Crowdfinancing

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Private Placement Advisors LLC 2013
Crowdfinancing
Title: Crowdfinancing
Sub-title: Introducing a New Asset Class
Author: Douglas Slain
First Edition
Published November 3! "#3$
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Private Placement Advisors LLC 2013
Crowdfinancing
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Private Placement Advisors LLC 2013
Crowdfinancing
Crowdfinancing
%ntroducing a New Asset Class
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I. %ntroduction
II. #' (uestions and Answers

III. Com)arative Anal*sis of +$S$ Crowdfinancing ,)tions
Private %ssuers Publicl* -aising .P%P-/ v$ T%T0E %%% Crowdfunding
%ntrastate Crowdfunding v$ -egistered Crowdfunding
%1$ Crowdfinancing in Euro)e
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Private Placement Advisors LLC 2013
Crowdfinancing
Crowdfinancing
%ntroducing a New Asset Class
Table of Contents Pages
I. %ntroduction222222222$22$222$2$222$$3
II. #' (uestions and Answers
1 4hat is crowdfunding5 222$2222222222222#
2 Are all issuers eligible to rel* on the
crowdfunding e6em)tion 2222$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$##
3 Can issuers or intermediaries engage in
unrestricted general solicitation and advertising in
connection with crowdfunding offerings5 222222$$22$$#"
4 Are issuers re7uired to conduct crowdfunding
offerings through intermediaries or bro8er9dealers 22222$$#"
! :ow much ca)ital can an issuer raise through
the crowdfunding e6em)tion5 $$$22222222$222$2$$#3
" Does the crowdfunding e6em)tion im)ose limits
on the number of investors5 22222222$$$$$$$$$$$$$$$$$$$$$$$$$$#3
# Does the crowdfunding e6em)tion im)ose limits
on how much an* investor can invest5 2222222222$#3
$ 4hat is a funding )ortal within the meaning
of the new rules5$$$$222222222$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$#'
% 4hat liabilit* regime governs crowdfunding
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e6em)t offerings5 22222222222$$$$$$$$$$$$$$$$$$$$$$$$$$$$$#;
10 :ow are investors in crowdfunding offerings
treated for )ur)oses of calculating the number of
record holders triggering registration under Section
#".g/ of the Securities E6change Act5 22222222$$$$$$$$$$#<
11 Can state regulators regulate crowdfunding offerings5 $$$2#3
12 4hat resale restrictions a))l* to securities ac7uired in
crowdfunding e6em)t offerings5 22222222222$$#=
13 :ow do the )rivate offering reforms e6)and o))ortunities
for ca)ital formation under the -egulation D )rivate
offering e6em)tion5 22222222$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$#=
14 4hat is an issuer5 $222222$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$"
III. Com)arative Anal*sis of
+$S$ Crowdfinancing 1ehicles222222222$$2$$""
I&. Crowdfunding in Euro)e 222222222222$$$$$";
About +s $$$2222222222222222222222$$$$$"=
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Private Placement Advisors LLC 2013
Crowdfinancing
Introduction
The >,?S Act@s crowdfunding and )rivate offering reforms in
"#3 re)resent historicall* significant develo)ments$ Together
with the deregulator* changes scheduled for "#' these new
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reforms turn on its head the traditional orthodo6* embodied in the
Securities Act of #=33$
The Securities Act of #=33 as administered b* the Securities and
E6change Commission for the last 3 *ears has )laced significant
hurdles on startu)s and small businesses who want seed ca)ital$
,ne obAective of the >,?S Act was to enable the Bsmall gu*C to
raise seed and ca)ital through )rivate )lacements! e6em)t from
Federal or state registration$ Accordingl*! ca)ital9see8ing
enter)rises can now engage in heretofore )rohibited general
solicitation of individual and institutional investors with whom
the* do not have a )rior relationshi)$
The >,?S Act@s )rivate offering reforms are alread* enabling
mar8et innovators to transform earl* stage ca)ital formation!
