September 28, 2017

GREGORY C. YADLEY
Shumaker, Loop & Kendrick, LLP, Tampa, FL http://www.slk-law.com/

ELIZABETH A. BLEAKLEY
Bleakley Law LLC, Chicago, IL http://buslawcounselor.com/

NANCY FALLON-HOULE
Velocity Law LLC, Downers Grove, IL https://www.velocitylaw.com/

ERIC K. GRABEN
Wyche, PA, Greenville, SC https://wyche.com/

BONNIE J. ROE
Cohen & Gresser LLP, New York, NY https://cohengresser.com/

GARY J. ROSS
Ross & Shulga PLLC, New York, NY http://www.rsglobal.law/
What do I need to know about the securities laws?
When do my clients need to worry about the SEC?
What are my clients’ alternatives for
raising capital?
What traps can I help clients avoid through
proper planning?
What documentation and disclosures
are required?
 Accredited Investors, Finders
JOBS Act; developments regarding
“private” financings
General Solicitation: Rules 506(b) & (c)
Crowdfunding and Regulation A+
Rule 147 and Intrastate Offerings;
Rule 504
Practice Pointers and Liability
Founders are 3 friends from college:
 Brown, a Georgia computer engineer, Green, a
SC bioengineer, Orange, a CA MBA
 Developed a human nerve and computer chip interface, allowing
nerves to communicate directly with the chip.
 Universities hold the patents on their inventions
 Formed a Delaware corporation on LegalZoom “Telepathy Now,
Inc.” that has obtained licenses to the patents from the
universities. Telepathy is headquartered in GA
 Telepathy seeks to develop the computer chip to be implanted
in humans, under skin at base of skull. Will receive and transmit
signals to and from the brain, wirelessly up to 2 miles.
 Telepathy Raised $100,000 in working capital from friends and
family under 4(a)(2) securities exemption.
 Received a US DoD grant $250,000 to develop chip for implant into
special ops personnel, allowing them to communicate telepathically
during operations.
 Believe they can raise only a few hundred thousand more from
friends and family
 Needs to raise $2 million to complete development of prototype
chip implant
 Needs an additional $7 to 10 million to conduct trials to determine
whether human brains can learn to communicate effectively with the
chip implants
• Securities Act §4(a)(2): “Transactions by an issuer not involving any
public offering.”
• The founders’ round, and an early seed round, are usually exempt
from federal registration under 1933 Act Section 4(a)(2).
• No filing with the SEC - self-executing exemption.
• Most states have self-executing small offering exemptions (SC: 25 or fewer
purchasers in SC in any 12 month period subject to conditions)
• Some states may require filings for small offering exemptions
• 4(a)(2) initial round has very few investors - typically <10 investors.
• 4(a)(2) investors are either:
• Extremely close personal connections to the issuer’s principals,
or
• Highly sophisticated accredited investors with deep knowledge
and experience in the industry and/or startups.
Who are commonly 4(a)(2) Investors?
 Founders
 Founders’ family: parents, grandparents, uncles, aunts, siblings, in-
laws
 Very close friends of founders: college roommates; parents of
childhood friends
 Venture capital or angel investor, member of established angel
group
 Investor or executive with prior experience in company’s space or
other startups as a board member, executive, or financial officer
 Investor who has professional training or degree (CPA, CFA, MBA,
JD)
 Registered broker-dealer or investment advisor
 Investor with significant private offering investment experience
Federal and state laws prohibit a person from engaging
in the business of effecting transactions in securities
without registration as, or licensure or affiliation with, a
broker-dealer
 “transaction based compensation” (commissions and other
contingent payments, based upon amount, closing, etc.)
 exception for “finder’s fees” paid in set amount, regardless
of whether sale results
 dealing with unregistered intermediaries presents
significant problems for the issuer: rescission rights,
regulatory enforcement, fraudulent representations
general solicitation
Income in each of the last two years was, and is
reasonably expected to be in the current year, at
least $200,000

Income, together with spouse, in each of the last

two years was, and is reasonably expected to be in
the current year, at least $300,000

