EPIP and Public Allies partnered for the third webinar in a four-part webinar series: "the future of funding social change", with two NYU Law and Social Enterprise Fellows. Our presenters led us through an exploration of crowdfunding, discussing at length what this new tool means for the future of funding, philanthropy and social change and how it can be used to make an impact. In "Crowdfunding 101", these two social enterprise experts elaborated on the nuts and bolts of the process, examined how impending legal changes may take effect, and explored the potential consequences for funders, governments, fundraising and the social sector as a whole. Speakers: • Robert Esposito, Law and Social Enterprise Fellow, NYU • Shawn Pelsinger, Law and Social Enterprise Fellow, NYU

1. CROWDFUNDING 101
EPIP/PA Webinar
July 30th, 2014
EPIP Host: Michael Barham
Speakers: Robert Esposito and Shawn Pelsinger

2. 2
Emerging Practitioners in
Philanthropy (EPIP) is a national
network of foundation
professionals and social
entrepreneurs who strive for
excellence in the practice of
philanthropy.

3. 3
We provide a platform
for our community to:
Connect
with others
Learn &
practice
leadership skills
Voice
emerging,
transformative
thoughts in the
social sector

4. Join EPIP
If you’re not yet a member, join us!
More information on our site at
www.epip.org/membership
or contact
michael@epip.org

5. Public Allies
• Public Allies’ Mission is to advance new leadership to
strengthen communities, nonprofits and civic participation
• The purpose of the Public Allies’ Alumni Network is to
advance the leadership practice (skills, career and
network) and impact of over 5,500 leaders have emerged
through Public Allies Apprenticeship over the past 23
years.

6. Announcements
• EPIP People of Color Network Gathering @ Facing Race
• At Race Forward’s Facing Race Conference
• November 13th-15th
• Dallas, Texas
• Next Webinar – save the date
• Talent Philanthropy with Rusty Stahl
• Wednesday, September 10th, 3pm ET
• Upcoming Events
• epip.org/events

7. Housekeeping
• Calling in on the phone? Mute your computer, please.
• All attendees on mute
• Use the question box for technical difficulties and to submit questions
for panelists
• We’ll save time for Q&A
• This webinar will be recorded and available on the EPIP website
• Complete the post-webinar survey!

8. Today’s Speakers
• Robert Esposito, Jacobson Fellow in Law &
Social Enterprise, NYU
• Shawn Pelsinger, Jacobson Fellow in Law &
Social Enterprise, NYU

9. CROWDFUNDING+101
Shawn+Pelsinger,+Esq.+&+Robert+T.+Esposito,+Esq.

10. Overview
● What+is+Crowdfunding?++
● Types+of+Crowdfunding+
● Equity+Crowdfunding+Regulation+
● Federal+Regulations+(JOBS+Act)+
● StatePlevel+Regulations+
● Conclusion+&+The+Future+of+
Crowdfunding

11. What+is+Crowdfunding?
● “The practice of funding a project or venture by raising many small amounts of
money from a large number of people, typically via the Internet.”
!
● “The use of small amounts of capital from a large number of individuals to
finance a new business venture. Crowdfunding makes use of the easy
accessibility of vast networks of friends, family and colleagues through social
media websites like Facebook, Twitter and LinkedIn to get the word out about a
new business and attract investors. Crowdfunding has the potential to increase
entrepreneurship by expanding the pool of investors from whom funds can be
raised beyond the traditional circle of owners, relatives and venture capitalists.”
!
● Raised via crowdfunding:
○ 2010: $89 million;
○ 2011: $1.47 billion;
○ 2012: $2.66 billion;
○ 2013 (projected): $5.1 billion.

12. Types+of+Crowdfunding
● Debt
○ Investors make loans to a person/company, are repaid over time at
negotiated interest rate
○ E.g. Kiva
● Equity
○ Investors receive equity security interest (shares/units) in a company.
○ E.g. SeedInvest
● Donation
○ Contributor (not investor) makes financial donation with no expectation
of repayment or consideration.
○ E.g. Razoo
● Rewards
○ Investors receive item or service as consideration for their investment/
purchase.
○ E.g. Kickstarter

13. Types+of+Crowdfunding:+Breakdown
!
Average campaign targets:
⬜ Debt: $5,587 (22% of all crowdfunding)
⬜ Reward: $4,076 (11% of all crowdfunding)
⬜ Donation: $664 (49% of all crowdfunding)
⬜ Equity: $84,597 (18% of all crowdfunding)

14. Types+of+Crowdfunding:+Debt
!
!
● Debt crowdfunding has traditionally
been peer-to-peer. In 2005, Kiva
launched with $25 minimum loan
amount. Have issued $322 million in
loans since 2005.
!
● Kiva has been wildly successful:
○ ~870,000 users;
○ ~470,000 loans issued;
○ 98.98% repayment rate;
!
● Lenders receive only their principal returned, no profit.

