crowdfunding from the investor’s perspective

CROWDFUNDING FROM THE INVESTOR’S PERSPECTIVE

CROWDFUNDING 2016 SERIESPremier date: March 9, 2016

crowdfunding 2016 series

crowdfunding from the investor’s perspective

Premier Date: MARCH 9, 2016

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS


meet the facultyPANELISTS

Alex Davie Riggs Davie PLCJordan Fishfeld PeerRealtyCharles Sidman ECS Capital Partners and Angels

MODERATOR Dave Freedman,

Financial Journalist and Author


Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.


http://www.financialpoise.com/

about this webinarAll investors, including accredited and non-accredited, will have vastly more opportunities to participate in private securities offerings, thanks to the launch of Regulation A+ “mini-IPOs” in 2015, and Title III securities crowdfunding in 2016. Some accredited investors have already been participating in Regulation D offerings on offering platforms, the hottest area of which has been real estate; and investors ranging from individuals to institutions have invested on peer-to-peer (P2P) lending platforms. This webinar updates listeners on the results of equity and debt crowdfunding platforms and deals over the past few years, as well as intrastate securities crowdfunding. And we offer opinions on the prospects for Reg A+ and Title III equity crowdfunding.© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

about this seriesIn 2015, the securities crowdfunding galaxy expanded at warp speed, threatening to collide with larger, stodgier galaxies and disrupt whole solar systems. Title IV of the Jumpstart Our Business Startups Act, launched in the summer of 2015, created a new planet called Regulation A+ (also known as the mini-IPO). Then the SEC issued final rules under Title III of the JOBS Act, creating yet another planet—this one with a plethora of moons (some of which are surrounded by toxic gases)—called equity crowdfunding for non-accredited investors, tens of millions of them scattered across the sky chasing comets and asteroids that may or may not turn out to be optical illusions. This webinar series explores this newly expanded galaxy with state-of-the-art telescopes, monitored by the most authoritative crowdfunding astronomers in the USA.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.


episodes in this series

EPISODE #1 Crowdfunding from the Investors Perspective

3/9/2016

EPISODE #2 Crowdfunding from the Start-Up’s Perspective

4/13/2016

EPISODE #3 Securities Crowdfunding for Intermediaries 5/11/2016Dates above are premier dates. All webinars also available on demand.


Debt-based Crowdfunding (P2P)

Debt-based crowdfunding emerged as a for-profit investment vehicle in 2006 in the United States, and a year earlier in the United Kingdom. Also known as peer-to-peer lending (P2P) and more recently marketplace lending (because institutional investors are overwhelming individual investors on some P2P platforms), it lets borrowers apply for unsecured loans and, if accepted by the platform, borrow money from “the crowd,” then pay it back with interest.

P2P platforms generate revenue by taking a percentage of the loan amounts (a one-time charge) from the borrower and a loan servicing fee (either a fixed annual fee or a one-time percentage of the loan amount) from investors. The application process is free for borrowers. Investors earn the interest on each loan (or package of similar loans), assuming the borrowers make timely payments. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™

Debt-based Crowdfunding (P2P)LendingClub, launched in 2007, is the largest P2P platform in the USA. It went public in 2014, raising $1 billion, with a valuation of $9 billion. The table below represents data available in January 2016.

Lending Club: Historical Returns and Interest Rates by GradeGrade Adjusted Net Annualized Return Average Interest Rate

A 5.2% 7.72%B 7.3% 11.8%C 8.7% 15.2%D 8.8% 18.2%E 9.5% 21.0%

F&G 9.0% 23.5%This chart includes all loans that were issued before June 30, 2014. The historical returns data is updated monthly. Adjusted net annualized return is a cumulative, annualized measure of the return on all of the money invested in loans over the life of those loans, with an adjustment for estimated future losses. Source: https://www.lendingclub.com/info/demand-and-credit-profile.action


Debt-based Crowdfunding (P2P)Lending Club Statistics Total loan issuance as of 9/30/15: $13,402,853,200

Loan Purpose Reported by Borrowers (2007-2015)Refinancing 49%Credit card payoff 19%Home improvement 5.5%Major purchase 1.6% Business 1%Medical expenses 1%Car financing 1%Other 22%


Equity-based Offering PlatformsKinds of Equity Offerings on Internet-based Platforms

Online Launch Raise Limit in

1 Year Investor Status Investment Limit

Intermediary Required?

