Angel Groups vs. 506 Platforms

ANGEL GROUPS VS.

506 PLATFORMS

Part of the Alternative Investment Basics Series 2015 Series

Premier Date: August 6, 2015

ANGEL GROUPS VS. 506 PLATFORMS

MEET THE FACULTY

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PANELISTSJonathan Friedland Levenfeld PearlsteinHuiwen Leo CrowdCheckDavid S. Rose Gust


MODERATORChristopher Cahill, Lowis & Gellen, LLP

Practical and entertaining education for business owners and executives, Accredited Investors, and their

legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

DISCLAIMER:

THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS

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http://www.financialpoise.com/

ABOUT THIS SERIES

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The personal investment landscape in the United States is undergoing the greatest transformation since the popularization of the mutual fund. The JOBS Act of 2012 lifted the ban that previously prevented private placements from being advertised. At this point, millions of accredited investors are only beginning to understand that there are investment options available to them that they never before considered. This webinar series was created for those millions of Americans who meet the federal government’s definition of “accredited investor,” to help them decide if some of their investment dollars should be allocated away from stocks, bonds, mutual funds, and the like and into the asset class that is commonly referred to as “alternatives,” which includes PE, VC, hedge funds, private placements, and hard assets (things like gold, land, comic books, and much else). Like all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera.

ABOUT THIS EPISODE

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Attend this webinar to learn about the different funding platforms available today. What types of choices are available and what benefits exist for each? Tune in to leaders in this field as they explain the intricacies of angel groups and 506 platforms.

EPISODES IN THIS SERIES

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(Dates below are premier dates; all webinars also available on demand)

#1 Are you an Accredited Investor, and if you are, so what? 5/7/15

#2 What is the JOBS Act and Why Should You Care? 6/4/15

#3 What is Equity Crowdfunding and Should it Matter to You? 7/9/15

#4 The Nuts & Bolts of Investing in a VC Fund 9/10/15

#5 Angel Groups vs. 506 Platforms 9/17/15

#6 The Nuts & Bolts of Investing in Pre-IPO Share 10/8/15

#7 The Nuts & Bolts of Investing in a PE Fund 10/29/15

#8 The Nuts & Bolts of Hedge Fund 11/12/15

#9 Basic Investment Principles- from Asset Allocation to Z Scores 12/3/15

Early Funders

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Seed / Friends and Family (and Fools?)

Angels

Venture Capital firms and funds

Regulation D offerings (Rules 506b and 506c), for accredited investors

Equity Crowdfunding

WHAT IS AN ANGEL

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Individual investing in a private company (syndicates have emerged)

Usually for equity

Probably one of several Angels

Not insisting on a lot of legal control (no Board seat)

Assisting where appropriate

Varied motives

THE ANGEL INVESTMENT LANDSCAPE

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• Hundreds of thousands of new businesses start up each year. About half of them survive five years or more, and about one-third survive 10 years or more.

• Just because a new business survives for 10 years does not guarantee that its equity investors will earn a good return.

Shikhar Ghosh (Harvard Business School) said: “If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for startups is 30 to 40%. If failure means failing to see the projected return on investment, then the failure rate is 70 to 80%.”

• Individual Angel investors collectively invest tens of billions of dollars each year in startups and early-stage companies. About half of that investment is equity, half is debt.

• Out of the approx. $80 billion per year of equity investment in small, private companies by individuals, 83% comes from family and friends; the remaining 17%—amounting to $13.8 billion per year—comes from Angel investors, individuals who do not have prior relationships with company owners or managers.

•More than half of Angel investment is made by non-accredited investors. Average Angel investor income is $90,000; average net worth is $750,000.


Angels in the US - 2014

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$14.1 billion invested

73,000 ventures invested in [16x number of ventures VC funds]

316,000 Angels

[Source: Center for Venture Research]

Angel ROI

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Invest in high growth, scalable ventures

Less manufacturing and more software or other tech

Capital pays developers and engineers

Payoff in 5-10 years

Repeat Angels build their own brands to gain access to deals

Angel Batting Average

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Lower than baseball batting averages

Many losers, but high returns for winners

Long liquidity horizons; possible follow-on investment

Angels diversify their bets

Angels bet funds they can live without

Initial Screening by Angels: What Matters Most?

