Transcript What must be achieved before crowdfunding will be lawful

Crowdfunding:
An efficient new financing model for facilitating capital
between Investors and SMEs– existing and currently financing
entrepreneurs internationally
Douglas S. Ellenoff, Esq.
Ellenoff Grossman & Schole LLP
EG&S and Crowdfunding
EG&S has been one of the most active IPO law firms in the US for the last 5 years (top 20 in
2012 and 4th in 2011); #1 Broker-Dealer counsel for PIPEs and Registered Directs and #1
world wide for SPACs and SPACquisitions. We represent 50 public companies.
Ellenoff Grossman & Schole has been heavily involved in the crowdfunding program since
its inception. The Firm has sponsored conferences, webinars and has been invited to
speak at different events on the topic. Douglas S. Ellenoff, a member of the Firm,
has met with the SEC on many occasions to discuss many aspects of the proposed new
law, how the industry currently operates and how both the SEC and FINRA will register
and regulate funding portals and the crowdfunding activity to be conducted.
The Firm is actively engaged with clients (funding portals, broker-dealers, technology
solution providers, software developers, investors and entrepreneurs). In cooperation
with the industry trade association, the Firm is discussing what level of regulatory review
and monitoring is appropriate by the SEC and FINRA in balancing the interests of the
program with investor protection.
Douglas S. Ellenoff
Douglas S. Ellenoff, a member of the Firm since its founding in 1992, is a
corporate and securities attorney with a specialty in business transactions and
corporate financings. Mr. Ellenoff and the rest of the corporate department
distinguish themselves from many other transactional lawyers on the basis of their
ability to be part of the establishment of new securities programs, like PIPEs,
SPACs, Registered Directs, Reverse Mergers and CrowdFunding, where the Firm's
professionals have played leadership roles within each of those industries,
assisting in the creation, formation and strategies relating to those financings, as
well as working closely with the regulatory agencies; including the SEC and FINRA;
and the listing exchanges - AMEX and NASDAQ.
Crowdfunding
Crowdfunding is the offering of unregistered securities
through a registered internet intermediary website or
broker to raise small amounts of money (up to
$1,000,000) from a large pool of investors
Quotation of President Barak Obama January 2012
“Right now, you can only turn to a limited group of investors -including banks and wealthy individuals -- to get funding. Laws
that are nearly eight decades old make it impossible for others
to invest. But a lot has changed in 80 years, and it’s time our
laws did as well. Because of this bill, start-ups and small
business will now have access to a big, new pool of potential
investors -- namely, the American people. For the first time,
ordinary Americans will be able to go online and invest in
entrepreneurs that they believe in.”
Title III of the US JOBS Act—
Offerings Limitations & Requirements
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The Act limits both the aggregate value of securities that an issuer may offer through a crowdfunding
intermediary and the amount that an individual can invest.
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An issuer may sell up to an aggregate of $1,000,000 of its securities during any 12 month period.
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Investors with an annual income or net worth of up to $40,000 will only be permitted to invest $2,000
and above $40,000 and less than $100,000 investors shall be entitled to invest 5% of their annual
income or net worth in any 12 month period.
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Investors with an annual income or net worth greater than $100,000 will be permitted to invest 10%
of their annual income or net worth.
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Investors are limited to investing $100,000 in crowdfunding issues in a 12 month period.
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Investors who purchase securities in a crowdfunding transaction are restricted from transferring
those securities for a period of one year. This restriction is subject to certain exceptions, including
transfers: (i) to the issuer; (ii) to an accredited investor; (iii) pursuant to an offering registered with
the SEC; (iv) or to the investor’s family members.
Title III of the US JOBS Act—
Crowdfunding Intermediaries: Funding Portals & Brokers

Crowdfunding transactions may only be conducted through either a
broker or funding portal registered with the Securities & Exchange
Commission (“SEC”) and the Financial Industry Regulatory Authority

Unlike a broker, a funding portal is restricted from offering investment
advice or recommendations to investors. Its members may not solicit
purchases, sales or offer to buy securities offered by the portal.