e6)anding o))ortunities for both accredited and non9accredited
investorsD the* have democratiEed an area of investment from
which ordinar* investors have been e6cluded$
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The mar8et for )rivate )lacements alread* ecli)ses that of )ublic
offerings$ %n "#" com)anies raised more than F= billion in
)rivate )lacements! nearl* four times the amount raised through
)ublic stoc8 offerings! according to the SEC$ Stri8ingl*! )rivate
)lacements were onl* sold to under "G! investors in "#"$ %n
"#' and "#G! and be*ond! this number will s8*roc8et$ This
monogra)h com)ares +$S$ crowdfunding vehicles and
)latforms and summariEes what several E+ countries are doing$
1. What is crowdfunding?
Crowdfunding is fundraising through securities offerings directed to the
general )ublic through the internet and other mass communications
media$ +nder historic securities law! an offer made to the general )ublic
was considered a B)ublic offeringC that had to be registered with
the SEC and registered or 7ualified with the securities regulator of each
state in which the offering was conducted$ This regulator* regime
)recluded crowdfunding b* startu)s and )rivate
emerging growth com)anies$
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The >,?S Act carved out a trul* historic e6em)tion for crowdfunding
b* adding a new transaction e6em)tion in Section ' of the Securities
Act$ %ssuers and intermediaries are free to engage in crowdfunding
activities that would otherwise be characteriEed as )ublic offerings
re7uiring registration under the Securities Act$
Funding )latforms or intermediaries are increasingl* ma8ing use of
networ8ing funding )ortals to attract and organiEe communities of angel
investors$
2. Are all issuers eligible to rely on the crowdfunding exemption?
No$
The crowdfunding e6em)tion is not available to foreign issuers! SEC9
re)orting issuers and certain investment com)anies$ The e6em)tion
e6cludes from eligibilit* an issuer not organiEed under the laws of a
state or territor* of the +nited States or the District of ColumbiaD or is
subAect to re)orting re7uirements )ursuant to Section #3 or #G.d/ of the
Securities E6change Act of #=3'D or is an investment com)an*! as
defined in Section 3 of the %nvestment Com)an* Act of #='D or is
e6cluded from the definition of investment com)an* b* Section 3.b/ or
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Section 3.c/ of the %nvestment Com)an* Act of #='$
Publicl* traded com)anies ma* not engage in crowdfunding e6em)t
offerings$ Similarl*! a )rivate fund e6cluded from regulation as an
investment com)an* under Section 3.c/.#/ or 3.c/.</ of the %nvestment
Com)an* Act .whether formed as a )ool investment vehicle or a conduit
formed for investment in a )articular issuer/ also ma* not rel* on the
crowdfunding e6em)tion$
The SEC has the rulema8ing authorit* to e6clude from eligibilit* other
com)anies as it ma* determine a))ro)riate$
3. Can issuers engage in unrestricted general solicitation and
advertising with crowdfunding exempt offerings?
No$
4hile issuers are free to introduce the general )ublic to an online
)latform through which the securities are discussed! the* ma* not
actuall* directl* offer the securities themselves$ %nstead! the* must direct
)ros)ective investors to intermediaries or funding )ortals$ This is meant
to )reclude use of ma8ing offerings via blast emails and similar
communications$
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-egistered intermediaries! on the other hand! are allowed to )romote
crowdfunding offerings$
4. Are issuers required to conduct crowdfunding exempt
offerings through intermediaries or broker-dealers?
Hes$
Crowdfunding offerings ma* not be conducted b* an issuer directl*!
using its website or otherwise$ Crowdfunding offerings must be
conducted through funding )ortals or through a licensed bro8er9dealer
networ8$
5. ow much capital can an issuer raise through the !itle III
crowdfunding exemption5
%ssuers can sell u) to F#!! aggregate amount of securities! sold
through crowdfunding e6em)t offerings! during an* #" month )eriod$
6. "oes the crowdfunding exemption impose limits on the
number of investors who can invest?
No$
There is no limit on the number of investors who can invest$ Further!
investors who become securit* holders through crowdfunding e6em)t
offerings are e6cluded when calculating the number of record holders
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under Section #".g/ of the Securities E6change Act$
7. "oes the crowdfunding exemption impose limits on how much
any investor can invest?
Hes$
The crowdfunding e6em)tion limits how much an investor ma* invest
based on the investor@s annual income or net worth and includes all
e6em)t investments made in the #"9month )eriod )receding the
investment in 7uestion$ The limits are:
1 for investors with either an annual income or net worth less than
F#!! the amount invested ma* not e6ceed the greater of F"! or
GI of the investor@s annual income or net worthD and "/ for investors
with either an annual income or net worth of at least F#!! the
amount invested ma* not e6ceed #I of the investor@s annual income or
net worth u) to a F#! ma6imum aggregate amount$
The crowdfunding e6em)tion also im)oses a re7uirement on
intermediaries to ma8e such efforts as the SEC ma* determine
a))ro)riate to ensure that no investor in the )rescribed )receding #"9
month )eriod has )urchased crowdfunding e6em)t securities from all
issuers that e6ceed the individual investment limits described above$
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8. What is a funding portal within the meaning of new #ule $%&?
