Regulation Crowdfunding

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"Regulation Crowdfunding" White Paper On October 30, 2015, more than three years after the passage of the Jumpstart Our Small Business Startups Act of 2012 (the “JOBS Act”) the U.S. Securities and Exchange Commission (the “SEC”) adopted rules that implement the “crowdfunding” provisions of Title III of the JOBS Act. Title III of the JOBS Act and the SEC’s rules promulgated thereunder (referred to herein as “Regulation CF”) have been called some of the most sweeping changes to U.S. securities laws since the passage of the Securities Act of 1933 (the “Securities Act”). They permit, for the first time, small business issuers to generally solicit investments in their securities using public advertising, and permitting investment by both accredited and non-accredited investors. Intended to spur investment in small business start-ups, Title III of the JOBS Act was a bi-partisan effort that attempts to apply the power of crowds–made possible by the Internet–to the market for startup for capital.

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November 9, 2015

Regulation Crowdfunding
On October 30, 2015, more than three years after the passage of the Jumpstart Our
Small Business Startups Act of 2012 (the “JOBS Act”) the U.S. Securities and
Exchange Commission (the “SEC”) adopted rules that implement the
“crowdfunding” provisions of Title III of the JOBS Act.
Title III of the JOBS Act and the SEC’s rules promulgated thereunder (referred to
herein as “Regulation CF”) have been called some of the most sweeping changes to
U.S. securities laws since the passage of the Securities Act of 1933 (the “Securities
Act”). They permit, for the first time, small business issuers to generally solicit
investments in their securities using public advertising, and permitting investment
by both accredited and non-accredited investors. Intended to spur investment in
small business start-ups, Title III of the JOBS Act was a bi-partisan effort that
attempts to apply the power of crowds–made possible by the Internet–to the market
for startup for capital.
This white paper summarizes Regulation CF in a manner intended to provide assistance to
small business owners and professionals who may consider conducting a fundraising through
Regulation CF.

General Requirements
An issuer may sell securities in reliance on Section 4(a)(6) provided that:
1) The aggregate amount of securities sold to all investors by the issuer in reliance on
Section 4(a)(6) during the 12-month period preceding the date of the offer or sale,
including the securities offered in such transaction, shall not exceed $1,000,000;
2) The aggregate amount of securities sold to any investor across all issuers in reliance
on Section 4(a)(6) during the 12-month period preceding the date of such transaction,
including the securities sold to such investor shall not exceed:
a) The greater of $2,000 or five percent of the lesser of the investor’s annual
income or net worth if either the investor’s annual income or net worth is less
than $100,000; or
b) 10 percent of the lesser of the investor’s annual income or net worth, not to
exceed an amount sold of $100,000, if both the investor’s annual income and
net worth are equal to or more than $100,000.
3) The transaction is conducted through an intermediary that complies with the
intermediary rules of Regulation CF and the transaction is conducted exclusively
through the intermediary’s platform; and
4) The issuer complies with the requirements in Section 4A(b) of the Securities Act
(including filing certain information, including results of operations and financial
statements, with the SEC and making such information available to potential investors,
not advertising the deal terms, complying with broker and promoter disclosure
requirements), provided that the failure to comply with Rule 227.202, 227.203(a)(3)
and 227.203(b) shall not prevent an issuer from relying on the exemption in Section
4(a)(6).