15. Types+of+Crowdfunding:+Debt
● Regulation of debt crowdfunding erupted in
2008 when the SEC issued a cease and desist
letter to Prosper, a peer-to-peer lender.
!
● SEC also targeted Loanio and Lending Club
claiming that the notes sold “are securities
pursuant to Section2(a)(1) of the Securities Act
and under the Supreme Court’s decisions in
both SEC v. W. J. Howey Co., 328 U.S. 293
(1946), and Reves v. Ernst & Young, Inc.,
494 U.S. 56 (1990).”
!
● Exceptions: (i) note delivered in consumer financing,
(ii) the note secured by a mortgage on a home, (iii) the
short term note secured by a lien on a small business or
some of its assets, (iv) the note evidencing a ‘character’
loan to a bank customer, (v) short-term notes secured
by an assignment of accounts receivable, (vi) a
note which simply formalizes an open-account debt incurred in the ordinary course
of business, (vii) notes evidencing loans by commercial
banks for current operations.

16. Types+of+Crowdfunding:+Donation
● Donation-based crowdfunding involves distributed donations made to a charitable
contribution in exchange for no tangible or security interest. These are effectively
donations to charitable causes.
!
● Donation-based crowdfunding is the most widely visible and least novel of the
crowdfunding categories
○ Wikipedia;
○ The Red Cross;
○ Political campaigns.
!
● Donation-based crowdfunding is estimated to account for 49% of all crowdfunding
dollars.

17. Types+of+Crowdfunding:+Donation
● Little known example:
○ Local Chicago organizer raises $137 million dollars
to fund unlikely political campaign

18. Types+of+Crowdfunding:+Donation
Legal Considerations
!
● Charitable Solicitation Regulation
!
○ Currently in 44 jurisdictions
!
○ Require registration and financial disclosure
!
○ Triggered by requesting donations in a given state
!
○ Does Donation Crowdfunding trigger charitable solicitation
regulation?
!
■ Charleston Principles
!
○ Follow-up Communications

19. Types+of+Crowdfunding:+Donation
Legal Considerations Cont’d
!
● Commercial Fundraisers
!
○ Persons or organizations paid by a nonprofit to raise money
on the nonprofit’s behalf
!
○ Are crowdfunding platforms commercial fundraisers?
!
■ Solicitation & Receipt/Control of charitable funds
!
○ Caution: Engaging with nonregistered commercial fundraisers

20. Types+of+Crowdfunding:+Donation
Legal Considerations Cont’d
!
● Fraud & Misrepresentation
!
○ Unauthorized or fraudulent crowdfunding using a
nonprofit’s name
!
○ Gift acceptance policies for crowdfunding donations
!
○ Indiegogo’s Verified Nonprofit Campaign Badge

21. Types+of+Crowdfunding:+Donation
Credit: Indiegogo

22. Types+of+Crowdfunding:+Reward
!
● Reward-based crowdfunding involves payment by an individual in exchange
for a product or service, often at the development phase, with the delivery
likely to be deferred for a number of months.

23. Types+of+Crowdfunding:+Reward

24. Types+of+Crowdfunding:+Reward

25. Types+of+Crowdfunding:+Reward

26. Types+of+Crowdfunding:+Reward
!
$300 investment in an Oculus Rift would’ve been worth $43,5000

27. Types+of+Crowdfunding:+Equity
● Equity crowdfunding typically refers to the widely distributed sale of equity
securities via an online portal. Equity crowdfunding is what many people
are talking about when they refer to the growth of crowdfunding.
2013 survey found the average equity crowdfunded raise was $178,790

28. Types+of+Crowdfunding:+Equity
SeedInvest advertises over $204 million in collective investor interest.

29. Equity+Crowdfunding:+Federal+Regulation
● Traditionally, the sale of securities within the United States has been
regulated by the Securities Act of 1933 and the Securities Exchange Act
of 1934.
!
● Securities Act of 1933 restricts the sale of securities unless (a) the offering
is registered with the SEC, or (b) there is an available exemption from
registration.
!
● The most common exemption - known as Regulation D - provides that
only accredited investors can purchase privately sold securities.

30. Equity+Crowdfunding:+Federal+Regulation
!
● Presently it is primarily accredited
investors that are able to
participate in private offerings of
securities under federal
regulation.
!
!
!
!
● Private sale of equity securities
has the potential to be expanded
beyond accredited investors
under the Jumpstart Our
American Business Act (JOBS
Act).