Funding portals are strictly prohibited from paying its agents or
employees any compensation based on the sale of securities offered
on its portal or website.
Title III of the US JOBS Act—
Crowdfunding Intermediaries: Funding Portals & Brokers
–
(Continued)
The crowdfunding intermediaries will have certain obligations to protect investors. The
Act requires a crowdfunding intermediary to:
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Ensure that investors review certain educational material and acknowledge that the
investor both understand the risks inherent in a crowdfunding investment and can
sustain the risks of loss;
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Ensure that investors demonstrate an understanding of the risks associated with
investing in new ventures and small business;
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Implement measures to reduce the risks of fraud;
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Implement measure to ensure that the proceeds of an offering are only released to the
issuer when the target offering amount is reached or exceeded;
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Comply with applicable privacy rights and protections of information requirements;
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Ensure that investors do not purchase an amount of crowdfunding securities during a
12 month period in excess of the statutory limit; and
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Prohibit its directors, officers or partners from participating in a crowdfunding offering
or having any financial interest in a company that uses its services.
Title III of the US JOBS Act— Issuer Responsibilities
Equal access to and disclosure of material information is a core principal of federal and state securities
regulations. It is essential for investors to have the necessary information to appreciate the
potential risks and rewards of an investment. The Act requires issuers to provide investors with a
description of the following:
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Company: the issuer and its members, including the name, legal status, physical address, the names of the
directors and officers holding more than 20 percent of the shares of the issuer.
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Offering: the anticipated business plan of the issuer, the target offering amount, the deadline to reach the
target offering amount and the price to the public of the securities.
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Structure: the ownership and capital structure of the issuer, including terms of the securities of the issuer
being offered.
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Valuation: how the securities being offered are being valued, and examples of methods for how such
securities may be valued by the issuer in the future, including during subsequent corporate actions; and
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Risks: the risks to purchasers of the securities relating to minority ownership in the issuer, the risks
associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of
the issuer, or transactions with related parties.
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The intermediary crowdfunding portals are also required to make available to the SEC and to potential
investors any information provided by the issuer no later than 21 days prior to the first day on which securities
are sold to any investor.
Title III of the US JOBS Act— Issuer Responsibilities (Continued)
Financial Statements
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The extent to which an issuer must disclose its financial
statements varies depending on the aggregate amount offered,
including any prior offerings in the preceding 12 months period.
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For crowdfunding offerings with an aggregate offering amount up
to $100,000, the issuer must disclosure its most recently filed
income tax returns and its financial statements certified by the
issuer’s principal executive officer.
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For offerings that exceed $100,000 during the 12 month period but
are less than $500,000, the issuer must provide financial
statements reviewed by an independent public accountant.
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If an aggregate offering amount exceeding $500,000, the issuer
must provide audited financial statements.
Acceptance of Basic Concept of Crowdfunding Law
By Investor Protection Advocates

Designed in Title III of the JOBS Act, so-called crowdfunding, is the novel concept that any investor
(accredited or otherwise) may invest in any available crowdfunding investment opportunity, so long as it is
proportionate to how much they make or are worth and is transacted through a regulated funding platform
or BD after satisfying investor education and disclosure requirements.

The concept of limiting investors based upon income and net worth doesn’t exist in any typical private
placement or public offering statutes– by convention broker-dealers impose such standards to reduce
investor risk and their own liability exposure based upon “suitability standards” only. Title III is unique in
this regard.

If the objective of investor protection advocates is to prevent non-accredited investors from ever
participating in entrepreneurial finance, and thereby, avoid suffering any investment losses (regardless of
properly disclosing the inherent risks in any such investment), then implementing Title III at all is
necessarily inconsistent with such an objective.

In our view, the wisdom of Title III is that it properly balances the undisputed need for investor protection
with the size of the offering and how much is being invested– but you have to really appreciate how
crowdfunding will operate under Title III.
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Title II under the JOBS Act is the lifting of the ban in the US on the General Solicitation of investors– so that
any issuer may generally solicit investors, but, only accept funding from accredited investors.
What Problem Does Crowdfunding Address

Provide more capital to entrepreneurs and SMEs, create jobs and provide opportunities for
non-accredited investors to invest in both community based businesses and
entrepreneurial companies.
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For the last several years the number of VC financings in the US has continued to drop-approximately 3,500 VC led deals; VCs are raising less capital and continue to finance only
larger opportunities with significant IRR potential and with exits of greater than $50 Million
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Although Angel statistics are difficult to obtain they funded nearly as much as VCs
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Fewer than 10% of all Accredited Investors in the U.S. invest in private financings

Except as friends or family, non-accredited investors have no exposure to private
financings.
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There are 25,000,000 SME in US; many are looking for funding and banks aren’t lending
and identifying investors is extremely difficult given securities laws
Existing Crowdfunding
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Donations, Rewards, Pre-Order (Kiva, Kickstarter, Indiegogo and
RocketHub)
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Domestic Noisy 506 Offerings (Angel List, CircleUp and FundersClub)
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KIVA-- $400 Million of Loans in increments of $25 and less than 2% defaults
Kickstarter-- $450 Million pledged by 3,000,000 people for 35,000 campaigns
Angel List, $1.8 Billion raised for start ups; $11,500,000 in February 2013 alone.
Internationally (FundingCircle, ASSOB, Symbid, Seedrs and CrowdCube)
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FundingCircle UK Pounds 76,000,000; 1,000 borrowers and less than 1.5% default
rate
ASSOB $132,500,000 for 1,000 issuers and 86% survival rate
Investor Protection Explicit in Statutory Design
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Crowdfunding may only be conducted through approved and regulated
Funding Portals and Brokers– SEC and FINRA.