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Prohibited Issuers
The exemption provided in Regulation CF cannot be used by any issuer that:
1) Is not organized under the laws of any state or the District of Columbia;
2) Is a reporting company under Section 13 or Section 15(d) of the 1934 Act;
3) Is an investment company as defined in Section 3 of the Investment Company Act of
1940;
4) Is disqualified under the disqualification provisions in Section 227.503(a);
5) Has sold securities in reliance on Section 4(a)(6) and has not filed with the Commission
and provided to investors the ongoing annual reports required by Regulation CF during
the two years immediately preceding the filing of the required offering statement; or
6) Has no specific business plan or has indicated in its business plan is to engage in a
merger or acquisition with an unidentified company or companies.
Disclosure Requirements
An issuer relying on the exemption in Regulation CF must file with the Commission and provide
to investors and the relevant intermediary the following information:
a) The name, legal status, physical address and website of the issuer;
b) The names of the directors and officers of the issuer, all positions and offices with the
issuer held by such persons, the period of time in which such persons served in the
position or office and their business experience during the past three years.
c) A description of beneficial owners of 20% or more of the issuer’s outstanding voting
securities;
d) A description of the business of the issuer;
e) The current number of employees of the issuer;
f) A discussion of the material factors that make an investment in the issuer speculative
or risky;
g) The target offering amount and the deadline to reach the target offering amount,
including a statement that if the offering does not meet the minimum offering amount
that no securities will be sold in the offering and any investment commitments will be
cancelled and any committed funds will be returned;
h) Whether the issuer will accept investments in excess of the target offering amount
and, if so, the maximum amount the issuer will accept;
i) A description of the purpose and intended use of the offering proceeds;
j) A description of the process to complete the transaction or cancel an investment
commitment, including a statement that investors may cancel an investment
commitment until 48 hours prior to the scheduled closing, that the intermediary will
notify investors when the target offering amount has been met, that the closing may
be accelerated if the issuer reaches its target offering amount sooner than expected,
if an investor does not cancel its investment commitment as required that the funds
will be released to the issuer at the closing;
k) A statement that if an investor does not reconfirm his investment commitment after a
material change is made in the offering that the investor’s investment commitment
will be cancelled and the committed funds will be returned;
l) The price to the public of the securities or the method for determining the price;
m) A description of the ownership and capital structure of the issuer, including the details
of the securities being offered and the details of each other class of security of the
issuer;
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n) The name, SEC file number and CRD number of the intermediary through which the
offering is being conducted;
o) A description of the intermediary’s financial interest in the issuer’s transaction and in
the issuer, including details regarding the intermediary’s compensation, financial
interest (if any) in the issuer, and the intermediary’s fees;
p) A description of the material terms of any indebtedness of the issuer;
q) A description of any exempt offerings conducted by the issuer during the past three
years;
r) A description of any material related party transactions closed since the beginning of
the issuer’s last fiscal year to which the issuer was a party and the amount involved in
the transaction (which materiality defined by amounts in excess of 5% of the amount
raised by the issuer in reliance on Regulation CF) and with “related parties” defined as
the directors or officers of the issuer, beneficial owners of 20% or more of the issuer’s
securities, promoters of the issuer, and family members of any of the foregoing; and
s) A discussion of the issuer’s financial condition including, to the extent material,
liquidity, capital resources and historical results of operations.
The issuer must also provide financial statements for the issuer. The requirements for those
financial statements vary depending on the target offering amount for the issue (in
combination with all offerings made by the issuer under Section 4(a)(6) during the preceding
12-month period).
For issuers with offerings of $100,000 or less, the financial statements must be for the most
recently completed year and must be certified by the issuer’s chief executive officer. For
issuers with offerings of more than $100,000 but not more than $500,000, the financial
statements must be reviewed by a public accountant that is independent of the issuer. (If the
issuer has audited financial statements the issuer must provide the audited financial
statements.) For issuers offering more than $500,000 the issuer’s financial statements must
be audited by a public accountant that is independent of the issuer.
The issuer must also disclose any matters that would have triggered disqualification under
Section 227.503(a) but occurred before the effective date of Regulation CF. But, an issuer
that fails to make such disclosure will not be prevented from relying on the exemption in
Section 4(a)(6) if the issuer establishes that it did not know and, in the exercise of reasonable
care, could not have known of the existence of the undisclosed matter or matters.
The issuer must also provide:
a) Updates regarding the progress of the issuer in meeting the target offering amount
(which updates must be provided through the intermediary as required by Rule
227.203);
b) Where on the issuer’s website investors will be able to find the issuer’s annual report
and the date by which such report will be available on the issuer’s website;
c) Whether the issuer or any of its predecessors previously failed to comply with the
ongoing reporting requirements of Rule 227.202; and
d) Any material information necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading.
(Rule 227.201)

