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Crowdfunding 101: Raising Capital through the JOBS Act

by Kendrick Law Practice, LLC. on May 30, 2012

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This informative presentation details how your business can start raising MONEY in exchange for equity the legal way through passage of the recent federal JOBS Act.

This informative presentation details how your business can start raising MONEY in exchange for equity the legal way through passage of the recent federal JOBS Act.

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Background- Born and raised in GA, undergrad at Oglethorpe Univ., law degree from UGA, MBA from Kennesaw State. I have dedicated my life to helping business owners thrive and grow through the practice of law and general business advice.My Firm- Kendrick Law Practice is located in Lithonia, GA and we practice business law exclusively. Our mission statement is to provide Georgia business owners with PASSION FOR and ACCESS TO CUSTOMIZED and personal business AND legal advice.Qualifications- This is all that I do, the only law I practice. My job is not only to provide legal advice to my clients but educate them about the latest business trends and news. The federal JOBS Act is one of the hottest business/legal trends right now. Additionally, my particular training in law school was on securities law: both the regulation side and litigation side. Additionally, I am a politician on the state level.How can I help?- Let me be your business attorney and counselor. I love to educate BOs about how to thrive and grow their businesses and I am NOT only an attorney but a true business legal counselor and advisor. If you are thinking of seeking funds in exchange for equity in the near future, let KLP provide you with the advice you need and deserve to make sure you stay “IN business and OUT of Court”.
1- The no. 1 issue of business owners is “How will I raise capital”?, i.e. “Where can I get some money?”2- The federal JOBS Act (“Jump Starting Our Business Start Ups” Act) changes the legal way you can raise funds. I will tell you why it’s so revolutionary.3- You cannot start raising funds until July and the SEC won’t have the legal framework available until January of 2013. Kickstarter and IndieGogo, which Charles I think will touch on, is NOT raising capital in exchange for EQUITY/OWNERSHIP. It is a donation-based model with NO EQUITY exchanged. (repeat)4- The Securities and Exchange Commission regulates securities or equities in companies, particularly publicly traded companies. They have received tremendous pressure to set up their game because of past transgressions like Worldcom and the Facebook IPO and the Act speaks to the Securities Act and so they are directly involved in this transfer of power from large, powerful, rich investors to the everyday investor.
Securities Act of 1934 is the federal Act that provides for how securities are to be regulated in the United States. The ultimate goal of the Act is information and transparency to protect consumers from fraudulent or false information of companies. To accomplish this goal, the SEC requires publicly traded companies (on a stock exchange) to report loads of materials and information to investors. If you are NOT publicly traded, you still have reporting requirements and have to meet certain income and sophistication requirements under the assumption that trading, selling or buying securities is a very complicated process and the average investor could be taken advantage of.Generally speaking, if you wanted to raise money through selling equity (or selling shares), you have to (1) register with the SEC or (2) FILE AN EXEMPTION. If you don’t meet the requirements for an exemption and have to file with the SEC, (like public companies like Coca Cola, Home Depot, etc.) the SEC then requires reporting of information throughout the year (8K- special announcement, quarterly reporting and annual reporting) and you can find this information online. It was time consuming and VERY expensive. BUT---for those that were NOT public companies but wanted to raise securities, there are EXEMPTIONS—3 exemptions under “Regulation D”. Rules 504-506, each with its own limits and rules. They limit the scope and amount of money you can raise. However, the catch WAS: You had to be an “accredited investor” to raise a majority of the funds, which is someone with a certain net worth of $1M or more or income of 2 years of $200k or more. OR you had to be a “sophisticated investor” which was someone involved in the stock market for a while. Or even you were under Rule 505 and didn’t have to be “accredited” or “sophisticated”, you could only be 1 of 35 investors. So this was mostly for the super wealthy and banks and NO opportunities for people like you and I to invest in a company.Ex.1- KLP Corp. wanted to sell graduation gifts and to take it to market I needed to raise $1M in capital. I’m not a public company (i.e. not on any stock exchange) so I don’t need to register with the SEC yearly so I just need to find an exemption under one of the 3 Regulation D rules. I find Rule 504 which says I can raise $1M in 12 months so long as all are “accredited investors”. Great! Now I have a big party at my House and invite everyone that believes in KLP Corp. and me and the room is filled with eager investors. So I start detailing this great idea, how we will make lots of money and how much we can raise: $1M. Then I say “But you have to be an accredited investor” so…raise your hand if you have made over $200k for the last couple of years that you can show on your tax returns?” I get 1 hand out of 100 people. You see the problem?Ex. No 2- Let’s say the same scenario and you were under Rule 505 which allows for raising capital through “non-accredited, unsophisticated” investors like you and I. Under that rule you can raise up to $5M in 12 months BUT (1) limited to 35 of these investors and (2) cannot use general solicitation or advertising. Now in my previous scenario, all 100 of those people in my Home had to have been people I PERSONALLY know and I can only pick 35 investors. You see the problem?Ex. No 3- Same scenario but in order to be one of the 35, you don’t need to be “accredited” but you need to be “sophisticated” which has the same result as the 1st scenario. “Sophistication” speaks to the level of trading activity you already have without regards to income.This was OVER and APART from state “blue sky” laws which are securities laws that each individual state has in place and to raise securities you had to comply with.
Signed by President Obama in April of this year and stands for the “Jumpstart Our Business Start Ups” Act which was designed to help entrepreneurs raise capital which fewer administrative and legal road blocks. The SEC is the federal agency that regulates securities but only has as much authority as Congress allows generally but can detail the specific administrative procedures to accomplish the goals of the JOBS Act.Before the jobs Act, securities regulations prevented privately held companies from advertising securities to the general public UNLESS “accredited” or “sophisticated”. NOW through crowdfunding, companies can raise capital by selling small amounts of equity to larger audiences of online investors that don’t have to be “accredited” or “sophisticated”. (Think of crowdfunding as “groupon” for small businesses raising capital in exchange for equity; there is a set supply and you can solicit the general public to “buy in” at a discounted rate because there is pooling.) The limit is $1M each year with $2M the cap in solicitation. (Emerging companies can sell up to $50M in shares) The amount you can raise from individual investors STILL depends on the income of the individual: Less than $100k can invest $2,000 or 5% of annual income, whichever is great vs. More than $100k income can invest 10% of annual income or net worth. There are STILL reporting obligations: Offerings of $100k or less in 12 month period are only obligated to provide in-house prepared financial SMS vs. Offerings of $100k-$500k are to provide financial statements that need to be “reviewed” by outside accounting firm vs. Offerings of $500k or more have to provide audited financial statements.You don’t; I don’t advise it yet. You cannot start raising Round 1 of funds until July and it won’t be until January 2013 when the SEC finishes coming up with compliance regulations. But starting in January of 2013, you must file financial SMs with the SEC and disclose any risks related to the offering and make income tax returns for the recent year available to investors as well as certified financial statements. But even after you do all this, you CANNOT start raising money on your own websites; there are pre-approved funding portals you must go through. Remember…the SEC’s purpose still has not changed to protect the investing consumer; it has just relaxed the rules to free up capital raising opportunities for smaller companies and allowed more individual investors to participate.
Who benefits MOST? For profit entrepreneurs who can appeal to investors that are not rigorous about reporting requirements and short term investment performance or for those that need to raise money for a specific project. If you are in the technology or high risk business, this is probably not for you because of the risk and financial need of over $2M needed to comply with your promises to investors.Downside-Harder to convince professionals to join BODsDisclosure of patent rights by overzealous investors before patents securedSome BAD companies will take advantage of the lessened regulations BUT, I believe the good will outweigh the badStart up companies less than 5 years old are vital to the United States economy and the economy of Georgia and provide a source of sustainable job growth. The JOBS Act is a step in the right direction towards freeing up access to capital that so many business owners need to thrive and grow. Georgia in particular is already doing remarkable things in the business world including ranking No. 2 among states in entrepreneurial activity in the last decade, No. 1 in women owned growth of businesses and No. 2 in AA owned businesses, and metro ATL businesses lead the nation in hiring. BUT---this JOBS Act needs reform at the state level’’s “blue sky” laws.