Reg A+ Tier 1 2015 $20 million All investors No limit No

Reg A+ Tier 2 2015 $50 million All investors Depends on income/worth No

Reg D Rule 506(b)1 2011No limit Accredited only No limit NoReg D Rule 506(c)2 2013

Intrastate Equity Crowdfunding

2013 (Georgia was first)

Ranges $1m to $4m All investors Depends on

income/worthVaries with

stateTitle III Equity Crowdfunding 2016 $1 million All investors Depends on

income/worthYes: online

portals3

1. This exemption allows a limited number of non-accredited investors to participate off-platform, but Reg D offering platforms allow only accredited investors to participate. Investors may self-certify accredited status.2. This exemption allows general solicitation., but issuers must take reasonable steps to verify investors’ accredited status.3. Issuers must use either non-broker-dealer funding portals or broker-dealer platforms, both of which must be registered with the SEC and FINRA.© 2016 David M. Freedman


Title IV: Regulation A+ Offerings

Title IV of the JOBS Act of 2012 expands the moribund Regulation A exemption by increasing the raise limit from $5 to $50 million. Non-accredited investors could participate in Reg A offerings before 2012, and they still can under Title IV but with certain limits.

In addition to the expanded raise limit, Title IV preempts blue sky review (i.e., no need for approval by every state in which the offering is made) for “Tier 2” offerings. Blue sky review is still required for “Tier 1” offerings under $20 million.

Non-accredited investors in Tier 2 offerings are limited (on an annual basis) to 10 percent of their income or net worth, whichever is greater. All investors can invest an unlimited amount in Tier 1 offerings.


Title IV: Regulation A+ Offerings

Issuers of Reg A+ offerings are allowed to “test the waters,” measuring potential interest by investors, before undertaking the obligations of an offering.

Reg A+ is nicknamed the “mini-IPO,” as issuers are required to go through a scaled-down registration process and file a prospectus-like document called an “offering circular” with the SEC.

The benefits of Reg A+ for seed-stage and startup companies seem limited mainly because Tier 1 offerings up to $20 million still require blue sky review and compliance, which can be costly and time-consuming, in addition to the SEC filing process.


Title III: Annual Investment Limits

Title III of the JOBS Act of 2012 sets yearly investment limits based on investors’ income and net worth. In October 2015 the SEC issued Regulation CF which clarified those limits:

• If an individual’s annual income or net worth is less than $100,000, he or she may invest the greater of (a) $2,000 or (b) 5 percent of the lesser of his or her annual income or net worth, over the course of the year.

• If the annual income and net worth of the individual are both greater than $100,000, he or she may invest up to 10 percent of the lesser of his or her annual income or net worth, but not more than $100,000, per year.

• Spouses may combine their incomes for the purpose of the income test.• In calculating net worth, investors may not include the value of their primary residence.

SEC Investor Bulletin dated 2/16/16 gives guidance on calculating net worth: http://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html


http://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html

http://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html

Title III Equity CrowdfundingTitle III of the JOBS Act, along with SEC rules issued in 2015, establish the following structure for equity crowdfunding:

• Title III offerings may launch (finally!) in May 2016.

• Issuers may raise up to $1 million in a 12-month period. (Congress may increase that limit.)

• Issuers may concurrently raise capital in Regulation D and Title IV offerings (known as parallel offerings).

• For raises above $500,000 issuers must show audited financial statements, except for first-time Title III issuers.

• Issuers must list offerings on intermediaries known as funding portals and broker-dealer platforms.

• Portals and platforms may use both objective and subjective criteria for accepting & rejecting applications submitted by issuers. Only broker-dealers may give investors advice about which offerings are suitable.