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Financial track record: None

Tangible Assets: None or few

Sales: Some

User base: Existing and presumably growing

Scalable (10X ROI potential required)

Founding Team: BINGO

[per research by Shai Bernstein (Stanford) and Arthur Korteweg (USC)]

Angels and Convertible Notes

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Debt that turns into equity when first equity round occurs

Angel gets discount on purchase price of equity shares

Less legal paperwork at time of funding

Avoids tax implications of equity ownership at first

REGULATION D OFFERINGS vs.

TITLE III EQUITY CROWDFUNDING PORTALS

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Regulation D Title IIIInvestor status Accredited investors only All investorsRaise limit per year for startup

Unlimited Up to $1m (maybe $5m)

Investment limit for an individual per year

Unlimited $100k/year even for accredited investors

Launch of platforms 2011 2016?


• 2003 – ArtistShare launched rewards-based crowdfunding site for musicians.• 2005 – Kiva Microfunds launched crowdfunding site for micro-lending (but not

as an investment, i.e., lenders do not earn interest).• 2005 – EquityNet launched platform to connect securities issuers & investors

(passive bulletin board).• 2006 – First U.S. peer-to-peer lending platform Prosper launched—regulated by

the SEC because investors earn interest. Lending Club launched in 2007, filed IPO in December 2014.

• 2008 – Indiegogo (and in 2009 Kickstarter) launched; rewards-based crowdfunding mushroomed. The term “crowdfunding” gained traction.

• 2010 – GoFundMe launched one of the first donation-based crowdfunding platforms.

• 2011 – MicroVentures and CircleUp launched early Reg D offering platforms.• 2012 – The JOBS Act created equity crowdfunding (Title III), open to non-

accredited investors. SEC must issue final rules before Title III portals launch.• 2013 – The SEC issued rules under Title II of the JOBS Act, allowing general

solicitation for Reg D offerings under Rule 506(c).

HISTORY OF ONLINE CROWDFUNDING AND

SECURITIES OFFERING PLATFORMS

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WHO CAN PARTICIPATE?

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Title II Reg D Offerings onInternet Platforms

Title III Equity Crowdfunding

ISSUERSThe JOBS Act generated Rule 506(c) of Regulation D, which provides domestic and foreign issuers with the opportunity to engage in general solicitation and advertising of offering, so long as they meet standard SEC requirements for issuers.

INVESTORSAccredited investors only. Platforms must take reasonable steps to verify investors’ accredited status, for example by requiring investors to submit tax returns, bank statements, or letters from their professional advisers.

ISSUERSU.S. companies will be eligible to raise funds using crowdfunding exemption 4(a)(6 ), from Main Street and Wall Street alike. Not eligible are non-U.S. companies and those who have not met or are disqualified under standard SEC provisions

INVESTORSAnyone can invest, but investment amount is limited based on individual income and net worth. Those with an income/worth less than $100k/year may invest the greater of $2k/year or 5% of annual net worth/income.

Those with income/worth greater than $100k per year can invest 10% of their annual net worth/income up to a maximum of $100k per year.


Who Is an Accredited Investor?

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There are several types of “accredited investors,” including:o A natural person with net worth (alone or with a

spouse) in excess of $1 milliono One’s primary residence is not counted as an asset, and

any mortgage is not counted as a liability, unless the mortgage is underwater

o A natural person with income exceeding $200,000 (or joint income with a spouse exceeding $300,000) in the 2 most recent years, and reasonable expectation of similar income in the current year

IF you meet either standard then YOU are an accredited investor


TITLE III EQUITY CROWDFUNDING True “crowdfunding” under Title III of the JOBS Act; not legal until

SEC issues regulations (Congress may revise Title III before SEC issues rules)

