January 9, 2014 Crowdfunding: What it is and Where it Stands Presented By Attorney Matthew Benson Cook, Little, Rosenblatt & Manson, p.l.l.c.

The Center for Women’s Business Advancement Presents: Women and Money Forum Cultivating Prosperity January 9, 2014 “Crowdfunding: What it is and Where it Stands” presented by Matthew Benson, Esq.. Presented For

DISCLAIMER The materials and this presentation are 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.

Crowdfunding – What is it? Broad definition: The process of reaching out to – and raising smaller amounts of capital from – a large pool of investors (i.e., the “crowd”) Equity vs. Non-Equity

Crowdfunding – What is it? “True” private offering to Accredited Investors (SEC Rule 506(b)) Commonly used today “Advertised” private offering to Accredited Investors (SEC Rule 506(c)) New in 2013, some implementing Rules still not final “Donation/Reward” based crowdfunding portals Not actually “securities” “Real” securities-based crowdfunding portals (proposed Regulation CF) Rules proposed October 2013

“Donation/Reward” based Crowdfunding Examples: Kickstarter, Indiegogo, RocketHub “Backers” donate funds, pre-buy product/service, or receive other perks Not a loan and not an ownership interest Not regulated as securities

“Donation/Reward” based Crowdfunding Is a campaign Traditionally for projects, not business start-up But…used to move business project forward Shifting…used to start business

“Donation/Reward” based Crowdfunding 54,725 projects funded (70,582 not funded) $937 million raised >50% raise $1,000-$10, raised > $1 million Source:

“Donation/Reward” based Crowdfunding Fees – 5%-10% of amount raised All or nothing vs. keep what you raise Even if not funded – market research

Securities Law Framework What is a security? Federal law (Securities Act of 1933; SEC Rules) and State law (“Blue Sky” laws) Registration vs. Exemption Accredited vs. Non-Accredited Investors

Securities Law Framework What is a Security? promissory note; stock; bond; debenture, evidence of indebtedness; certificate of interest or participation in any profit sharing agreement; membership interest in a limited liability company; partnership interests in a partnership; collateral trust certificate; preorganization certificate or subscription; transferable shares; investment contract; ETC!!!

Securities Law Framework Federal & State Laws Federal law (Securities Act of 1933; SEC Rules) State law (“Blue Sky” laws)

Securities Law Framework Registration vs. Exemption Registration of Securities – costly, time consuming, etc. Exemptions – federal and state

Securities Law Framework Accredited vs. Non-Accredited Investors Accredited $1M of net worth (exclusive of primary residence) $200k of income (or with spouse $300k) Etc. Non- Accredited – everyone else

Crowdfunding – What is it? “True” private offering to Accredited Investors (SEC Rule 506(b)) Commonly used today “Advertised” private offering to Accredited Investors (SEC Rule 506(c)) New in 2013, some implementing Rules still not final “Donation/Reward” based crowdfunding portals Not actually “securities” “Real” securities-based crowdfunding portals (proposed Regulation CF) Rules proposed October 2013

“True” Private Offering SEC Rule 506(b) under Section 4(a)(2) of the 1933 Act Typically, limited to Accredited Investors – self-certify May include up to 35 sophisticated non-accredited investors BUT enhanced disclosures apply No general advertising allowed Notice filing only (SEC Form D); and often state notice filings and fees Commonly used exemption

“Advertised” Private Offering New SEC Rule 506(c) under the JOBS Act Became final in September 2013 Currently available; but additional implementation rules still under review (pre-filing to be required) General advertising permitted Accredited Investors only BUT enhanced verification requirements apply Accredited crowdfunding portal examples: WeFunder, SeedInvest

“Bad Actor” Rules for Private Offerings New for 2013: SEC Rule 506(d) prohibits companies from using 506(b) or 506(d) if certain people related to the company have experienced certain disqualifying events

“Real” Securities-based Crowdfunding Portals Timeline April 2012: JOBS Act directed SEC to issue Rules allowing securities-based crowdfunding through online portals to non-accredited investors October 23, 2013: SEC Rules proposes Regulation CF February 3, 2014: Public comment period ends Sometime in 2014: Final SEC Rules expected

“Real” Securities-based Crowdfunding Portals Fine print Limits on investors: Investors need not be accredited, but limits on amounts investors can invest Limits on issuers: Can raise up to $1 million in 12 months; $500,000 if financial statements reviewed but not audited; $100,000 if financial statements not reviewed Must use a registered crowdfunding portal

“Real” Securities-based Crowdfunding Portals More Fine print No general advertising; Generally, portals may not favor one issuer over another Offering disclosures; on-going disclosures (“public company light”) Similar “bad actor” rules as those that apply to Rule 506 offerings

Summary & Questions “True” private offering“Advertised” private offering “Donation/Reward” based crowdfunding portals “Real” securities-based crowdfunding portals Matthew Benson,

| 1000 Elm Street, 20 th Floor | Manchester, New Hampshire 03101