Presented on Aug. 13, 2021 by Shane Hanna - Parsons Behle & Latimer

1. parsonsbehle.com
Securities Private Placements, including through
Crowdfunding and Online Offerings
Friday, August 13, 2021

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What is a Security?
 Equity—common or preferred stock
 Capital or profits interests in limited liability company (LLC) or partnership
 Promissory note
 Bond, debenture or evidence of indebtedness
 Investment contract—including participation in profit-sharing agreement
 Derivative instrument (put, call, option or other right to acquire securities)
 Certain cryptocurrencies are investment contracts and would be securities

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Identifying a Security
 Howey test to determine if investment contract is a security
o Investment of money
o In a common enterprise
o With the expectation of profits
o Derived from the efforts of others
 Orange grove was a ‘security’ (SEC v. W.J. Howey Co.)
 Focus is whether purchaser expects return based on other’s efforts
 Issuers and counsel need to think about broad application to identify transactions
subject to federal and state securities regulations

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Examples of Offerings
 Entity formation
 Funding
o SAFE (Simple Agreement for Equity)
o Convertible Note
o Series Seed Preferred Stock (seriesseed.com)
o Series X Preferred Stock (NVCA)
o Common Stock
 Other capital raises through private placements—Section 4(a)(2), Regulation D,
Regulation CF, Regulation S
 Registered offerings—Regulation A, IPO
 Equity incentive plans—e.g., options, restricted stock, restricted stock units (RSUs),
LLC capital and profits interests—Rule 701

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Regulatory Framework
 Securities Act of 1933 (Securities Act)
 Securities Exchange Act of 1934 (Exchange Act)
 Sarbanes Oxley Act of 2002 (Sarbanes-Oxley)
 Investment Company Act of 1940 (ICA)
 Investment Advisers Act of 1940 (IAA)
 Trust Indenture Act of 1939 (TIA)
 State securities and regulatory agencies
(note preemption under National Securities Markets Improvement Act of 1996)
 Broker-dealer regulation and finder limitations (SEC and FINRA)
o (Anka no-action letter)
 Exchanges

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Potential Liabilities
 Civil Enforcement
o SEC and/or state regulatory agencies may seek remedies
 Civil – Private Actions
o Private investors can file complaints in state or federal court and seek damages
 Administrative
o SEC and/or state regulatory agencies seek sanctions
o Cease and desist orders, suspension or revocation of registrations, censures,
civil monetary penalties, and disgorgement
o Prohibitions on subsequent offerings
 Rescission (for all investors)
 Criminal
o Potential criminal liability for violations of securities laws

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Regulatory Goals
 Protect investors, particularly those that cannot fend for themselves
o Investors should have access to certain basic facts about an issuer and an
investment prior to making an investment
 Maintain fair, orderly and efficient markets
o Investors in traded companies should have access to equal information
 Facilitate capital formation
o Starting with the Jumpstart Our Business Startup (JOBS) Act in 2012 and
through recent legislation, the SEC has taken steps to facilitate access to capital
and streamline offering processes for smaller companies
 Promote disclosure and discourage fraud

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 Established January 2019
 To advance the interests of small businesses and their investors at the SEC and in
the capital markets
 Work with small businesses and their investors to understand their capital formation
issues through education and research
 Analyze impact of SEC and self-regulatory organization (SRO) rules and regulations
likely to affect small businesses
 Recommend policy changes to Congress and the SEC
SEC Office of the Advocate for Small Business
Capital Formation

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• Following JOBS Act, SEC implemented Rule 506(c), allowing for general solicitation,
and Section 4(a)(6)—Crowdfunding
• Effective January 2021:
• Expanded ‘accredited investor’ categories under Regulation D
• Tier 2 Regulation A offering limits raised from $50 million to $75 million
• Regulation Crowdfunding offerings raised from $1.07 million to $5 million
• Rule 504 of Regulation D offerings raised from $5 million to $10 million
• Changes to integration rules
• SEC proposed changes to finder rules but this is likely dropped
Recent Changes to Promote Capital Formation

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Securities Act Section 5—Registration Requirements
 Unless an exemption is available, Section 5 requires an issuer to register any
offer or sale of its securities:
o An offer may not be made unless an issuer has filed a registration statement
with the SEC that contains mandated disclosure required by the Securities Act,
Regulation S-K and Regulation S-X
o A sale may not be made unless the SEC has declared the registration statement
effective
 Sales must be made by prospectus
 The premise is that all investors should have access to certain basic facts about an
investment prior to making such investment

