Transcript of "TCN - Crowdfunding by Michelle Basil"
Nutter McClennen & Fish LLP Attorneys at LawSurfing the Wave – What the Heckis Crowdfunding Anyway?May 23, 2012Michelle L. BasilPartner, Nutter McClennen & Fish LLP
Michelle L. Basil Partner, Co-Chair, Life Sciences Practice GroupBiography Michelle L. Basil is a partner in the Business Department and co-chair of Nutter’s Life Sciences practice group and is actively involved with the firm’s Emerging Companies practice group. Michelle focuses her practice on corporate and securities law, including securities offerings, mergers and acquisitions, and strategic partnerships and collaborations. She represents clients in a broad range of industries, including life sciences, high technology and financial services. Michelle advises private companies regarding formation, ongoing business issues, equity compensation and angel and venture financing. She also counsels clients regarding ongoing reporting requirements of publicly‐traded companies, securities compliance, corporate governance, equityEducation compensation, and various other matters affecting publicly‐tradedUniversity of California, Berkeley, companies and their officers and directors. She also has significantSchool of Law, J.D. experience representing banks in corporate and regulatory matters.University of California, Berkeley,B.A., with honors and distinction Michelle is a member of the Boston Bar Association and frequently lectures on securities law issues.Bar AdmissionsMassachusettsHonors and AwardsMassachusetts Super Lawyer RisingStar 2006-2008 & 2010-2011 2
Nutter’s Emerging Companies GroupAs a full service firm with a dedicated team of lawyers in the Emerging Companies Group, Nutter supportsventures across the innovation economy:• Biomedical Devices • Cleantech• Biotechnology • Mobile• Pharmaceuticals • Consumer Products• Life sciences • Analytics• Software • New Media• Hardware • Robotics• Information TechnologyWe provide entrepreneurs will the full spectrum of support that they need to build their businesses and realizetheir visions:• Entity Formation • Employment support• Founders Agreements • Equity Compensation• Financing Strategy and Key Introductions • Tax Strategy• Angel & Venture Capital • Litigation• Debt Financing • Licensing• Private Equity • Distribution• Initial Public Offerings • Manufacturing• Private Placements • Supply Agreements• Strategic Partnering • Electronic Commerce• Mergers & Acquisitions • Patent and Trademark Strategy & Prosecution 3
Surfing the Wave – What the Heck isCrowdfunding Anyway? Overview of U.S. Securities Law Regulatory Scheme for Startups What is a ―Security?‖ Effect of Offering or Selling Securities What is Crowdfunding? Traditional Meaning Examples of Crowdfunding Sites Interaction with Federal Securities Laws Crowdfunding Under the JOBS Act Title III of the JOBS Act: Basic Overview Title III of the JOBS Act: Specific Requirements Comparison with Traditional Crowdfunding Is Crowdfunding Right for You? Select Considerations for a Startup Company 4
Overview of U.S. Securities LawRegulatory Scheme for Startups• Regulators: – U.S. Securities & Exchange Commission – State Regulatory Agencies• Securities Laws: – Federal Law (Primary) • Securities Act of 1933 • Securities Exchange Act of 1934 – SEC Rules and Regulations – State Securities Laws• Scope of Regulation: Companies that offer and sell “securities” 5
Overview of U.S. Securities LawWhat is a “Security?” First legal question for a startup company that is considering crowdfunding: - “Am I offering or selling a security?” 6
Overview of U.S. Securities LawWhat is a Security?Federal securities law defines the term “security” very broadly toinclude, among many other things: – Stock (including Options and Warrants) – Convertible Debt – Membership Interests/Profit Sharing – Royalties? 7
Overview of U.S. Securities LawEffect of Offering or Selling Securities• A Company that is offering or selling securities must either: 1. Register those Securities with the SEC (i.e. engage in an Initial Public Offering (IPO)); or 2. Find a Registration Exemption • Example: Rule 506 of Regulation D 8
Overview of U.S. Securities LawEffect of Offering or Selling SecuritiesFailure to Register or Find an Exemption: Civil Liability (a) SEC Entitled to: – Disgorgement of proceeds – Civil penalties – Prejudgment interest (b) Investors Entitled to: – Rescission of transaction – Payment for any losses associated with the transaction 9
What is Crowdfunding?Traditional Meaning Two Typical Types of Pre-JOBS Act Crowdfunding: 1. Fundraising for artistic and other creative ventures through websites that aggregate small online contributions made gratuitously or in exchange for nominal gifts, but not equity. 2. Accredited-Investor only member websites that permit investors to pledge money in exchange for an equity interest in the venture. 10
What is Crowdfunding?Examples of Crowdfunding Sites1. Kickstarter (www.kickstarter.com) • Basic Idea: Raises money for ―Creative Projects‖ through online pledges • Fundraising: Requires a funding goal (a dollar amount) and a time limit (from 1 - 60 days) • Who Can Join/Who Can Pledge: Anyone • All or Nothing Funding: If funding goal not reached in time limit, no pledged funds are collected • Rewards Required: But equity interest and performance-based rewards not allowed • Disclosure Requirements: Kickstarter does not investigate a project’s claims • Fees: 5% of funds raised for successful projects + Amazon credit card processing fees • Kickstarter does not take an interest in underlying Project • Funds Raised: No maximum limit • Typical Project: $5,000 • Largest Project: over $10 million; 68,248 backers (Pebble Watch) 11