Net worth jointly with their spouse exceeds $1

million, excluding the equity in their home
Alternative qualification for accredited investor status based
upon knowledge and experience (“sophistication”)?
 prior board, executive or financial responsibility

 relevant training or degree (e.g. CPA, CFA, MBA, JD)

 licensure as a broker-dealer or investment advisor

 membership in an established angel group

 previous investment experience in private offerings

 passing a test or completing a questionnaire

Title V – Changed registration threshold
under Section 12(g) (private)
 Issuer has total assets exceeding $10 million
 A class of equity security “held of record” by
2,000 persons or 500 non-accredited
 Excludes from the term “held of record” any
securities
Employee Equity Compensation Plan
Crowdfunding Offering
Title I – Emerging Growth Companies (public)
 Issuer with total gross revenues of less than $1
billion
 Reduces disclosure requirements for initial IPO
of equity securities
Title III – Crowdfunding (public)
 Raise up to $1 million in 12 months through a
“funding portal”(now $1.07 million due to cost-
of-living adjustment)
 Issuer is required to use a registered funding
portal or broker-dealer intermediary
 Limitations on investment and required
disclosures and investor education
 Regulation Crowdfunding (“Regulation CF”) (Oct
2015) provides the rules and forms for
implementing crowdfunding
Title IV – Regulation A (March 2015) (private/public)

 Raise up to $50 million in 12 months

 Securities may be offered and sold publicly
 Periodicdisclosures to investors and audited
financial filings may be required
 Amended Regulation A (“Regulation A+”)
provides rules and forms
Title II – “Rule 506(c)” and Rule 144A –
Solicitation (public)
 Implementing Rules adopted July 2013
 Removed prohibition on general solicitation or
general advertising in new Rule 506(c) and
Rule 144A (QIBs) (Note: Existing rule became
Rule 506(b))
 “Reasonable steps” to verify all accredited
investors (no self-certification)
Rule adopted disqualifying “bad
Actors” from Rule 506 Offerings
Intrastate and Regional Securities
Offerings Final Rules (October 2016)
 Rule 504 now $5 million (doesn’t preempt
state “blue sky” law)
 Rule 505 repealed
 Rule 147 amended and 147A added to
accommodate crowdfunding
 General solicitation not defined; Rule 502(c) gives
some examples (newspaper, radio . . .)
 Social Media
 Pre-existing substantive relationship
Able to form, and did form, a conclusion about the
financial capabilities and sophistication of the investor
Relationship existed before offer is made
Generally, the relationship is with a broker-dealer or
other third party, not the issuer; issuer benefits from the
third party’s pre-existing substantive relationship
 What about personal relationships (e.g.
friends and family offering)? If it’s genuinely
a small group, not a public offering
 Targeted offering to narrow group of
professional investors (e.g. VC funds
interested in your niche industry) – also
probably not a public offering
 Facts and circumstances, and the
sophistication of the investors, are key
Angel groups
 if the group is composed mainly of accredited investors, coming
together based mainly on existing personal relationships, it’s not
general solicitation
Demo days, investor conferences
 could be general solicitation if present investment opportunities,
terms, etc.
Website offering
 A notice on the issuer’s website – general solicitation
 A relationship developed through a password-protected third
party portal before the offering commenced may be a pre-
existing substantive relationship; portal site admits investors
based on financial qualifications and possibly investment
experience
Rule 506(b)
a safe harbor for the statutory private
placement exemption

Rule 506(c)
similar, but permits general solicitation; all
investors must be accredited
 Offering may be made to an unlimited number of “accredited
investors” and up to 35 non-accredited investors – issuer must
have reasonable belief as to accredited investor qualification
(self-certification and no red flags)

 Non-accredited investors must have sufficient knowledge and

experience to evaluate the merits and risks of the offering

 Non-accredited investors must receive specified types of

information similar to what you might provide in a Reg A
offering and an audited balance sheet or audited financial
statements

 For accredited investors, the exemption is not conditioned on

any specific disclosure requirements, but the issuer must avoid
fraud (no misleading statement or omission)
 Form D must be filed (electronically with the SEC) within 15
days after the first sale

 Rule 506 offerings are exempt from state Blue Sky

qualification requirements, but states may require a copy of
the Form D, a consent to service of process and payment of
a filing fee. An additional filing, Form 99, may be required in
NY, and state laws concerning sales by officers, directors,
finders and brokers should be reviewed.