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Section 3 Exemptions
 Government and municipal obligations
 Bank securities
 Commercial paper—short-term debt (< 9 months for current needs)
 Non-profit issuers
 Insurance policies and annuity contracts
 Exchanges with existing securities holders
 Corporate reorganizations
 Certain intrastate offerings
 Section 3(b)(1)—small offering exemption as basis for Rule 504
 Section 3(b)(2)—basis for Regulation “A+” offerings

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Section 4 Exemptions
 Transactions by a person other than an issuer, underwriter or dealer (“ordinary trading
exemption”—broader definition of underwriter)
 Private placement—issuances not involving public offering (Section 4(a)(2))
 Transaction by dealer not acting as underwriter
 Certain brokers’ transactions
 < $5 million to accredited investors, no general solicitation/advertising, Form D filed (Section
4(a)(5))
 Crowdfunding—up to $5 million
 Certain resales to accredited investor purchasers (4(a)(7))—a codification of 4(1)(1/2)

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Other Exemptions and Safe Harbors
 Regulation S—sales outside the US to non-US persons
 Rule 144—certain resale transactions
 Rule 144A—resales of eligible securities to qualified institutional buyers (QIBs)
 Regulation D—Rules 504 and 506; safe harbor private placements
 Rule 701—issuance of securities under compensatory employee benefit plans

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Private Placement
 Section 4(a)(2) of the Securities Act provides for offers and sales by an issuer not
involving a public offering
 Referred to as a “private placement”
 Public offering not defined under statutes
 Multi-factor test focused on whether a distribution is being made
 Even if an offering may appear to be a Section 4(a)(2) private placement under
federal law, state laws and regulations must be considered
o State laws often focus on whether offering is intrastate, the offering amount, the number of offerees
and purchasers within the state and outside the state

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Private Placement Determination Factors
 Investor suitability—can the investor “fend for itself”?
 Sophisticated investor—is the investor a QIB or an “accredited investor”?
 Limited number of investors—but no formal numerical test exists
 No general solicitation or advertising
 Information furnished
 Transfer restrictions on restricted securities
 Investment intent—investor must purchase for investment without intent to resale
 Integration with other offerings
 Does the offering fall within a Regulation D safe harbor?

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Regulation D
 Regulation D adopted in 1982 to provide safe harbor private placement transactions
 Rule 501—definitions and terms used in Regulation D
o Includes definition of “accredited investor”
 Rule 502—general conditions, including information requirements
 Rule 503—Form D requirement
 Rule 504—limited offerings and sales of securities not exceeding $10 million
 Rule 506—limited offerings and sales without regard to dollar amount
 Rule 507—provides for certain disqualifications for failure to file Form D

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Comparison of Regulation D Exemptions
Rule 504
(under Section 3(b)(1))
Rule 506(b)
(Section 4(a)(2))
Rule 506(c)
(Section 4(a)(2))
Maximum offering size $10 million in 12 months (issuances under
Section 3(b)(1) or in violation of Section 5(a))
No limit No limit
Issuers permitted to rely on this
exemption
Non-reporting companies. Not available for
investment companies or blank check
companies
Any issuer Any issuer
“Bad actor” disqualification Yes Yes Yes
Types of investors Any investor. No limits on number or
sophistication of investors
Unlimited accredited investors and up to
35 non-accredited investors (who alone
or together with purchaser representative
must be sophisticated)
An unlimited number of accredited
investors
Standard of verification required for
accredited investors
NA Reasonable belief Reasonable belief and reasonable steps
to verify all investors are accredited
Information requirements No. But consider antifraud Yes, to non-accredited investors (Rule
502).
No. But consider antifraud
General solicitation or
advertisement?
Subject to the exceptions provided by Rule
504(b)(1).
No Yes
Limitations on resale? Yes, subject to the exceptions provided by Rule
504(b)(1)
Yes Yes
Subject to integration? Yes Yes Yes
Form D filing? Yes Yes Yes
State law (blue sky) registration
and qualification requirements pre-
empted?
No. Yes. Yes.