Section 3.a/ .3/ of the Securities Act! added b* the >,?S Act! defines a
funding )ortal as an*one engaged in the business of effecting
transactions in securities for the account of others! solel* )ursuant to the
crowdfunding e6em)tion contained in Section '.a/ .;/ of the Securities
Act$
A funding )ortal is not )ermitted to:
offer investment advice or recommendations
com)ensate em)lo*ees! agents! or other )ersons for such
solicitation or based on the sale of securities dis)la*ed or
referenced on its website or )ortalD
hold! manage! )ossess! or otherwise handle investor funds or
securitiesD or
engage in such other activities as the SEC ma* determine
a))ro)riate$
?ro8ers or dealers o)erating in the over9the9counter mar8et for P%P-s
.Private %ssuers Publicl* -aising/ must register under the Securities
E6change Act and become a member of a registered securities
association or Aoin a self9regulator* organiEation$ New Section 3.h/ of
the Securities E6change Act re7uires the SEC to e6em)t a registered
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funding )ortal from the re7uirement to register as a bro8er or dealer!
)rovided that the funding )ortal:
remains subAect to the e6amination! enforcement! and other
rulema8ing authorit* of the SECD
is a member of a national securities association registered under
Section #GA of the Securities E6change Act .such as F%N-A or an
association organiEed b* the crowdfunding industr*/D and
is subAect to such other re7uirements under this title as the SEC
ma* determine$
=$ What liabilities are occasioned by violations of law with
exempt offerings?
%nvestors in crowdfunding offerings ma* institute actions for rescission
or damages$ As is the case with liabilit* under Section #".a/ ."/ of the
Securities Act for )ublic offerings! defendants can defeat liabilit* if the*
can demonstrate an ade7uate due diligence defense! i$e$! that the* have
conducted a reasonable investigation as has been develo)ed b* the
federal courts in their inter)retation of Section #".a/ ."/ of the Securities
Act$

Section 'A.c/ .3/ of Securities Act contains an e6)ansive definition of
the term BissuerC for )ur)oses of the liabilit* )rovisions$ The term
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BissuerC includes an* )erson who is a director or )artner of the issuer!
and the )rinci)al e6ecutive officer or officers! )rinci)al financial officer!
and controller or )rinci)al accounting officer of the issuer .and an*
)erson occu)*ing a similar status or )erforming a similar function/ that
offers or sells a securit* in a crowdfunding e6em)t offering! and an*
)erson who offers or sells the securit* in such offering$
Since crowdfunding offerings are e6)ressl* e6em)t from registration!
issuers and their intermediaries will not be subAect to liabilit* under
Section ## of the Securities Act for an* disclosure defects contained in
an* registration statement$ As is the case with an* securities transaction!
crowdfunding e6em)t offerings are subAect to the general anti9fraud
)rovisions of Section #.b/ of the Securities E6change Act and -ule
#b9G thereunder$
#$ ow are investors in crowdfunding offerings treated for
purposes of calculating the number of record holders triggering
registration under 'ection ()*g+ of the 'ecurities ,xchange Act?
Section #".g/ of the Securities E6change Act in its form )rior to the
enactment of the >,?S Act mandates that a )rivate issuer with G or
more shareholders and more than F# million in assets register as )ublic
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re)orting issuer and com)l* with ongoing SEC )eriodic re)orting
re7uirements$ As has was the case with Faceboo8 remaining a )rivate
com)an*! the G holder threshold has been a burden on man* )rivate
enter)rises$
The crowdfunding reforms also amend Section #".g/ to re7uire the SEC
to e6em)t from Section #".g/! conditionall* or unconditionall*!
securities ac7uired in crowdfunding e6em)t offerings$
##$ Can state securities commissioners regulate crowdfunding
offerings?
State blue s8* registration! documentation and offering re7uirements that
would otherwise a))l* to crowdfunding e6em)t offerings are )reem)ted$
The >,?S Act amends Section #3.b/.'/ of the Securities Act to add to
the list of covered securities for which )reem)tion a))lies securities that
are the subAect of crowdfunding offerings e6em)t under Section '.a/.;/
of the Securities Act$
:owever! this amendment does not affect an* state@s enforcement
authorit* over an issuer! bro8er! dealer! or funding )ortal for fraud or
deceit or unlawful conduct in crowdfunding e6em)t offerings$ There
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will be a filing and fee re7uirement with the securities regulator of the
state in which the issuer maintains its )rinci)al )lace of business or in
which )urchasers of GI or greater of the aggregate amount of the
securities issued are residents$
%n addition! the >,?S Act )reem)ts state blue s8* regulation of
registered funding )ortals! e6ce)t that the state where the funding )ortal
maintains its )rinci)al )lace of business will retain enforcement and
e6amination authorit*$
12. What resale restrictions apply to securities acquired in
crowdfunding exempt offerings5
Securities sold in crowdfunding e6em)t offerings are not transferable b*
the )urchaser for a one9*ear )eriod beginning on the date of )urchase!