 Offerings involving “bad actors” in key positions (director,

executive officer, 20% beneficial owner, promoter,
placement agent, etc.) cannot qualify for Rule 506(b);
depending on when the bad act was adjudicated, there may
be disclosure rather than disqualification
 No “general solicitation or general advertising” is
permitted
 Possible integration problems with inconsistent offerings
Involving general solicitation
Involving unaccredited investors
May require a cooling off period between offerings
Generally integrate (at least potentially) with other
offerings within 6 months before or after the offering
 Possible to conduct “side by side” offerings in some
cases
 Rule 506(c) offerings are like Rule 506(b) offerings in most
respects but general solicitation is permitted
 Only accredited investors may purchase securities in a Rule
506(c) offering (non-accredited investors may receive offers)
 Must take reasonable steps to confirm that each purchaser is
accredited – a higher standard than reasonable belief;
exemption depends on performing appropriate due diligence
(facts and circumstances test, Rule 506(c) includes safe
harbors)
 Many individual investors are reluctant to provide evidence of
their financial position, such as tax returns or brokerage
statements, making 506(c) less popular for offerings to
individuals than 506(b)
 Pluses
Can raise from non-accredited investors
Can general solicit/advertise (with restrictions)
Generally leads to more visibility (and perhaps
customers!)

 Minuses
Not ideal for B2B
More expensive and time-consuming that Rule 506
More SEC scrutiny
 $1 million maximum (in any 12 months) (raised to
$1.07 million due to cost-of-living adjustment)
 Will not be integrated with a separate concurrent
exempt offering
 Have to use an intermediary that is either a
registered broker or an approved funding portal
 Examples – WeFunder, Republic, SeedInvest, StartEngine
 Advertising Restrictions
 Any communication regarding offering must have link
 Communications limited to “tombstone” information, such as
price and nature of securities, max offering amount and closing
date, and basic information about issuer
 Form C must be filed with SEC before offering
Contains
Info about directors, officers, 20% shareholders
Description of company’s business
Target offering amount, deadline to reach target
Financial Statements
– If maximum offering amount is less that $107,000
• Financial statements must be “certified” by CEO
– If maximum offering amount is $100,001 to $535,000
• Financial statements must be reviewed by independent
accountant
– If maximum offering amount is over $535,000
• First-time Reg CF issuers – same as above
• Repeat Reg CF issuers – audited financials
 Limits for investments in all Reg CF offerings in
any 12 months
Income/net worth <$107k – greater of $2.2k or 5% of
income or net worth/year
Income/net worth >$107k – lesser of 10% of income or
net worth/year, up to $107k
Applies to accredited investors as well
 Reg CF Securities cannot be resold for one year
Except to
Issuer
Accredited Investor
Registered offering (e.g. IPO)
Family member, trust, upon death/divorce, etc.
 Tier 1 Tier 2
Offering Limits $20,000,000 $50,000,000

Blue Sky Laws Must comply Preempted

Ongoing Reporting Only at offering Annual; Semi-annual;

completion Current

Financial Statements Do not have to be Audited financials

audited

Investor Limitations No limit Limits for

unaccredited

National Exchange Not eligible for Possibility of listing

listing
 Form 1-A
Similar to registration statement (Form S-1) for IPO
Includes prospectus for distribution to investors