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Comparison of Regulation D Exemptions
 Rule 504
o Rule 504 has not been widely used because of dollar limitations—originally limited to $1 million and
increased to $5 million and in 2021 increased to $10 million
o Pro—not limited to accredited investors or minimum information requirements (subject to antifraud)
o Con--state regulation not preempted and regulators may not have increased corresponding $$$
 Rule 506
o Rule 506 has not allowed general solicitation or advertising
o 506(c) was implemented following JOBS Act adoption and allows for general solicitation/advertising
o 506(c) allows sales only to accredited investors and issuer must take reasonable steps to verify
status. Issuers should consider third party verification services, including online portal
o For Rule 506(b) sales to non-accredited investors, must provide Rule 502 information—depends on
size of company and available registration form

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Accredited Investors—Main Categories
 Individual with net worth, or joint net worth with spouse, > $1 million at time of purchase
(excluding primary residence and related debt unless debt exceeds FMV)
 Individual with annual income >$200,000, or joint annual income with spouse >$300,000, for
each of last two years
 Issuer’s directors, executive officers, and general partners
 Corporations, partnerships, LLCs and tax-exempt organizations with total assets > $5 million
 Trusts with assets >$5 million
 Any other type of entity that owns investments in excess of $5 million
 Certain family offices or family clients with at least $5M in assets under management
 Entities whose equity owners are all accredited investors

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Accredited Investors—Other Categories
 Individuals who hold certain professional certifications, designations, or other credentials (currently
limited to holders of Series 7, Series 65, and Series 82 securities licenses)
 Institutional investors, including US banks, US branches or agencies of foreign banks, S&Ls
 Registered broker-dealers
 Registered investment advisers and advisers exempt from registration under IAA Section 203(l) or (m)
 Registered investment companies, business development companies, insurance companies, small
business investment companies, rural business investment companies and private business
development companies
 Individuals who are “knowledgeable employees” of private funds investing in such funds.

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General Solicitation or Advertising
 Prohibited general solicitation or advertising (Section 4(a)(2), Rule 504, Rule 506(b))
o Advertisements, articles, notices, or other publication in US newspaper, magazine, or similar media
(including internet)
o Broadcasts over US television or radio (including the internet)
o Any seminar or meeting in US whose attendees invited by any general solicitation or advertisement
 Other Guidance
o Road shows that only invite a limited number of qualified investors are generally acceptable
o Posting information on an unrestricted publicly available website is general solicitation
o Certain research reports distributed to QIBs may be allowed in limited circumstances
o Product advertising and factual business (non-offering) information is not prohibited
o Offers to persons with pre-existing substantive relationship with issuer

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Disclosure—Antifraud and Rule 10(b)-5
 Antifraud liability exists for both private placements and registered offerings
(this is true even in a Rule 504 or Rule 506 accredited investor offering with no minimum information requirements)
 It shall be unlawful for any person . . .
o (a) to employ any device, scheme, or artifice to defraud,
o (b) to make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light
of the circumstances under which they were made, not misleading, or
o (c) to engage in any act, practice or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase or
sale of any security.

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Disclosure—What is Enough?
 To PPM or not PPM that is the question…
 Issuers need to weigh the type and amount of disclosure based on
o size and nature of the offering
o regulatory requirements (i.e., Rule 502 for Regulation D nonaccredited investors)
o size and sophistication of target investor audience
o tax implications to issuer and investor
o riskiness of the issuer’s operations and overall investment in the issuer
 A PPM provides the most issuer protection but is not necessarily market
 Summary PPM can incorporate business plan, issuer deck and other information
 Financial information

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Disclosure—What is Enough?
 Consider additional documents
 Always disclose related party transactions
 Urge investors to obtain their own financial, tax and legal advice
 Subscription agreement should contain representations and warranties of investor to
support exemption from registration
 Forward looking statements and information
 Issuers should have legal review of business plan to look for disclosure and
omissions, even if counsel does not draft business plan

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Disclosure—Risk Factors
 An issuer should ‘always’ provide risk factors
o Business specific risk factors
o Operational risk factors, including regulatory framework, necessary licenses, etc.
o Industry specific risk factors
o Risk factors specific to the investment vehicle (i.e., taxes, waterfall, additional capital needs)
o Securities risk factors—restricted nature of securities, rescission risks, etc.
 Risk factors should be provided in descending order of importance
 Risk factors may be provided in a PPM, a subscription agreement or an annex
 Risk factors should not be a generic kitchen sink approach but specific to the issuer
and the issuer’s operations and situation