• Broker-dealers are held to a higher standard of due diligence than funding portals.

• Portals and platforms must provide communication channels that let investors engage in (a) discussions with each other, and (b) Q&A with issuers.

• Each investor buys shares in the issuer directly. Portals may not aggregate investors into special purpose vehicles.

• For a thorough discussion of Title III and SEC rules, see CrowdCheck’s memo of Nov. 2015: http://bit.ly/1XE8c44


http://bit.ly/1XE8c44

http://bit.ly/1XE8c44

Intrastate Equity CrowdfundingIntrastate securities exemptions allow all investors, including non-accredited, to invest in startups and private companies that are based in their state. As of February 2016, here are the states that have enacted (through legislation) or promulgated (through regulation) intrastate securities exemptions:

• These states (and D.C.) have broad intrastate securities exemptions that allow, but do not require, intrastate offerings to be listed on securities crowdfunding portals: Alabama, Colorado, District of Columbia, Florida, Georgia, Illinois, Kansas, Maine, Massachusetts, Michigan, Montana, Oregon, South Carolina, Tennessee, Vermont, Virginia, Washington.

• The following states have narrow intrastate crowdfunding exemptions that require offerings to be made on crowdfunding portals: Arizona, Indiana, Iowa, Kentucky, Minnesota, Mississippi, New Jersey, Texas, Wisconsin.

For details on each state (including raise limits and investment limits) see http://www.freedman-chicago.com/ec4i/Intrastate-Securities-Exemptions.pdf


http://www.freedman-chicago.com/ec4i/Intrastate-Securities-Exemptions.pdf

http://www.freedman-chicago.com/ec4i/Intrastate-Securities-Exemptions.pdf

Crowdfunding Securities

• Straight debt• Straight equity (preferred stock, LLC

shares, etc.)• Convertible debt (starts as debt, converts to

equity–maybe)


Straight Equity Deal TermsEconomic terms• Type of securities offered, price per share, valuation (fully diluted), percent of ownership offered

• Target amount of capital being raised, minimum investment amount and increments, deadline for the raise

• Use of proceeds, capital structure, et al.

Control terms• Seat on the board of directors (in Regulation D offerings?)

• Protective provisions (veto rights); voting rights

Terms relating to liquidity events and future financing rounds• Liquidation preferences, full participation

• Anti-dilution provisions, pro rata participation in future rounds, pay to play, drag-along agreement

Other terms• Conversion rights, information rights, redemption rights, right of first refusal, co-sale right

• Dividends

• Restrictive covenants, vesting of founder stock, et al


Convertible Debt Deal Terms

• Principal amount• Interest rate, loan term, maturity date• Conversion rights (in what circumstances other than maturity date,

e.g., acquisition)• Conversion terms (discounts and/or caps, i.e., derived from later-

round valuation)

For a more thorough discussion of deal terms on both straight equity and convertible debt, see:

Venture Deals, Second Edition, by Brad Feld and Jason Mendelson (Wiley & Sons, 2012)

Angel Investing (Chapter 12), by David S. Rose (Wiley & Sons, 2014)

Equity Crowdfunding for Investors (Chapters 10 and 11), by David M. Freedman and Matthew R. Nutting (Wiley & Sons, 2015)


Regulation D, Rule 506As a result of Title II of the JOBS Act, the SEC split Rule 506 into two parts.

• “Traditional” private offerings under Rule 506(b) may not use general solicitation. Off-platform, up to 35 non-accredited investors may participate; but on-platform, only accredited may participate, and they can self-certify their AI status.

• Rule 506(c) removes the strict ban on general solicitation and advertising. That is, issuers can publicize certain details of their offerings outside of the platform where the offering is listed. Only accredited investors may participate, and they must verify their AI status.