Crowdfunding 101: Raising Capital through the JOBS Act Presentation Transcript

Dar’shun N. Kendrick, Esq./M.B.A.Owner of Kendrick Law Practice(www.kendricklaw.net)Keeping you “IN business and OUT of Court”(678) 739-8109
My backgroundMy FirmQualifications- Why Iam particularlyqualifiedHow can I help?
 1- No. 1 issue of businessowners= Funding/raising capital 2- JOBS Act revoluntionary 3- JOBS Act has not fully takenaffect 4- Besides God and the IRS, theSEC can shut you downFASTER than anything.
 Securities Act of 1934 How the Process USE to work(www.sec.gov)◦ Rule 504 Problem= “Accredited Investor”◦ Rule 505 Problem= Personal connectionand limited numbers for unaccredited◦ Rule 506 Problem= Must be“sophisticated” if unaccredited Examples State “Blue Sky” Laws
 In relation to the SEC NOW…◦ Larger “regular” audiences (like Groupon)◦ Still $1M limit each year; $2M TOTAL(“Emerging growth companies”)◦ Individual Investors still limited◦ Reporting Obligations still in place How Do I Get Started?!
 Kickstarter.com (“all or nothing” selling) Indiegogo.com (penalty for non-goal) Things to Consider:◦ 1- You need a strategy; sit down withmarketing consultant, which we do, andaccountant. (Short term vs. long term)◦ 2- You will need a network of friends that youcan reach. (Build anticipation)◦ 3- You will need a story to tell. (Ex. 14 yearolds and app= $14M)
 Who benefits MOST fromcrowdfunding? Are there any downfalls tocrowdfunding? My personal thoughts
 KLP is here to keep you “IN business and OUT ofCourt” WHAT ARE YOU WAITING ON?! CALL TODAY! (678) 739-8109 www.kendricklaw.net