 Issuers permitted to draft Offering Statements

for non-public review by SEC staff before filing
 Regulation A+ allows for “Testing the Waters”
prior to SEC filing or qualification or after SEC
qualification
Required disclaimer that no offer to buy securities
can be accepted until the issuer’s offering
statement is qualified
 No limits for accredited investors
 Unaccredited investors in Tier 2 offerings are
limited to investing
Greater of 10% of their income or net worth
Unless issuer will be listed on a national exchange such as
NASDAQ immediately upon commencement of the offering
Issuer is not required to verify that investors are staying
within the limit
 Shares sold in Tier 2 offerings are not considered
“restricted securities”
State preemption only applies to initial offering, not resales
Issuers may impose transfer restrictions
What if the Issuer doesn’t want to go though using a crowdfunding portal or
broker, but still wants to sell its own small public offering? Use either:

 Reg D Rule 504 (“Small Offerings – Up to $ 5 million”), or

 Rule 147, 147A, § 3(a)(11) Intra-State = “All In One State”
 These Exemptions are for Small offerings, or local-only offerings
 Narrow in scope compared to Reg D 506, Reg CF or Reg A
 If Issuer fits in narrow scope, (local issuer, or small capital raise):
Then these offer more flexibility, and fewer rules apply.
 Pros, Cons and Conditions in next Slides
 Great for purely local business with strong local following:
 Brewery, Restaurant, Bookstore, Gym, Boutique Shop
 Typically Issuer-Sold, without Brokers
 No Mandated Disclosure Format; but Disclosure is Required under
10b-5
 States control clearance, and even terms of deal, in some states.
 $5 million limit (More than Reg CF’s $1.07 million)
 $5 million allowed every 12 months (Quiet period
of 12 months before 1st offering and 6 months
after last is required)
 No limit on # of investors (unlike 506(b)
 Nonaccrediteds unlimited (unlike 506(c))
 No limit on investor’s dollar investment (unlike CF)
 Public Solicitation Allowed (unlike 506(b))
◦ 504: If public solicitation made, then must either sell to all accredited investors, or
must register in at least one state. (Illinois requires only Form D notice.)
 No Escrow Required (unlike CF) (States may require)
 No Portal Required (unlike CF)
 No Mandated Disclosure Doc Format or type (any PPM, U-7),
but must provide disclosure.
 No Audited Financials Required (States may require)
 Bad Actor Disqualifications Apply
 SEC Form D Notice Filing Required (on EDGAR)
https://www.filermanagement.edgarfiling.sec.gov/Welcome/EDGARFilerMgmtMain.htm
◦ Due 15 days after 1st sale; File again at 1 year
◦ 4-6 Page Notice, Just Facts, no narrative writing required
◦ Principals, deal terms, brokers & finders, finders fees, offering amount, $
sold, # investors, insider payments.
 States - No State Preemption - Blue Sky is the Rub
◦ State requirements all over the map: From nothing, to notice filing, to full
registration, to full registration using “NASAA Guides”.
◦ May need “reviewed” financials by CPA (not audited)
◦ Your Own State Regulator my be lenient (job creation), others may not
◦ File Form D (paper for 504, no NASAA EFD for 504); File PPM or Form U-7 + $$ fee
◦ Might be state issuer-dealer filings required
 Investors receive non-listed, illiquid shares; for which there is no resale
market
 Resale Restrictions apply
 Effective 1/20/17
 Intra-state Offering Exemption: Rule 147, 147A and 3(a)(11)
“Offerings All in One State”
 Issuer must be “doing business” in same state as investors
 Unlimited dollar amount offered and sold (Unlike CF or 504)
 Unlimited number of investors (Unlike Reg D 506(b) and (c))
 Nonaccredited and accredited investors allowed (Unlike 506(c))
 Unlimited amount each investor can invest (Unlike Reg CF)
 Public solicitation allowed, But sales must occur all in 1 state –
(Unlike 506(b))
 Out-of-state residents can view online and public offers, but
sales limited to only in-state residents.
 No mandated disclosure document format, but some disclosure
required 10b-5 (Unlike Reg D 506)
 No escrow required (Unlike Reg CF)
 No portal or broker required (Unlike Reg CF)
 No financial statement requirements
 No Bad Actor Disqualifications (Though states may impose them)
 No SEC filling Required. No ongoing reporting required (Unlike Reg
A, D, CF)
 State Filings required in some states (states vary)
