Crowdfunding allows companies to raise funds from many small individual investors online rather than from traditional sources like venture capitalists or business angels. There are four main types of crowdfunding: microfinance, peer-to-peer lending, donor-based funding, and investment crowdfunding. New JOBS Act regulations will allow investment crowdfunding in the US through regulated online portals. This may compete with or complement traditional angel investors by providing an alternative source of funding for startups. However, angels may still provide advantages like business expertise and mentorship that "dumb money" crowdfunding alone cannot. The crowdfunding landscape is still developing and will change the investment environment significantly.

1. Crowdfunding Basics and the
Impact on Angel Investors
June 14, 2012
David Menard
860.240.6047 (Hartford) | 617.457.4105 (Boston)
dmenard@murthalaw.com

2. Disclaimer
This information is educational material that provides an
overview of the issues described. It does not deal with every
issue, and does not deal with every exception to this information.
This information does not constitute legal advice.
Please contact your attorney or a Murtha Cullina attorney if you
would like legal advice which would be best for your particular
circumstance.
© 2011 Murtha Cullina LLP

3. Crowdfunding Explained

Aggregating funds from a broad donor/investor base
toward a common goal

Four Types
• Microfinance / Microloans
– ex. Kiva.Org – minimum loan is $25; Have handled $320M in
loans since 2005, with numbers increasing rapidly in the last
few years
– Generally no investor returns or very small returns expected.

4. Crowdfunding (cont’d.)
• Peer-to-Peer (P2P) Loans / Social Lending
– Loans from group of lenders without traditional
intermediaries (banks) - reduces overhead costs
– Strong financial regulations involved
– Ex. Prosper.Com ($350M in loans since 2006; average
annual returns over all investment classes – 10.08%)
– Lending circles (ex. FundingCircle.Com - $56,145,586 in
loans since 2010; average annual gross yield: 8.5%)

5. Crowdfunding (cont’d.)
• Donor-Based Funding
– Generally creative and culture-based (movies, television,
art and music) as well as philanthropic endeavors
– No financial return on investment, but may get physical
(final copy of movie, t-shirt, stage prop, etc.) reward or
offered a unique experience (walk-on part in movie).
– Ex. Kickstarter.com; IndieGoGo.com; RocketHub.com
– Increased from approx. $32M in 2010 to $123M in 2011.

6. Crowdfunding (cont’d.)
• Investment Crowdfunding
– Securities (equity, debt or revenue share) for funding.
– Prior to JOBS Act, this type of funding generally violated
securities rules for private placements.
– Crowdfunding “portals” already in place in other countries (UK:
CrowdCube; Australia: ASSOB ), but is still in its infancy,
especially in the United States.
– Worldwide crowdfunding market in 2011 was approximately
$1.5B. Expected to be $3B in 2012. One consulting firm has
proposed over $6B in 2013 once SEC regulations are final and
crowdfunding “portals” are in place in US.

7. U.S. Crowdfunding
• SEC regulations due by end of 2012; actual final regulations and
beginning of U.S. crowdfunding not expected until late Q1 or Q2,
2013.
• Basics of U.S. crowdfunding requirements:

Crowdfunding must take place through SEC (or SEC designee)
regulated online portals;

Unlimited # of investors, likely to include foreign investors, may
invest. In the aggregate, up to $1M in a company’s securities in
a 12-month period;

Investors with net worth of $100K or less may invest no more
than the greater of $2,000 or 5% of net worth / annual income;

8. U.S. Crowdfunding
(cont’d.)

Investors with net worth of more than $100K may
invest no more than the lesser of $100,000 or 10% of
net worth / annual income;

Certain resale restrictions on securities for no less
than one year after purchase;

Companies will having varying requirements with
respect to delivery of tax returns and financials
depending on amount of investment being sought
(e.g., audited returns for companies seeking
$500,000 or more in crowdfunded investments).

9. Crowdfunding and Angels
• Competition or Complement

Will Angels, as we know them now, remain the same, or will crowdfunders become a new breed of Angels?

One argument is that traditional Angels will have to compete with crowdfunders for investment
opportunities, and they will have to convince Start-Ups why they’re the better source of funding.

One the other side, crowdfunding could develop broad-based investment platforms that increase investor
synergies, create the ability to perform strong due diligence with multiple investor perspectives, increase
investor-to-investor interaction, and provide an area for regular and meaningful investor-to-management
interaction.
• Smart Money vs. Dumb Money

This argument may be important for Angels depending on how crowdfunding portals develop.

Companies that are crowdfunded may not do as well in the long run, because they do not have the mentor
relationships, business expertise and industry relationships that a seasoned Angel can provide. The Angel
Investment Performance Project from the Kaufmann Foundation shows that the average return for
companies where the investors remain engaged post-closing increases from 1.3X to 3.7X.

An experienced Angel Investor creates a value-added proposition, where crowdfunding may just provide
cash.

10. Crowdfunding and Angels
(cont’d.)
• Don’t Forget: Before crowdfunding takes place, the SEC is required to drop the ban on general solicitation with
respect to Reg. D Rule 506 offerings!! This will undoubtedly also impact the seed funding landscape – and is a
topic unto itself.
• So where does this leave us?

At the beginning, expect the wild west. Also expect constant development. The investment landscape will
be subject to continual changes as portals try to outdo one another with respect to the company and
investor services they provide.

Crowdfunding raises many questions that we expect the market to address over time: Who will make up the
majority of crowdfunders, those with experience or new dabblers? Does this mean that more companies
with bad or incomplete ideas will be more likely to get funded? What kind of securities will sell – can
companies get away with selling non-voting stock? As these items shake out, we will learn more about
whether crowdfunding becomes more of a complement to traditional Angel investing, or competition.
• Expect Change! The investing environment will never be the same again – more opportunities for investment will
by necessity create additional diversity among both the investors and those who seek investment. Many
companies will seek investments where they give away little and only have to interact with investors rarely, while
experienced investors will seek to develop and support portals that provide better investment tools and
opportunities.
• The answers to our questions will, as always, be in the middle. I look forward to experiencing this new investing
envrionment with you, and encourage you to be active in it and help it develop to a point where it provides
significant benefits to both investors and companies.

11. Mr. Menard is an attorney in the firm's corporate law practice, where he represents both
private and public companies. He practices in the areas of general corporate law, private
equity and venture capital investments, mergers and acquisitions, and securities law. In
the private equity and venture capital area, Mr. Menard has represented both companies
and investors in debt and equity offerings, and has provided both pre and post-
investment general corporate law guidance to companies in the high tech, bio-science,
manufacturing, audio and video, steel and retail industries.
DMenard@murthalaw.com | 860.240.6047