What is Crowdfunding?Examples of Crowdfunding Sites2. AngelList (angel.co) • Basic Idea: ―Match.com for investors and startups‖ • Differences from Kickstarter: • Only ―Accredited Investors‖ can see which startups are attempting to raise capital • No restrictions on entrepreneurial ventures • No funding minimums or time limits • No fees • Investors can take an equity stake in the companies • Why? • Disclosure Requirements: Investors are vetted; startups are not • Statistics: • In 2011, 500 startups and 2,500 investors joined the community, with a total of 12,500 introductions resulting • Since 2010, 978 startups have received funding, and 48 have been acquired 12
What is Crowdfunding?Interaction with Federal Securities Laws Securities Registration? Exemption? Offered or Sold? Kickstarter No1 N/A N/A Rule 506 of AngelList Yes2 No Regulation D3 1Pledges receive no equity interests, only tangible ―rewards‖ (e.g. t-shirt, album, credit in movie) 2 Pledges may receive an equity interest (e.g. stock) in exchange for their investment 3 Rule 506 permits the sale of unregistered securities to accredited investors, including: 1) Individuals with $1 million net worth or $200,000 annual income 2) Private Equity, Venture Capital, and Angel Firms 13
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Basic Overview•Jumpstart Our Business Startups (JOBS) Act — Signed into law April 5, 2012• JOBS Act, Title III – “Crowdfunding” — Effective Date: December 31, 2012* •*Important: You cannot rely on the JOBS Act’s crowdfunding exemption until the SEC passes final rules, which will occur on or before 12/31/12. 14
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Basic OverviewTitle III of the JOBS Act (“Crowdfunding”) allows entrepreneurs to raise upto $1 million online from the general public in exchange for equity. • General Public means anyone can purchase your company’s equity through crowdfunding, not just accredited investors. • Equity issued through ―crowdfunding‖ under the JOBS Act is exempt from securities registration. 15
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Specific Requirements1. Cannot sell more than $1 million in securities over any 12 month period • e.g. If you issue $500,000 in equity to accredited investors on AngelList, then you cannot sell more than $500,000 in additional equity in the same 12-month period to the general public in reliance on the crowdfunding exemption.2. Maximum Individual Investor Contributions • Less than $100,000 in Annual Income or Net Worth: $2,000 or 5% of annual income or net worth • More than $100,000 in Annual Income or Net Worth: 10% of individual income or net worth, but not to exceed $100,000.3. Equity must be offered and sold through a broker or “Funding Portal”4. The Issuer must make certain initial and periodic disclosures to investors5. Other Requirements Pending SEC Rulemaking • Minimum target fundraising thresholds (―All or nothing‖ funding) • Time limits on fundraising • Right of investors to cancel their commitments to invest 16
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Specific Requirements Funding Portals • All crowdfunding securities offerings must be conducted through a SEC-registered broker or Funding Portal • ―Funding Portal‖ means an operator of one or more websites or portals used to facilitate the offer and sale of securities as contemplated by the crowdfunding provisions of the JOBS Act. • Funding Portals remain subject to final SEC rulemaking, but we do know they must: Register with the SEC Not offer investment advice, solicit purchases, hold or manage investors funds, or offer sales commissions to employees Ensure that investors review investor-education information and understand the risks of investing Conduct background checks on companies, directors, officers, and large Shareholders Allow investors to cancel their commitments to purchase 17
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Specific Requirements Issuer Disclosure Requirements •Description of business and anticipated business plan; •Financial Condition, based on aggregate fundraising targets (including non-crowdfunding equity offerings) in preceding 12-month period: •$100,000 or Less Income tax returns for most recent fiscal year •$100,000 - $500,000 Financial statement reviewed by independent Accountant •$500,000 or more Audited financial statements •Target offering amount, deadline, price of securities, and use of proceeds •Ownership and capital structure of the Issuer •Annual reports filed with the SEC and provided to investors discussing the results of operations and financial statement of the issuer •Any other disclosures the SEC requires in its final rulemaking 18
Crowdfunding Under the JOBS ActTitle III of the JOBS Act: Specific Requirements Potential Liability for Crowdfunding Under the JOBS ActIssuers could face potential liability for knowingly false or misleadingstatements made in their disclosure materials. (a) SEC Lawsuit (1) Civil Liability • Disgorgement of proceeds • Civil penalties • Prejudgment interest (2) Criminal Penalties • 5 years imprisonment/$10,000 fine • Director/Officer Bar (b) Investor Lawsuit Civil Liability • Rescission of transaction • Payment for any losses associated with the transaction 19
Crowdfunding Under the JOBS Act Summary Chart Accredited All or SEC Subject to Equity Register Nothing Pledge Time Securities Effective Investors Regulated Investments? Securities? Pledge Limit? Limit? Law Now? Only? Intermediary? Minimum? Liability?Kickstarter No N/A No Yes No 1-60 No No Yes DaysAngelList Yes Rule 506 Yes No No No No Yes Yes Exemption (Reg. D, Securities Act)JOBS Act Yes Section 4(6) No Yes* $1 Yes* Yes (broker Yes No* Exemption Million or portal) (Securities (over 12 Act) Months)*Pending SEC Rulemaking 20
Is Crowdfunding Right for You?Select Considerations for a Startup CompanyThe door is opened – but . . . •Disclosure/Reporting Requirements •Valuation Issues •Non-Price Terms •Human Capital •Effect on Subsequent Financings 21
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