Creates new exemption- Section 4(a)(6) of Securities Act of 1933 U.S. companies will be able to raise $1m/year/entity from both

accredited and non-accredited investors (Congress may increase raise limit to $5m/year/entity)

Limits on amount each investor can invest, during any 12 month period, based on income and net worth

Companies that crowdfund will have to use a registered broker or registered funding portal

Proposed rules require issuers to comply with significant financial and business documentation, similar to public company reporting, aimed at protecting unsophisticated investors

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Regulation D, Rule 506(c)

Derived from Title II of the JOBS Act, Rule 506(c); removes the strict ban on general solicitation and advertising. That is, issuers can publicize certain details of their offerings outside of the platform where the offering is listed.

“Traditional” private offerings under Rule 506(b) may not use general solicitation.

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Rule 506(b) Rule 506(c)General solicitation Banned AllowedAccredited Investors Self-certify AI status Verify AI status


RULE 506(c) (cont’d)

Companies engaged in Rule 506 offerings not required to use an intermediary, like a registered broker‑dealer

Rule 506(c) issuers have an obligation to take reasonable steps to verify accredited investor status of investors Rule 506(b) issuers are not so obligated- but must

establish a reasonable belief

No investor or issuer limits21


DUE DILIGENCE RESPONSIBILITIESOF INTERMEDIARIES

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REGULATION D OFFERING PLATFORMS

•The due diligence requirements for Regulation D offering platforms depend on the selling efforts that they engage in on behalf of companies. In some instances, for example, they must take reasonable steps to screen out fraudulent offerings.•Reg D offering platforms that are broker-dealers have a high level of due diligence responsibility, e.g., screening out stupid ideas, outrageous valuations, and investments that are unsuitable for their registered investors.•Reg D offering platforms that are not broker-dealers may have due diligence responsibility (in addition to screening for fraud) if they are promoting the offerings – unless they are a passive bulletin board, which has no diligence responsibility.•Issuers that feature Rule 506(c) offerings (allowing general solicitation) must take reasonable steps to verify the accredited status of investors; many platforms perform this duty on behalf of issuers.

TITLE III CROWDFUNDING PORTALS

•All crowdfunding portals under Title III must take reasonable steps to screen out fraudulent offers and issuers that employ bad actors.•Crowdfunding portals that are broker-dealers will likely have the same due diligence requirements as in Reg D platforms, including confirming the suitability of offerings for investors.•Crowdfunding portals that are not broker-dealers will likely have a lower standard of review, but it will vary depending on the selling efforts they engage in on behalf of companies (pending SEC rules).•All crowdfunding portals must take reasonable steps to ensure that investors do not exceed their investment limits based on net worth and income.


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Available on Amazon

http://www.amazon.com/Angel-Investing-Making-Having-Startups/

dp/1118858255

“As an angel investor and a long-time fan of David S. Rose, I was delighted to hear he finally captured his wit and wisdom in the pages of a book. David’s witty stories and angel investing principles — as well as his unsurpassed knowledge of his field — are teaching me so much more about investing than I’ve learned over the years doing it!”—BARBARA CORCORAN, Real Estate Mogul, Shark Tank star, Angel Investor

http://www.amazon.com/Angel-Investing-Making-Having-Startups/dp/1118858255




MORE ABOUT THE FACULTY

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CHRISTOPHER CAHILL

Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and litigated on behalf of manufacturers and secured lenders in large and middle-market cases.

Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2015) and is the host of Accredited Investor Markets Radio, a weekly broadcast for investors, on accreditedinvestormarkets.com.