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Integration
 Rule 152(b) provides 4 safe harbors from integration
o 30-Day Rule. Offerings more than 30 days apart (termination of first offering and start of second
offering) will not be integrated. However, if the first offering allowed general solicitation and the
second offering does not allow general solicitation issuer must have reasonable belief that there was
no general solicitation of any purchaser in the first offering or that the issuer established a
substantive relationship with each purchaser in second offering before commencement.
o Rule 701 and Regulation S offers and sales are not integrated with other offerings.
o An offering where a registration statement is filed will not be integrated with earlier terminated or
completed offering if earlier offering (i) did not allow general solicitation, (ii) allowed such solicitation
and it was made only to QIBs and institutional accredited investors or (iii) allowed general solicitation
but terminated or completed more > 30 days before commencement of registered offering.
o Offers and sales made in an offering exempt from registration that allows general solicitation will not
be integrated with another earlier offering that has been terminated or completed.

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Integration
 If the safe harbors do not apply Rule 152(a) (as recently amended) provides:
o Offers and sales will not be integrated if, based on facts and circumstances, issuer can establish that
each offering either complies with the Securities Act registration requirements or that an exemption
from registration is available for that particular offering
o Issuer must have reasonable belief with respect to purchasers in exempt offering prohibiting general
solicitation that the issuer either did not solicit such purchaser through general solicitation or
established a substantive relationship with such purchase prior to commencement of the offering
o If there are two concurrent exempts offerings that each allow general solicitation the offering
materials of each may constitute an offer of securities in the other offering so the communications
must comply with both exemption rules

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 The mini-IPO
 Tier 1 = $20M limit. No ongoing reporting requirements
 Tier 2 = $75M limit. Annual and semi-annual reporting required
 Must file Form A-1 and have offering circular approved by SEC (similar to public
registration statement) and financial statements
 Permits general solicitation from both accredited and non-accredited investors
(limitations on non-accredited investor participation)
 Example: VidAngel
Regulation A (aka Reg A+)

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VidAngel, Inc.

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 Temporary rules are in place that will apply through 8/23/22
 New Section 4(a)(6) exemption flowed from Title III of JOBS Act
 Crowdfunding involves use of internet and social media to raise capital from a large
number of people in relatively small amounts
 Rules adopted under Section 6 are contained in Regulation Crowdfunding (CF)
o Governs offering made in reliance on 4(a)(6) exemption
o Provides framework for operation of crowdfunding intermediaries, including
funding portals and brokers
o Places restrictions on resale of securities
o Exempts securities sold in CF from counting toward Exchange Act Section 12(g)
thresholds
Crowdfunding

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 CF allows general solicitation of accredited and non-accredited investors (with
limitations)
 Amount raised through CF by issuer (including affiliates) is limited to $5 million
during 12-month period
 Current individual limits
o No limits to accredited investors
o For non-accredited investors with either an annual income or net worth that is less than $107,000 the
greater of $2,200 and 5% of the greater of the investor’s annual income and net worth
o For non-accredited investors with both an annual income and net worth of at least $107,000, 10% of
the greater of the investor’s annual income (not to exceed an amount sold of $107,000 to each
individual) and net worth (not to exceed an amount sold of $107,000 to each individual).
o Same limitations apply to businesses
Crowdfunding

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 CF offerings must be conducted through a registered broker-dealer or through a
funding portal
 All CF offerings must be conducted over the Internet exclusively through single
intermediary’s platform—ensures information parity
 CF offerings can only be done by US non-reporting issuers that are not investment
companies or blank check companies (other than special crowdfunding vehicles
formed by the Crowdfunding Issuer for that purpose)
 Requires Form C and generally 2 year audited financial statements (except for very
small offerings)
 Funds must flow through FINRA-approved portal (can be white-labeled to fit website)
 JOBS Act provides that Section 4(a)(6) offerings are ‘covered securities’ so states
are preempted from regulation but not anti-fraud
Crowdfunding

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VidAngel Isolated CF Raises

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Resources
 SEC Improves Exempt Offering Framework – Link
 SEC Modernizes the Accredited investor Definition – Link
 SEC Proposes Conditional Exemption for Finders – Link
 SEC Exempt Offering Chart – Link
 SEC Press Release Archive – Link
 Subscribe to SEC new updates – Link

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Contact Information
Shane L. Hanna
Parsons Behle & Latimer
201 South Main Street, Suite 1800 • Salt Lake City, Utah 84111
Direct 801.536.6947
Mobile 801.673.4299
shanna@parsonsbehle.com

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