1. What You Need to Know About Raising Capital IESBGA Annual Conference May 20, 2015 Timothy M. Sullivan Hinshaw & Culbertson LLP 222 N LaSalle St., Suite 300 Chicago, IL 60601 312-704-3852 tsullivan@hinshawlaw.com 131044161

2. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 2  Business Entity  Capital Raising  Preparation for Capital Raise  Capital Instruments  Private Placements  Compliance with Federal Securities Laws  Compliance with Illinois Securities Laws  Crowdfunding  Regulation A

3. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 3  Sole Proprietorship: - The sole proprietorship consists of a single person carrying on a business for profit as the owner. - The owner is personally responsible for all obligations and liabilities of the business. Business Entity  Partnership:  General Partnership: - A general partnership is an association of at least two persons carrying on a business as co-owners for profit. - Each partner has the power to bind the partnership. - A written partnership agreement, if one exists, may alter a number of the rules set out by state law.

4. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 4 Business Entity - Participants in a general partnership remain individually and personally liable for all of the general partnership’s obligations. - For federal income tax purposes, partnership gain and loss are allocated among the partners and the partners will probably have to file income tax returns and pay income taxes in the states in which the partnership earns taxable income.

5. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 5 Business Entity  Limited Partnership: - A limited partnership must have at least one general partner and one limited partner. The general partner’s rights and liabilities are just like those of a partner in a general partnership. - The limited partner is liable for his contribution of capital and is not personally responsible for the debts and liabilities of the partnership. - A written agreement of limited partnership will usually specify the amount of capital that each partner must contribute to the partnership both initially and in the future.

6. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 6  Corporations:  C Corporation: - A corporation is a distinct legal entity, separate and apart from its owners. The standard corporate form is sometimes called a “C Corp” because it is taxed under Subchapter C of the Internal Revenue Code. Illinois for profit corporations are governed by the Business Corporation Act of 1983. - A corporation can enter into contracts; it can sue or be sued; and it can hold title to real property, all in its own name. - The corporation’s shareholders are passive investors in the business venture and they have no liability for debts of the corporation. Business Entity

7. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 7 Business Entity - The corporation’s officers - employees of the corporation - and its board of directors are responsible for managing the corporation’s business affairs. - Generally, officers and directors are not liable for obligations of the corporation. - In order to preserve its separate legal identity, the corporation, its officers, and its directors must observe corporate formalities. - Corporate contracts must be signed in the corporation’s name and not in the names of individual officers or shareholders. - Most importantly, corporate funds must not be intermingled with individual funds. - A C Corp is taxed on its net income. A second layer of income tax is assessed against the individual shareholders on the dividends they receive.

8. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 8 Business Entity - The directors and shareholders of the corporation must meet at least annually to handle certain “housekeeping” matters, and major transactions and agreements should be approved in advance by the directors and, in some cases, the shareholders.

9. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 9 Business Entity  Subchapter S Corporation: - An S Corp is a corporation that has elected special tax treatment under Subchapter S of the Internal Revenue Code. - An S Corp generally is not taxed on its income or gain; all of the S Corp’s taxable gain is deemed to pass through directly to the shareholders, and they are taxed on it, regardless of whether they actually receive it. The tax treatment of the S Corp mirrors that of a partnership.

10. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 10 Business Entity - An S Corp must meet the following criteria: It may have no more than 100 shareholders (Note: ownership rules for S corps provide that family members are counted as one shareholder). All shareholders must be individuals, estates, “electing small business trusts” or “qualified tax-exempt shareholders”. No shareholder may be a nonresident alien. The corporation may have only one class of stock. An S Corp may voluntarily terminate its S status at any time.

11. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 11 Business Entity  Limited Liability Company :  An LLC combines some of the advantages of S corp status and partnerships (pass-through tax treatment for income) with the limited liability and flexible ownership structure of the corporate form. An LLC has members as opposed to shareholders. -The right to manage the affairs of the LLC may be vested in the members or in one or more managers. -Like shareholders and directors of corporations, members and managers are not personally liable for the debts, obligations, or liabilities of the LLC. -An LLC should have a written operating agreement signed by all of the members of the LLC.

12. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 12 Business Entity -The LLC form also allows for great flexibility in management, control, and distribution of profits. -An LLC may have an unlimited number of equity owners. There are no restrictions on the types of entities that can be members of an LLC; corporations, nonresident aliens, partnerships, individuals, and other types of entities can be members. An LLC may have more than one class of equity interest or membership interest.

13. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 13  Pros  Cushion for difficult economic environment in the future.  Capitalize on market opportunities (e.g., acquisitions).  Purchase significant assets to expand business (machinery, real estate), for working capital or to pay down debt. Capital Raising  Cons  Value dilution.  Voting: - loss of control; - Blocking rights for significant investors; and - Board seats for significant investors.  Capital costs: - Legal; - Accounting; and - Investment banking fees.

14. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Preparation for Capital Raise 14  Cleaning House  Demonstrate strong management team.  Clean-up balance sheet problems or perceived problems before raising capital.  Are core earnings good?  Getting Ready to Raise Capital  Develop a Business Plan;  Prepare Projections;  Review financial statements;  Clean-up corporate records; and  Identify investors.

15. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Capital Instruments  Common Stock  Pros  Most easily understood.  Allows investors to participate in future increases in value.  Cons  Dilution of value.  Dilution of voting.  Shareholder approval may be needed to issue common.  Shareholder agreement: Company right to buy back stock in the future; Investor right to block certain actions or put stock back; Pre-emptive rights; Drag-along rights; and Tag-along rights.  Disclosure of problems is paramount.  Dividends not deductible.  Selling a security to investor involves compliance with federal and state securities laws. 15

16. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Pros  Limit investor voting and will not share in increase in future value.  Redeemable at company's or investor's option.  Convertible at company's or investor's option.  Can be structured to meet needs of company and investor.  Cons  Dividend level - higher yield may be required.  Cumulative vs non-cumulative dividends.  Shareholder approval may be needed to issue preferred.  Shareholder agreement: Company right to buy back stock in the future; Investor right to block certain actions or put stock back; Pre-emptive rights; Drag-along rights; and Tag-along rights.  Disclosure of problems is paramount.  Dividends not deductible.  Selling a security to investor involves compliance with federal and state securities laws. 16  Preferred Capital Instruments

17. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Pros  Interest deductible.  No voting rights or right to participate in future growth.  Can be convertible to common or preferred a future date at option of investor or company.  Cons  Setting interest rate – fixed or variable.  Investor may want it to be secured by company assets with numerous default provisions.  Investor may want personal guarantees of principal shareholders.  Lending bank will want notes to be subordinate to bank debt.  Disclosure of problems is paramount.  Selling a security to investor involves compliance with federal and state securities laws 17  Promissory Notes Capital Instruments

18. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Pros  No voting or other rights; not shareholders.  Cons  Setting conversion rate and conversion date.  Anti-dilution provisions.  Pricing.  Disclosure of problems is paramount.  Selling a security to investor involves compliance with federal and state securities laws. 18  Warrants/Options Capital Instruments

19. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Hybrid ° Combine common, preferred, notes, warrants or option into package - e.g., for $1,000 you get 100 shares of common, 10 shares of Class A Preferred, note for $300.00 and warrants/options to acquire 100 shares of common in the future at a fixed price.  LLC or Partnership Interests ° Pros  Can be structured to suit needs of company and investor.  Can limit investor voting rights.  Divide profits as parties see fit. 19 Capital Instruments

20. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. ° Cons  Dilution of value.  Operating Agreement provisions. Company right to buy back interests in the future; Investor right to block certain actions or put stock back; Pre-emptive rights; Drag-along rights; and Tag-along rights.  Disclosure of problems is paramount.  Selling a security to investor involves compliance with federal and state securities laws. 20 Capital Instruments

21. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Debt ° Borrowing from a bank or other lender.  Lien on all assets of the company and pledge of assets of owners.  All other debt must be subordinate to bank debt.  Personal guarantees and/or indemnification from principal shareholders.  Default provisions if company does not comply with covenants. 21 Capital Instruments

22. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Private Placements  Most businesses raise capital through a private placement. °Costs involved in a public offering are significant. °Continued costs of being a public company due to reporting requirements. °A private placement allows a company to raise funds at a lower cost, without continuing reporting obligations.  Contents of a private placement offering document. °Description of the business, including operating history; °Use of proceeds; °Risk factors; °Directors, officers and principal shareholders; °Amount to be raised and type of security (common, preferred, notes) to be sold °Plan of distribution (sales by directors and officers, by investment banker); °Representations from buyers to demonstrate compliance with securities laws; and °Financial statements. 22

23. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Private Placements  Valuation of Business – What do you sell equity for? ° In raising capital, how do you value your business to determine pricing for securities being sold?  Underpricing immediately passes value to investors.  Overpricing may make it difficult to find investors. ° Valuation Methods  Comparable business that is publicly traded.  Sales of comparable businesses.  Book value.  Multiple of earnings.  Trade association reports.  Professionals – accountants, bankers, lawyers. 23

24. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Private Placements ° Need to project value.  If business worth $1MM today, what will it be worth in three years?  Capture some of that value in pricing ° Retaining voting control for as long as possible is essential.  Investment Bankers ° In most smaller private placements, companies sell stock themselves.  Friends and family.  Business associates.  Customers and suppliers. ° However, this can become more of a problem as more capital needs to be raised in the future – running out of buyers. 24

25. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Private Placements ° Engaging an investment banker.  Establish relationships as early as possible even though you do not need to use them.  Contact sources – lenders, accountants, attorney, associations for related businesses. ° Investment bankers may not be willing to work with a company if capital raise amount is too small. ° Investment bankers fees. ° Finders are a concern. 25

26. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Compliance with Federal Securities Laws Sales of securities in private placements must be made pursuant to an exemption from federal securities laws.  Regulation D ° There are a number of Federal exemptions including those offered by Regulation D under Rules 504, 505 and 506. 26 ° Rule 504  Rule 504 permits sales of up to $1,000,000 of securities during any twelve month period.  A company may sell to an unlimited number of investors. No general solicitation or general advertising is permitted.

27. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. ° Rule 505  Rule 505 permits sales up to $5 million in a single offering.  Offers and sales under Rule 505 may be made to an unlimited number of accredited investors and to an unlimited number of non-accredited investors but sales may only be made to 35 non-accredited investors.  Non-accredited investors need not be sophisticated. The issuer should use a questionnaire or subscription form to satisfy itself that prospective investors are accredited or that non-accredited purchasers are sophisticated. 27 Compliance with Federal Securities Laws

28. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. ° Rule 505  If non-accredited investors are going to purchase shares, fairly extensive disclosures must be made.  If only accredited investors are involved, no specific disclosures are required but the issuer is still subject to anti-fraud rules.  Rule 505 does not allow any general solicitation or advertising. 28 Compliance with Federal Securities Laws

29. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 29 Compliance with Federal Securities Laws ° Rule 506  Rule 506 permits sales of any amount in a single offering. Rule 506 sales are largely exempt from state regulation.  Offers and sales under Rule 506 may be made to an unlimited number of accredited investors and to an unlimited number of non-accredited investors but sales may only be made to 35 purchasers.  Non-accredited investors must be reasonably sophisticated. An issuer should use a questionnaire or subscription form to satisfy itself that investors are accredited or that non-accredited purchasers are sophisticated.

30. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. 30 Compliance with Federal Securities Laws ° Rule 506  If non-accredited investors are going to purchase shares, fairly extensive disclosures must be made.  If only accredited investors are involved, no specific disclosures are required but the issuer is still subject to anti-fraud rules.  Rule 506 now allows general solicitation or advertising.

31. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. ° Accredited Investors  There are a number of categories of accredited investors. The most common ones for individuals are set forth below: A natural person whose individual net worth, or joint net worth with his/her spouse, at the time of purchase exceeds $1,000,000 (minus the net value of the purchaser’s primary residence plus any amount by which debt on residence exceeds value of home). A natural person who had an individual income in excess of $200,000, or joint income with his/her spouse in excess of $300,000, in each of the two most recent years and reasonably expects the same income level in 2015. Any director, executive officer or general partner of the issuer of the securities being sold. 31 Compliance with Federal Securities Laws

32. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Rule 147 – Intrastate Offerings ° Under Rule 147, the securities may only be offered and sold to residents of one state. ° The issuer must be a resident of state where offer made.  State where it is incorporated or where its principal office is located if a general partnership. 32 Compliance with Federal Securities Laws  The issuer must be doing business primarily within this state.  Must derive at least 80% of consolidated gross revenues within the state within specified time frames;  80% of its assets must be located within the state;  At least 80% of net proceeds from the sale must be used within the state; and  The principal office of the company must be located within the state.

33. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Compliance with Illinois Securities Laws  Once an exemption from the federal securities laws has been secured, the issuer needs to review the laws of the states where the securities will be sold in order to see if there is an exemption under state law.  Under Illinois law, there are a variety of exemptions available. These exemptions exempt the transaction not the underlying security. Subsequent transactions may have to be registered if no exemption is available. 33 °Sales to Existing Shareholders  Offers, sales, issuances or exchanges with existing shareholders, if no commission is paid. °Rule 506  Issuers relying on Rule 506 of Regulation D (issuing covered securities) need only file a Form D with a $100.00 fee. °Rule 505  Rule 505 offerings are exempted if all criteria are satisfied

34. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Compliance with Illinois Securities Laws ° Accredited Investors  Section 4H exempts sales to accredited investors (who meet income and net worth tests discussed above). Securities may not be sold by means of general advertising or solicitation. ° Sales to Executive Officers and Directors  Offers, sales or issuances to any person who is a director, executive officer or general partner of the company. ° Limited Offering - Offers, sales or issuance to residents (or non-residents) where: - All sales to Illinois residents during the preceding 12 months have been made to fewer than 35 persons in Illinois or (regardless of how many people buy in Illinois) involve sales of less than $1,000,000. - When counting the 35 people or the amount of the sales, the issuer excludes sales exempted under other provisions. 34

35. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Compliance with Illinois Securities Laws - No general advertising or solicitation and no commissions in excess of 20% of sale price. - A report on Form 4G must be filed (alternatively issuer may file a Form D) within 12 months of first sale. A $100.00 fee must be paid. Failure to file report or filing of inaccurate report does not give right of rescission. By filing company agrees to deliver disclosure materials to the Illinois Securities Department if so requested. 35

36. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Crowdfunding Rules for Companies Seeking to Raise Capital  SEC has not finalized crowdfunding rules authorized by the JOBS Act; rules proposed over 15 months ago.  Offering and Investment Limits - The aggregate amount of securities that may be sold by a company within a 12- month period in crowdfunding transactions may not exceed $1 million. - During any 12-month period, the aggregate amount of securities sold to any investor by all companies in crowdfunding transactions must not exceed the greater of: (i) $2,000 or 5% of either the annual income or net worth of such investor (and his spouse), if both the annual income and the net worth of the investor is less than $100,000; and (ii) 10% of either the annual income or net worth of such investor (and his spouse), not to exceed a maximum aggregate amount of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000. 36 Crowdfunding

37. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. - Before accepting any investment commitment, company must have a reasonable basis to believe that the investor satisfies the investment requirements under the crowdfunding rules; the intermediary may rely on the investor’s representations that the investor so qualifies. - The investor purchase limits are calculated on all crowdfunding purchases made by an investor during any 12-month period. Thus, an investor’s purchases in all crowdfunding transactions during such period must be aggregated (and not just from the offering in which the investor is participating). A company may rely on the efforts of an intermediary to ensure that an investor does not exceed these aggregate purchase amounts. 37 Crowdfunding

38. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Restrictions on Resales  Crowdfunding securities may not be transferred by the purchaser for one year after the date of purchase, except when transferred: - to the company that issued the securities; - to accredited investors; - as part of an offering registered with the SEC; or - to a family member of the purchaser or the equivalent, or in connection with certain events (e.g., death or divorce). 38 Crowdfunding

39. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Advertising - Companies will not be permitted to advertise crowdfunding offerings; they will be allowed to provide very limited notices that direct investors to the intermediary’s platform. A company may communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary’s platform. - Under the proposed rules, a crowdfunding transaction must take place exclusively online through platforms operated by a single SEC registered intermediary, either a registered broker-dealer or a new type of SEC registrant called a “funding portal." An intermediary must be a member of FINRA or any other applicable national securities association registered under Section 15A of the 1934 Act. 39 Crowdfunding

40. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Under the proposed rules, a crowdfunding transaction must take place exclusively online through platforms operated by a single SEC registered intermediary, either a registered broker-dealer or a new type of SEC registrant called a "funding portal." An intermediary must be a member of FINRA or any other applicable national securities association registered under Section 15A of the 1934 Act.  A funding portal is defined as any person acting as an intermediary in a crowdfunding transaction that does not: offer investment advice or recommendations; solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal; compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; or hold, manage, possess or otherwise handle investor funds or securities. 40 Crowdfunding

41. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  A company may compensate the intermediary for its participation in the crowdfunding offering, so long as that compensation does not include a financial interest in the company. An intermediary must advise all investors who open accounts with it of the manner in which it will be compensated in connection with a crowdfunding offering.  An intermediary must conduct a background and securities enforcement regulatory history check on each company whose securities are to be offered by the intermediary, as well as on each of the company’s officers, directors (or any person occupying a similar status or performing a similar function) and 20% owners.  The intermediary would have to make publicly available on the intermediary’s platform all of the company’s required disclosures at least 21 days before any securities are sold and until the crowdfunding offer has been completed or cancelled. 41 Crowdfunding

42. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Offering Circular; Annual Reporting Requirements - A company that offers crowdfunding securities must electronically file an offering circular on Form C with the SEC and must amend its Form C disclosures by filing a Form C-A that will contain updates or material changes. - A company will have to file with the SEC on Form C-U regular updates on the progress of its offering, and provide such updates to investors and each intermediary.  The theory underlying crowdfunding is that it is a capital raising technique that will allow startups to inexpensively raise capital from a large group of investors. The investment opportunity would be available to all investors, not just those with a high net worth or net income, allowing the small investor to acquire shares on a company that one day might become a Fortune 100 company (e.g., Facebook) and reap the benefits of such an investment. 42 Crowdfunding

43. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  The JOBS Act provisions and the SEC crowdfunding rules are supposed to bring this opportunity to startups and small investors. The JOBS Act provisions and the proposed crowdfunding rules establish what may be a cumbersome and potentially costly regulatory regime. This may deter startups from initiating crowdfunding offerings and intermediaries (the ones who would, under the rules, sell the shares for startups) from participating in such transactions. With a proposed limit of $1 million on the amount that a company may raise in a crowdfunding exemption transaction in any 12- month period and the costs that may be incurred to complete a crowdfunding offering, the issue that must be resolved is whether the benefits of raising capital through crowdfunding or acting as a crowdfunding intermediary would be great enough to justify the compliance costs and potential liability risks.  For more information about these proposed rules see http://www.hinshawlaw.com/newsroom-publications-alerts-556.html. http://www.hinshawlaw.com/newsroom-publications-alerts-556.html 43 Crowdfunding

44. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Crowdfunding outside of SEC rules:  Investment companies are organizing crowdfunding websites. - Qualify accredited investors to participate; - Conduct due diligence on companies seeking to raise capital; - If company acceptable, qualified accredited investors allowed to review company data and invest; and - Fee charged by investment company. 44 Crowdfunding

45. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Regulation A  The SEC, as directed by Section 401 of the JOBS Act, adopted rules on March 25, 2015 which significantly amend Regulation A.  The SEC's rules expand and revise Reg A and create two tiers of Reg A offerings: Tier 1 offerings will consist of securities offerings of up to $20 million in a 12-month period, including sales for the account of selling security-holders equal to the lesser of $6 million or 30% of the aggregate offering price (including sales by the issuer). Tier 2 offerings will consist of securities offerings of up to $50 million in a 12-month period, including sales for the account of selling security-holders equal to the lesser of $15 million or 30% of aggregate offering price (including sales by the issuer). 45 Regulation A

46. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  For offerings up to $20 million, a company could elect to proceed under either Tier 1 or 2.  The new rules will require issuers to electronically file disclosure documents with the SEC but impose different disclosure requirements for issuers involved in Tier 1 and Tier 2 offerings. In addition, the rules will allow issuers to submit offerings to the SEC on a confidential basis.  Tier 2 offerings will be subject to investment limits.  In addition, an issuer completing a Tier 2 offering will be required to comply with periodic reporting rules. 46 Regulation A

47. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved.  Tier 2 offerings will be exempt from the state registration and qualification rules.  Companies relying on Tier 2 of Reg A would not become subject to the reporting and most other requirements of the Securities Exchange Act of 1934 (the "1934 Act"). As a result, Tier 2 companies will not be subject to, among other rules, Sarbanes-Oxley, insider trading and reporting rules, or SEC proxy rules.  For more information about these rules, see http://www.hinshawlaw.com/newsroom-publications-alerts-661.html. http://www.hinshawlaw.com/newsroom-publications-alerts-661.html 47 Regulation A

48. © 2014 Hinshaw & Culbertson LLP, an Illinois Limited Liability Partnership. All rights reserved. Timothy M. Sullivan Hinshaw & Culbertson LLP Office 312-704-3852 tsullivan@hinshawlaw.com www.hinshawlaw.com tsullivan@hinshawlaw.com www.hinshawlaw.com 48