31. Equity+Crowdfunding:+Federal+Regulation
The JOBS Act (Jumpstart Our Business Startups Act) was signed into law on April 5,2012
Equity Crowdfunding regulations have yet to be finalized...

32. Equity+Crowdfunding:+Federal+Regulation
● The JOBS Act authorized the SEC to issue rules governing equity-
crowdfunding to unaccredited investors.
!
● On October 23, 2013, the SEC proposed new rules to permit the offer and
sale of securities through internet crowdfunding without Securities Act
registration (Regulation Crowdfunding):
○ Issuer Total Offering:$1 Million During Any 12-Month Period;
○ Individual Investor Limit:
■ greater of $2,000 or 5% of the investor’s annual income or net worth,if the
annual income or net worth of the investor is less than $100,000; or
■ the greater of 10% of the investor’s annual income or net worth (not to exceed
an amount sold of $100,000), if the investor’s annual income or net worth is
$100,000 or more.
○ Must distribute via crowdfunding portal or broker-dealer;
○ Disclosure requirements (officers, directors, and greater than 20%
shareholders;business and business plan;use of proceeds;target offering amount,
price of securities, and method of determining price; ownership and capital
structure)
○ 1-year restriction on resale unless sold in registered offering, to an accredited
investor, or to the company.

33. Equity+Crowdfunding:+State+Regulation
The Washington Jobs Act of 2014
The legislature finds that start-up companies play a critical role in
creating new jobs and revenues. Crowdfunding, or raising money
through small contributions from a large number of investors, allows
smaller enterprises to access the capital they need to get new
businesses off the ground. The legislature further finds that the
costs of state securities registration often outweigh the benefits to
Washington start-ups seeking to make small securities offerings
and that the use of crowdfunding for business financing in
Washington is significantly restricted by state securities laws.
Helping new businesses access equity crowdfunding within certain
boundaries will democratize venture capital and facilitate
investment by Washington residents in Washington start-ups while
protecting consumers and investors.

34. Equity+Crowdfunding:+StatePLevel+Developments
!
● States have adopted exemptions for intrastate equity crowdfunding that comply
with the federal exemption for intrastate offerings under Section 3(a)(11) of the
Securities Act of 1933, 15 U.S.C. 77c(a)(11).
● Some states have passed legislation to amend existing securities laws
○ E.g., Wisconsin, Michigan, Washington
● Some state securities regulators have adopted new rules to provide for equity
crowdfunding exemptions
○ E.g., Georgia, Kansas
● Currently, 14 states permit equity crowdfunding, and many more are considering
similar legislation

35. Equity+Crowdfunding:+StatePLevel+Developments
Credit: Anthony Zeoli, State of the States, http://crowdfundinglegalhub.com/2014/06/25/state-of-the-
states-list-of-current-active-and-proposed-intrastate-exemptions/

36. Equity+Crowdfunding:+Variations+in+Intrastate+Exemptions
!
○ In Wisconsin
!
■ Decreased the threshold for “certified investor” to
individual net worth of at least $750,000 or individual
income exceeding $100,000 (or $150,000 joint income)
!
■ Issuer Total Offering Cap:
● $1MM (without financial audit)
● $2MM (with financial audit)
!
■ Non-accredited investor limit: $10,000

37. Equity+Crowdfunding:+Variations+in+Intrastate+Exemptions
○ In Michigan
!
■ Uses Reg. D “accredited investor” standard
!
■ Issuer Total Offering Cap:
● $1MM (without financial audit)
● $2MM (with financial audit)
!
■ Non-accredited investor limit: $10,000

38. Equity+Crowdfunding:+Variations+in+Intrastate+Exemptions
○ In Washington
!
■ Issuer Total Offering Cap: $1MM
!
■ Individual Investor Limits:
● For investors with <$100,000 annual income/net worth
- the greater of $2,000 or 5% of annual income/net
worth
● For investors with >$100,000 annual income/net worth
- 10% annual income/net worth, up to $100,000

39. Conclusion+&+The+Future+of+Crowdfunding
● Crowdfunding+&+Social+Enterprise+
○Both+are+currently+being+experimented+with+on+the+state+level+
○Social+enterprises+are+often+small+organizations+with+local+community+
focus+that+are++wellPsuited+to+intrastate+securities+offerings+
!
● Crowdfunding+&+SIBs+
○Also+being+experimented+with+by+state+and+local+governments+
■Essex+“Allia+Future+for+Children+Bond”+(first+opportunity+for+retail+
investors)+
○SIBs+involve+state+and+local+governments,+and+thus+are+inherently+
regionally+focused+
○Potential+for+increased+diligence+and+transparency+at+state+and+local+
levels