 State issuer-dealer filings required in some states (jury still out)
 Investors must all reside in 1 state (No exceptions) (Unlike Reg A, D, CF)
 Issuer must be “doing business” or located in that same state
◦ (80% of revenue, or 80% assets, or 80% use of offering proceeds;
or majority of EEs)
 Investors must sign written Residency Representation
 Intra-State Offering Legend required in Offering docs
 6 month window required before or after an offering in another
state, or before or after another offering type (Integration).
 Resale restriction during offering, and for 9 months after last sale
 Investors Receive non-listed, illiquid shares; for which no resale
market exists
 Effective 4-20-17
 Disclosure required even if “no filing” exemption.
 § 10b-5 (anti-fraud) laws require “full and fair
disclosure” of all material information to investment
decision: Issuer, principals, Offering terms, risks,
industry, repayment, exit strategy, more.
 Need PPM, Offering Memo, Disclosure Book,
Executive Summary, Business Plan, Extensive Slide
Deck, background check results if hits.
 Written Disclosure is Consistent. While Oral
Disclosure is Inconsistent, time-consuming and
not documented.
 Legal Protection (to Issuer), from investors - if
unsuccessful investment, and exaggerating
brokers.
◦ Investors may sue, but they wont win if issuer provided
written disclosure.
 Don’t say anything outside the book
 Don’t say anything untrue or misleading.
 Investor Perception: Improved with professional book;
Increases investor confidence that compliance done
correctly.
 Forces Issuer to crystalize thoughts in writing.
 Anticipates & answers investor questions so
that Issuer is prepared and looks prepared.
 Time Saver for Issuer at investor pitches.
 Can be, & should be, a marketing document:
◦ Touting the virtues of company, its innovation and
disruption, its background, its team.
 Balances Sales Pitch vs. Full Disclosure
 Puts your money where your mouth is:
◦ Issuer and principals end up investing personal
assets in start-up costs (legal, accounting,
marketing), which means you back the deal.
 Material information for investment decision, “full and fair
disclosure” about:
◦ Issuer, offering, owners, %, principals, deal terms, price
◦ Product, invention, uses, markets, industry, competition
 Biographies; 20-year background of principals and 5% owners;
Disclose Affiliated entities and people
 “Bad Actor” history on principals:
◦ Criminal, Fraud, Regulatory/licensing, court actions, bankruptcy, tax
liens.
 Use of Proceeds Table; Expenses and Salaries paid out of
investor money: Clear & concise.
 Compensation and Loan Repayments to Principals
 How investors get paid: Profit-splits, exit
 Dilution possibilities to Investors
 Liquidation priorities, or lack of
 Company financial condition & debt.
 Brokers or Finders ? Names, Fees $$?
 Exit Strategy for company, founders,
investors
 Material Agreements, including debt.
 IP ownership and how protected
 Risk Factors: Strategy Risks, Market
Risks, Competition, experience level.
 Disclosure Short Cuts (Only Use if All Investors Are
Accredited or if Close Family):
◦ Relationship Approach: Family & a few very close friends
can acquire disclosure through relationship with you. But
still need to give them info. Only use this method for
people who would not sue if you lost all of their money

◦ Professional Investor: Highly sophisticated, VC or Angel,

securities business, mega net worth, Disclosure by their
due diligence. Only use this for very small # of investors.

◦ Stack of Documents approach – Give Investors all docs

typically summarized in PPM: Corp docs, legal, contracts,
bios, financials, industry info, leases, trademark, patent…
 Failure to file registration with regulators:
◦ Issuers liable for fines and penalties from regulators
◦ Investors have right of rescission
 Inadequacy of disclosure (10b-5 securities fraud
liability):
◦ Civil penalties even for unintentional material misstatements or
omissions
◦ Criminal liability for intentionally materially misleading
statements or omissions
 No personal liability shield for principals – Issuer’s
controlling persons (officers, directors and significant
shareholders) may be jointly and severally personally
liable with the issuer
 Issuer’s Counsel can incur liability in the value of the
investor raise
 Issuer’s Accountant can incur liability in the value of the
investor raise