Capitalizing on Financial Innovation Webinar Series

Part I - Preparing for the Crowdfunding Revolution

Moderator: Dara Albright, Founder, NowStreet – Panelists: * Richard J. Salute, CPA, Consultant with extensive expertise in capital markets and securities regulations; *Douglas S. Ellenoff,

Partner at Ellenoff, Grossman & Schole; *Ruth Hedges, CEO of Funding Roadmap

Dara Albright, Founder of NowStreetTwitter: @nowstreet

www.nowstreetjournal.comdalbright@nowstreetjournal.com

http://facebook.com/nowstreetevents

The Crowdfund Investing Industry

Crowdfunding: An efficient new financing model for facilitating capital between Investors and SMEs and Start Ups

Douglas S. Ellenoff, Esq.Ellenoff Grossman & Schole LLP www.CrowdEsq.com

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

– 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.

– An issuer may sell up to an aggregate of $1,000,000 of its securities during any 12 month period.

– Investors with an annual income or net worth of up to $40,000 will 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.

– 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.

– Investors are limited to investing $100,000 in crowdfunding issues in a 12 month period.

– 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.

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 & Broker

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:

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;

Ensure that investors demonstrate an understanding of the risks associated with investing in new ventures and small business;

Implement measures to reduce the risks of fraud;

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;

Comply with applicable privacy rights and protections of information requirements;

Ensure that investors do not purchase an amount of crowdfunding securities during a 12 month period in excess of the statutory limit; and

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:

– 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.

– 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.

– Structure: the ownership and capital structure of the issuer, including terms of the securities of the issuer being offered.

– 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

– 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.

– 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

– 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.

– 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.

– 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.

– If an aggregate offering amount exceeding $500,000, the issuer must provide audited financial statements.

Acceptance of Basic Concept of Crowdfunding LawBy 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.

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.

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

Although Angel statistics are difficult to obtain they funded nearly as much as VCs

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.

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

Donations, Rewards, Pre-Order (Kiva, Kickstarter, Indiegogo and RocketHub)

– 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

Domestic Noisy 506 Offerings (Angel List, CircleUp and FundersClub)

– Angel List, $1.8 Billion raised for start ups; $11,500,000 in February 2013 alone.

Internationally (FundingCircle, ASSOB, Symbid, Seedrs and CrowdCube)

– 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

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.

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.

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)

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

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

Disclosure requirements and financial statements

Funding for the next app and high growth opportunities (actually small and community based businesses)

Capital structure and the Crowd

Exits

Substantive Issues To Be Considered

Better than friends and family

Fraud v Failure

Investment Advice and Curation

Substantive disclosure is just a good beginning

Title III platforms will be able to demonstrate that investors may have convenient memories for risk disclosure (digital footprint)

Liabilities of platforms

Valuation is as much a problem with public companies as crowdfunding

Is crowdfunding due diligence any match for conventionaldue diligence

Timeline

Proposed Rules by End of 1st Quarter

Public Comment Period (60 to 90 days)

Staff Review Period (60 days)

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 andacquisitions. 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).

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

Douglas S. Ellenoff, Esq.Ellenoff Grossman & Schole LLP150 East 42nd Street, New York, NY 10017(212) 370-1300Ellenoff@EGSllp.com

Disclaimer

• This information may answer some questions, but is not intended as a comprehensiveanalysis of the topic. In addition, this information should not be relied upon as the onlysource of information.

• This information is supplied from sources we believe to be reliable but we cannot guaranteeits accuracy.

• This document and the information contained herein is confidential. This document hasbeen furnished to you solely for your information and neither this document nor theinformation contained herein my be reproduced, disclosed or redistributed, in whole or inpart, by mail, facsimile, electronic or computer transmission or by any other means to anyother person, except with the prior written consent of the Ellenoff Grossman & Schole LLP.

• The material has been prepared or is distributed solely for information purposes and is not asolicitation or an offer to buy any security or instrument or to participate in any tradingstrategy.

• This presentation is made solely for the interest of friends and clients of Ellenoff Grossman& Schole LLP and should in no way be relied upon or construed as legal advice. For specificinformation on particular factual situations, an opinion of legal counsel should be sought.

JOBS Act Implementation

Presented by Richard Salute

January 31, 2013

What you need to know regarding the JOBS ACT implementation

Communication the Value Proposition– Be clear about your objectives and the

expected outcomes.– What is the solution you are offering.– Why is it relevant.– Describe the revenue model and anticipated

income.– Describe why the entities valuation is appropriate.– And much more!

What you need to know regarding the JOBS ACT implementation

The team: – Describe the management skills and experience

and why they can execute the business plan.– Best practice for achieving transparency requires

that you have the correct advisors i.e., Attorney’s, Accountants and Investment Bankers.

– Consider forming Boards of Directors and Advisors.

What you need to know regarding the JOBS ACT implementation

Financial Reporting– Depending on the raise GAAP financials are

required.– The financials may need to be reviewed or

audited.– There is a cost which will be dependent upon the

entity’s complexity.

What you need to know regarding the JOBS ACT implementation

On going communications with Stakeholders– Look at best of breed to see examples of

transparency.– Discuss key metrics good or bad.– The crowd is efficient be careful not to under

estimate its power.– Never forget that you are selling a portion of your

business.– Good Luck!

Thank you for participating in the webinar. To listen to a replay please visit: https://www.brighttalk.com/webcast/5205/69111

We also hope to meet you in person at the 2nd Annual Crowdfunding Convention & Bootcamp

www.crowdfundingroadmap.com/bootcamp

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