Founders Space Roundtable October 31, 2012

1. CROWDFUNDING AND ALTERNATIVE
FUNDING FOR STARTUPS
Roger Royse
Royse Law Firm, PC
1717 Embarcadero Road
Palo Alto, CA 94303
Phone: (650) 813-9700
E-mail: rroyse@rroyselaw.com
www.rroyselaw.com
www.rogerroyse.com
Twitter: Rroyse00 Founders Space
Skype: roger.royse Roundtable
October 31, 2012
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. JOBS ACT
Jumpstart Our Business Startups Act (JOBS Act)
• Improves access to capital markets for emerging
growth companies
o Relaxes reporting and disclosure
requirements for public companies with less
than $1 billion in gross revenues
• Crowdfunding
o Exemption from registration for issuance of
securities
o Securities issued through crowdfunding do
not count towards registration threshold
• Increases 500 shareholder registration
threshold
• General solicitation in Rule 506 offerings,
provided that all investors are accredited
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3. CROWDFUNDING
Exemption from Registration
• Private companies may sell up to $1 million of securities in a 12-month
period
• Amount sold to a single investor in any 12-month period cannot exceed:
o The greater of $2,000 or 5% of annual income or net worth if annual
income or net worth is less than $100,000; or
o 10% of annual income or net worth (up to a maximum of $100,000) if
annual income or net worth is greater than $100,000
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4. CROWDFUNDING
• Investment must be through an “intermediary” broker or funding
portal
o Intermediary must register with SEC and any applicable self-
regulatory organization
• Issuer disclosure requirements
o File business plan with SEC
o File financial statements
 Audited if offering exceeds $500,000
 Reviewed by an independent CPA if offering is between
$100,000 and $500,000
o Annual SEC filings and annual reports
• Post fundraising
o Securities cannot be resold within 12 months
o Private right of action for material misstatements/personal liability
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5. CROWDFUNDING
Points for Consideration
• Crowdsourcing through donations, e.g.,
Kickstarter or IndieGoGo
• Public solicitations and use of the internet
and social media
• Advertising terms of offer is restricted
o Issuer can only direct investors to
broker/funding portal
• Costs of disclosure and reporting
• Use of intermediary
• Risk of fraud
• High number of unsophisticated investors
o Fiduciary duties to all investors
o Could be a concern for VCs in future
fundraisings
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6. PROPOSED
RULE 506
REGULATIONS
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7. PROPOSED 506 REGULATIONS
• Would allow for public advertising and general solicitation in Rule 506
offerings, provided that:
o The issuer takes reasonable steps to verify that potential investors
are accredited; and
o All investors are accredited (or the issuer reasonably believes they
are) at the time of the sale of securities
• What must companies do to verify the accredited status of an investor?
o Issuers are not required to use specified methods of verification
 NOT required to review an investor’s tax returns
o Whether the steps taken are “reasonable” would be an objective
determination, based on the particular facts/circumstances of each
transaction
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8. PROPOSED 506 REGULATIONS
• Third party info an issuer may rely on:
o Purchaser is a natural person and provides copies of Forms W-2;
o Industry/trade publications disclose compensation for certain
employees/partners, and compensation for persons at the level of
purchaser’s seniority are publicly available; or
o Verification of a person’s accredited status by third party, such as a
broker-dealer, attorney or accountant
• In addition, the nature and terms of the offering are important:
o Widely disseminated e-mail/social media message (more steps
needed to verify “accredited” status)
o Database of pre-screened accredited investors (less steps needed)
o High vs. low minimum investment
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9. PROPOSED 506 REGULATIONS
• The SEC had a 30-day public comment period and will soon decide
whether to approve the regulations
• Stay tuned for proposed Crowdfunding regulations next January
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11. PALO ALTO LOS ANGELES SAN FRANCISCO
1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street,
Palo Alto, CA 94303 Suite 1200 12th Floor
Los Angeles, CA 90025 San Francisco, CA 94105
www.rroyselaw.com
www.rogerroyse.com
E-mail: rroyse@rroyselaw.com
Twitter: Rroyse00
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Skype: roger.royse