  This presentation is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.  11/10/2018 Copyright Vinson & Vinson, 2016