[email protected]


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JONATHAN [email protected]

Jonathan Friedland is a partner with Levenfeld Pearlstein.Jonathan’s corporate work includes serving as outside general counsel to a number of closely held businesses and their principals, representing private equity funds and others in their M&A activities, and in advising start-ups and their investors. The wide range of corporate issues he advises clients on include: fiduciary duties; structuring issues (between shareholders, members, joint venturers, etc.); credit negotiations; general contract issues; succession planning, employee matters, and litigation. Jonathan is on the editorial board of The Corporate Counselor.Jonathan also leads the firm’s Restructuring & Insolvency Service Practice. He has extensive experience in guiding companies and their constituents through a variety of financially challenging situations. He represents banks, debtors, official and ad hoc creditor committees, buyers, and other stakeholders in bankruptcy cases, assignments for the benefit of creditors, receiverships, and out-of-court workouts. Jonathan is lead author of Strategic Alternatives for Distressed Businesses, an 800 page treatise and Commercial Bankruptcy Litigation, a 1500 page treatise.Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “Superlawyer” in the areas of Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, and has received several other similar distinctions. Jonathan has been profiled, interviewed, and/or quoted in many publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire; and The Daily Deal.Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 (after three years of study) and from the University of Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of Business for several years and was the 2006 Clayton Center for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan was a partner with Kirkland & Ellis before joining Levenfeld Pearlstein. Jonathan is also the founder and chairman of DailyDAC, LLC.


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HUIWEN LEO


[email protected]

Huiwen Leo, Director of Investor Services, is a corporate and securities attorney. She began her career at the World Bank, where she focused on Private Sector Development issues including corporate governance, aid effectiveness, privatization and globalization. She then joined the New York office of Clifford Chance, where she advised on capital markets transactions and corporate matters for companies and major investment banks in Asia, Europe and Latin America. When her husband was based in Camp Pendleton and deploying to Iraq, she relocated to the San Diego office of Latham & Watkins, where she worked on everything from start-up financing to multi-million dollar deals. She has worked pro bono on microfinance in Haiti, clean tech in San Diego, and military family and veterans issues. Huiwen helps investors maximize the investment opportunities of crowdfunding by having the information they need to make an educated decision.Huiwen received her B.A. and M.A. in law from Cambridge University and received her LL.M. with distinction from Georgetown University Law Center. She is a member of the New York and California bars. Huiwen has lived in Singapore and Beijing, traveled extensively throughout China, and is fluent in Chinese.


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DAVID S. ROSE

David S. Rose is an Inc. 500 CEO, serial entrepreneur, angel investor, and author who has founded or funded over 100 pioneering companies. He has been described by Forbes as "New York's Archangel", by BusinessWeek as a "world conquering entrepreneur", by Crain's New York Business as "the father of angel investing in New York", and by Red Herring magazine as "patriarch of Silicon Alley". He is the New York Times best selling author of Angel Investing: The Gust Guide to Making Money & Having Fun Investing in Startups.David is the founder and CEO of Gust, which operates the world's largest online platform and community for entrepreneurs and early stage investors. Gust is used by my more than half a million entrepreneurs in 190 countries to connect and collaborate with over 75,000 accredited investors.He is also Managing Director of Rose Tech Ventures; Founder and Chairman Emeritus of New York Angels; and Founding Track Chair for Finance and Entrepreneurship at Singularity University, the Google/NASA-sponsored post-graduate program in exponential technologies.David is Chairman of Board of Social Bicycles, Waywire.com, Miner and Por ti, Famila, serves as a director of KoolSpan; TekServe and the NY Tech Meetup, and is an active early stage investor in companies including LearnVest, RealtyMogul, Space Adventures, and Moven.David is is a regular speaker at the TED conferences, and his TEDtalk on How to Pitch a VC has been viewed nearly a million times. He lectures at business schools including Yale, Harvard, Columbia, Pace, and Stevens, and was named Mentor of the Year by NYU's Stern School of Business. David can be followed online @davidsrose

[email protected]

More information at http://www.ec4i.co

m (Image reproduced with permission of John Wiley & Sons)

The JOBS Act & the accredited investor:

What every accredited investor should know before

investing in alternative assets

www.financialpoisewebinars.com

About Financial Poise™ DailyDAC, LLC, d/b/a Financial Poise™ provides continuing education to business

owners and executives, investors, and their respective trusted advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining,

explanations about legal, financial, and other subjects of interest to these audiences.

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THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

Important Notes