e6ce)t such securities ma* be transferred:
to the issuer!
to an accredited investor!
as )art of an offering registered with the SECD or
to a member of the )urchaser@s famil* or the e7uivalent! or in
connection with the )urchaser@s death or divorce or other similar
circumstance! in the discretion of the SEC$
13. ow do the private offering reforms expand opportunities for
capital formation aside from the #egulation " private offering
exemption?
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Since its ado)tion in the #=3s! a maAorit* of small businesses have
relied on -egulation D under the Securities Act to raise debt and e7uit*
ca)ital in +$S$ )rivate ca)ital mar8ets$ -egulation D )rovides a non9
e6clusive safe harbor from registration of the offering with the SEC$
-ule G; of -egulation D )ermits offerings to an unlimited number of
accredited investors in an unlimited dollar amount! )rovided that the
issuers com)l* with the conditions set forth in the regulation$ ,ne 8e*
condition )rohibits the issuer or an* )erson acting on its behalf from
offering or selling securities b* an* form of general solicitation or
general advertising! including! but not limited to:
'i an* advertisement! article! or other )ublished or broadcast
communication or
'ii .ii/ an* seminar or meeting whose attendees have been invited
b* general solicitation or advertising$ This )rohibition on
general solicitation also im)licates )rivate offerings conducted
in reliance on -ule #''A under the Securities Act
Jar8et )artici)ants have advocated to the SEC for well over a decade
that the )rohibition on general solicitation be removed )rovided that the
ultimate sales are made to accredited investors$ 4ith im)lementation of
the >,?S Act! this is now the law$
#'$ What is an issuer5
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Section 'A.c/ .3/ of Securities Act contains an e6)ansive definition of
the term BissuerC for )ur)oses of establishing liabilit*$ The term BissuerC
includes an* )erson who is a director or )artner of the issuer! and the
)rinci)al e6ecutive officer or officers! )rinci)al financial officer!
and controller or )rinci)al accounting officer of the issuer .and an*
)erson occu)*ing a similar status or )erforming a similar function/ that
offers or sells a securit* in a crowdfunding e6em)t offering$ Since
crowdfunding offerings are e6)ressl* e6em)t from registration! issuers
and intermediaries will not be subAect to liabilit* under Section ## of the
Securities Act for an* disclosure defects contained in an* registration
statements$ As is the case with an* securities transaction! crowdfunding
e6em)t offerings will be subAect to the general anti9fraud )rovisions
of Section #.b/ of the Securities E6change Act and -ule #b9G
thereunder$

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III. Crowdfunding in Euro)e
Country
'ecurities
crowdfunding
Current
requirements-
limitations
Crowdfunding
#egulation
status
France
Allowed onl* if
)latforms are
licensed as
financial
investment
advisers or
monitored b* the
French ban8ing
mono)ol*
.lending
)latforms/$
1er* high ca)ital
re7uirements for
the
)latforms9%ssuer
can )romote its
ca)ital offer u) to
onl* #'= investors
Consultation
)eriod for
)ro)osed
legislation! that
would create a
new categor* of
financial adviser
for crowdfunding
)ortals and
remove the )ublic
)romotion limit$
Kerman* Allowed onl* if
)latforms have a
license from
?aFin$ :owever!
if the )latform is
onl* bro8ering
silent )artnershi)s!
Threshold of
#$L offering
within #" months
)er issuer$
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it does not need a
license$
%tal*
E7uit* CF
)latforms need to
register with
C,NS,?$
0ending )latforms
need to be
authoriEed b* the
?an8 of %tal*$
,nl* Binnovative
start9u)sC can use
e7uit*
CF9Threshold of
LGm )er issuer9GI
of ca)ital offered
shall be subscribed
b* a )rofessional
investor$
C,NS,?
released
regulations
allowing retail
investors to invest
through e7uit*
crowdfunding$
The
Netherlands
Platforms are
considered
investment firms!
thus the* re7uire a
license under the
Dutch Financial
Su)ervision Act$
Securities CF:
Threshold:L"!Gmln
within #" months
)er issuer
Portugal
Difficult to
im)lement! due to
lac8 of regulation$
%t will )robabl*
im)l* the
authoriEation of
local financial
regulators$
No regulation for
securities
crowdfunding *et
e6ists$
S)ain E7uit* CF
)latforms are not
treated as financial
services )roviders!