Entrepreneurs seeking capital are specifically limited to what they can
communicated to the public with respect to conducting a crowdfunding
campaign at a particular funding portal or broker-dealer portal; no terms of
the offering may be mentioned.
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Even the funding portal and broker-dealer portal is restricted from marketing
the particular campaign and can only market the general activities of the
website.
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No incentive fees of any kind may be paid by either the entrepreneur or the
funding portal/broker-dealer portal to induce potential investors to register
on their platform.
Investor Protection Explicit in Statutory Design
(continued)
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Further, assuming that a potential investor even decides of their own volition to visit a
funding portal/broker-dealer portal, they must register with the platform and share
relevant information
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Title III requires that the funding portals provide investors with a well defined education
process

Title III requires review and complete standard private placement investor
documentation (provide full and fair disclosure compliant with Title III, including use of
proceeds and risk factors) all PRIOR to being able to invest.

Funding portals are providing entrepreneurs and issuers with education as well.

Additionally, unlike Title II or most other areas of the securities markets, there is clearly
defined limitation on how much any one investor may invest in any one deal or
crowdfunding deals overall all (in 12 month rolling period)-- capped at a percentage of
their income and net worth (it varies).

Funding Portals are precluded from giving investment advice

Crowd Intelligence (Not Required by Title III)
Role of Social Media/Investor Protection

Crowd Intelligence through social media will transparently vet entrepreneurs, their
opportunities and their community of contacts and colleagues

Crowd Intelligence has played a significant and instructive role in the establishment of
other online industries in the last decade; these industries had similar voiced concerns
for consumer protection. Over time, the successful operators learned to adapt and
embrace the role of other consumer experiences (the crowd as it were) and use such
experiences to their collective benefit in a manner that enabled them to tackle those
concerns and demonstrate their ability to increase overall consumer satisfaction and
reduce complications otherwise experienced by their legacy or offline competitors. By
embracing social media and its transparency, along with the other sophisticated
technology solutions that are offered in the market today, much of the previous and
legitimate concerns about purchasing goods online (think Amazon), or through an
informal network of retail sellers (think EBay), have reduced risks of improper conduct
and enhance user experience-- it stands to reason that without it, there wouldn't be the
confidence in the system necessary to create and industry. Done properly in
crowdfunding, we would expect similar benefits. We don't claim to have all of the
answers to how to properly and effectively combat fraud in the securities world and
would welcome the opportunity to work cooperatively with the SEC's microcap fraud
experts to buttress our efforts and initiatives.
Common Concerns, Misconceptions and Other Provisions of Title III
Often Lost on Critics

CrowdFraud
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Disclosure requirements and financial statements
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Funding for the next app and high growth opportunities (actually small
and community based businesses)
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Capital structure and the Crowd
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Exits
Substantive Issues To Be Considered
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Better than friends and family
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Fraud v Failure
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Investment Advice and Curation
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Substantive disclosure is just a good beginning
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Title III platforms will be able to demonstrate that investors may have convenient memories for risk
disclosure (digital footprint)
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Liabilities of platforms
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Valuation is as much a problem with public companies as crowdfunding

Is crowdfunding due diligence any match for conventional
due diligence
Timeline
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Proposed Rules by End of 1st Quarter
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Public Comment Period (60 to 90 days)
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Staff Review Period (60 days)
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Final SEC Rules (Currently expected 4th Quarter)
Contact Information
Ellenoff Grossman & Schole LLP is a New York City-based law firm comprised of almost 60 professionals
(30 Securities Lawyers), offering its clients legal services in a broad range of business related matters.
Founded in 1992, the Firm specializes in many areas of commercial law, including corporate and securities,
'33 Act and '34 Act representation, reverse mergers, PIPEs, SPACs, going private and mergers and
acquisitions. We represent nearly 50 public companies in various industries: biotechnology, medical devices,
information technology, financial services, shipping, alternative energy, consumer products and business
services throughout the world – including Greece, China, India and Israel; Hedge Fund Formation and Regulation;
Broker-Dealer Regulation, transactional Real Estate (leasing, financing and buy/sell; domestic corporate Taxation
and general commercial Litigation).
Douglas S. Ellenoff, Esq.
Ellenoff Grossman & Schole LLP
150 East 42nd Street, New York, NY 10017
(212) 370-1300
[email protected]
This presentation is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer
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