First 2 Years of General SolicitationRule 506(c) permits general solicitation for Regulation D offerings. Only accredited investors may participate. In the first two years of general solicitation (Sept 23, 2013, through Sept. 23, 2015):

1. About 9% of Reg D offerings used the Rule 506(c) exemption. [source: Offerboard]

2. Roughly 100,000 accredited investors participated in private capital markets for the first time. That’s a ~50% increase over the number of AIs who participated each year before 2013. [Doug Ellenoff]

3. On the 18 major equity offering platforms tracked by Crowdnetic, 6,063 distinct 506(c) offerings recorded capital commitments of approx. $870 million. [Crowdnetic is the source for #3 thru #6]

4. The sectors with the highest number of successful 506(c) offerings were services, technology, financial, consumer goods, and healthcare (out of 8 sectors total). The sectors with the highest success rates were financial, energy, healthcare, materials, and commerce & industry. The industries with the highest recorded capital commitments were real estate and oil & gas (out of 10 industries total).

5. 69% of 506(c) offerings were equity, 20% were convertible debt, 9% were straight debt. The rest included revenue share, royalty, real estate, and SAFE.

6. Although equity was the most used security type, it had a low success rate (21%). The securities types with the highest success rate were real estate (81%) and revenue share & royalty (63%). Convertible debt’s success rate was 36%, straight debt 31%. SAFE was the lowest (15%).


More About The Faculty: D

[email protected] FREEDMAN

David M. Freedman has worked as a journalist since 1978, primarily in the fields of law, business, and personal finance. He has served on the editorial staff of The Value Examiner (NACVA) since 2005, focusing on business valuation and forensic accounting. He is a columnist for Accredited Investor Markets (AIMkts.com). Dave is a coauthor of Equity Crowdfunding for Investors: A Guide to Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms (Wiley & Sons, 2015)



ALEX [email protected]

Alexander J. Davie is a corporate and securities attorney in Nashville, Tennessee. Many businesses look to Alex as their outside “general counsel” for day-to-day legal needs as well as their trusted adviser on high-stakes transactions, such as capital raising, partnership buyouts and disputes, technology transactions, and mergers and acquisitions. His first goal is to provide clients with responsive service and candid and decisive legal advice for the difficult choices they often face. Alex frequently works with technology companies, including startups and emerging growth companies, and with private investment funds, such as private equity, venture capital, and hedge funds. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™


JORDAN [email protected]

Jordan Fishfeld is the founder and CEO of PeerRealty. He focuses on the development of strategic partnerships with investors, sponsors, and developers, while ensuring all deals are strong and viable. With over eight years of investing, development and sales experience in the real estate industry, Jordan understands the benefits of strong and tangible assets.

Prior to founding PeerRealty, Jordan worked as a finance attorney for Katten Muchin Rosenman, LLP, where he assisted on more than $1 billion worth of syndicated loan transactions. Before graduate school, Jordan worked as a law clerk for a New York based real estate firm, representing lenders for properties valued at over $45 million. Jordan holds Bachelor of Arts in Political Science and Bachelor of Science in Business Administration degrees from the University of Florida. Jordan also received Master of Business Administration and Juris Doctorate degrees from the University of Miami, where he graduated magna cum laude. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™


CHARLIE [email protected]

Charles Sidman earned a PhD at Harvard and had a full career of scientific research and teaching at Harvard Medical School, the Basel (Switzerland) Institute for Immunology, the Jackson Laboratory in Bar Harbor, Maine (where he still resides), and as a retired professor of Molecular Genetics, Biochemistry and Microbiology at the University of Cincinnati College of Medicine. He also earned an MBA from the University of Cincinnati, and was adjunct Professor of Management in its College of Business.

Today he manages the innovative venture fund ECS Capital Partners, which he started, and continues as an active angel investor and founding member of the Angel Capital Association. He is past President of the Crowdfunding Professional Association, the non-profit umbrella trade group for the crowdfunding industry.© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

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Visit www.eisneramper.comEisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

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Published in June 2015

More information at http://www.ec4i.com

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29© 2016 DailyDAC, LLC d/b/a/ Financial Poise™

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What every accredited investor should know before investing in

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.