thus outside the
su)ervision of
CNJ1 and ban8
The lac8 of a
s)ecific regulation
ma8es it ver*
burdensome and
inefficient to start
a securities
crowdfunding
No regulation for
securities
crowdfunding *et
e6ists$
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,f S)ain$ 0ending
models are
regulated b* the
regime for
cor)orations$
)latform$
+M
E7uit* CF
)latforms need an
authoriEation b*
FCA! but some
)ortals ma8e use
of e6em)tions$
0ending )latforms
will need
authoriEation from
A)ril "#'
onwards$
%f investment is
characteriEed as
collective
investment
scheme! it cannot
be )romoted to
retail investors$
Threshold: LGmln
)er issuer within
#" months$
FCA will be soon
releasing a
regulation that
will re7uire from
"#':9 Not to
)romote to the
)ublic the S)ecial
Pur)ose
%nvestment
1ehicles .SP1s/$
FCA
AuthoriEation for
lending )ortals$

Each countr* is treating securities crowdfunding in a wa* that com)orts
with an e6isting legal framewor8$
As the industr* becomes more familiar! regulators will be better able to
understand it and evaluate whether there is a need to create a s)ecific
regulation in order to facilitate its develo)ment or to )rotect investors$
The challenge will be to harmoniEe the national crowdfunding
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regulations to facilitate a cross9border Euro)ean crowdfunding mar8et$
The Euro)ean Commission has encouraged its member states to loo8 at
what the others are doing and it is also launching a )ublic consultation to
frame Euro)ean thoughts and o)inion on the to)ic of crowdfunding$
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I&. Com)arative Anal*sis of +$S$ Crowdfunding 1ehicles
!I!., !W/: 0rivate Issuers !I!., III1 Crowdfunding
0ublicly #aising *0I0#s+
-eg D G;c e6em)tion '.a/ .;/ e6em)tion
Effective date: Se)tember "3! "#3 Effective date .est/: >une! "#'
Filings: F,-J D Filings: F,-J C! F,-J C9+!
No audited financials and no Audited financialsD annual
annual re)orting re)orting for offerings in e6cess
of FG!
Costs: var* on ban8ing fees Costs: var* on ban8ing fees
No offering limit F# million offering limit in each
#"9month )eriod
Just )rovide SEC verification 0imited general solicitation such as
that )urchasers are accredited tombstone ads directing investors
to funding )ortal
%ntermediar* not re7uired Just use funding )ortal or registered
intermediar*
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AD1ANTAKES AD1ANTAKES
Can raise unlimited amount without +nlimited number of investorsD
Title %%% disclosure burdenD unlimited hel)s convert customers into
advertising investors

D%SAD1ANTAKES D%SAD1ANTAKES
S(C veri)ication re*uirements +1, ca- on annual
raises. more re-ortin/
re*uirements t0an
1it0 2itle II.
disclosure
re*uirements can be costl3.
4'a'" investors
must com-l3
&&&&&&&&&&&&&&&&&&&&&&&&&&&& &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&
Intrastate Crowdfunding #egistered Crowdfunding
*2.oca3esting4+
-ule #'< offerings with few Non9e6em)tD must full* register and
re)orting re7uirements ma8e notice filings with states
Currentl* effective Currentl* effective
Not costl* Costl*
Keneral solicitation )ermitted No offering limitsD use of bro8er9
dealer networ8
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AD1ANTAKES AD1ANTAKES
Can raise unlimited amount +nlimited number of investorsD
without Title %%% disclosure )restige and )ublic awarenessD
burdenD ideal for retailers as no resale restrictions
it can bring communities together
D%SAD1ANTAKES D%SAD1ANTAKES
0imited to local ca)ital mar8etD Costl*
non9accredited investors must
com)l* with a))licable limits


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About 5s
Private Placement Advisors serves as a 7ualified intermediar* in )rivate
)lacement transactions$ 4e )rovide funding documentation and
accredited investor verification services$ Douglas Slain is the managing
)artner of Private Placement Advisors! a grou) of law*ers and other
)rofessionals who otherwise wor8 with investors and entre)reneurs on a
)roAect9b*9)roAect basis$
Slain is the founding editor of two law re)orting services covering state
regulation of )rivate )lacements! Blue Sky Chronicle and Securities
Enforcement Reporter. Slain manages a #!3G member 0in8ed%n
discussion grou)! Securities -egulation N Enforcement! and he
contributes to www$regDconsumersre)ort$com$ Please go to
www$)rivate)lacementadvisors$com for more information$
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