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Ongoing Reporting Requirements
After the consummation of an offering exempt under Regulation CF, the issuer must file with
the Commission an annual report along with financial statements certified by the issuer’s chief
executive officer and various statements regarding the business of the issuer. (Rule 227.202)
Filing Requirements
An issuer intending to rely on Regulation CF for an exempt offering must:
1) File a Form C offering statement with specified information;
2) File amendments to its Form C offering statement when required; and
3) File progress updates when required by Regulation CF.
(Rule 227.203)
Advertising
Regulation CF contains specific restrictions on how issuers may advertise the existence and
terms of their crowdfund offerings.
An issuer may not, directly or indirectly, advertise the terms of an offering under Regulation
CF except for a notice that advertises the terms of the offering and that directors investors to
the intermediary’s platform and includes no more than the following items of information:
1) A statement that the issuer is conducting an offering under Regulation CF, the name
of the intermediary through which the offering is being conducted and a link directing
the potential investor to the intermediary’s platform;
2) The terms of the offering; and
3) Factual information about the legal identify and business location of the issuer, limited
to the name of the issuer, the address, phone number and website of the issuer, the
email address of a representative of the issuer and a brief description of the business
of the issuer.
This requirement limits written advertising to factual statements that meet the requirements
of the rule.
Notwithstanding this general limitation, however, an issuer and persons acting on behalf of
the issuer, may communicate with investors and potential investors about the terms of the
offering through communication channels provided by the intermediary on the intermediary’s
platform, provided that an issuer identifies itself as the issuer in all communications. Persons
acting on behalf of the issuer must identify their affiliation with the issuer in all
communications on the intermediary’s platform. Presumably, this additional pathway for
advertising is intended to permit direct communications and non-written presentations (such
as webinars) that are provided “on the intermediary’s platform” and that comply with the
remaining provisions of the rule. (Rule 227.204)
Promoter Compensation
Regulation CF contains specific requirements pertaining to compensation paid by an issuer to
promoters of the issuer.
In general, an issuer may compensate or commit to compensate, any person to promote the
issuer’s offerings made in reliance on Regulation CF but only if the issuer takes reasonable
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steps to ensure that the person promoting the offering clearly discloses the receipt, past or
prospective, of such compensation with any communication it makes. The promoter must
make all of its communications to prospective investors “through communication channels
provided by the intermediary on the intermediary’s platform.”
One of the rationales for this rule is that, by requiring promoters to communicate to
prospective investors solely through communication channels on the intermediary’s platform,
the rule ensures that all such communications will be channeled through the intermediary. By
doing this the rule is trying to ensure that a record is established of all investor
communications so that parties will be able to prove the existence of those communications
at a later time in the event of a dispute. (Rule 227.205)
Requirements for Intermediaries
Regulation CF requires all transactions involving the offer or sale of securities in reliance on
Section 4(a)(6) to be conducted through an intermediary and exclusively through the
intermediary’s platform.
An “intermediary” may be either a broker registered under Section 15(b) of the Exchange Act
or a funding portal registered under Section 227.400. A “platform” means a program or
application accessible via the Internet or other similar electronic communication medium
through which a registered broker or funding portal acts as an intermediary.
No director, officer or partner of an intermediary may have a financial interest in an issuer
that is conducting a Section 4(a)(6) offering through its intermediary’s platform, or receive a
financial interest in an issuer as compensation for the services provided to the issuer in
connection with Section 4(a)(6) offering.
An intermediary may not have a financial interest in an issuer that is offering or selling
securities in reliance on Section 4(a)(6) through the intermediary’s platform unless:
1) The intermediary receives the financial interest from the issuer as compensation for
the services provided to the issuer in connection with the Section 4(a)(6) offering; and
2) The financial interest consists of securities of the same class and having the same
terms, conditions and rights as the securities being offered or sold in the Section
4(a)(6) offering through the intermediary’s platform. (Rule 227.300)
Measures to Reduce Risk of Fraud
Regulation CF contains specific requirements pertaining to an intermediary’s role in reducing
the risk of fraud.
In general, an intermediary must have a reason for believing that an issuer seeking to offer
and sell securities in reliance on Section 4(a)(6): (a) complies with the requirements in
Section 4A(b) of the Securities Act and Regulation CF; and (b) has established means to keep
accurate records of the holders of the securities being offered and sold through the
intermediary’s platform.
If an intermediary has reason to believe that the issuer (or any of its representatives or
security holders owning more than 20 percent) is subject to a disqualification under Section
227.503 or presents the potential for fraud or otherwise raises concerns about investor
protection, then such intermediary must deny access to its platform. (Rule 227.301)

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Account Opening
Regulation CF contains specific disclosure requirements that intermediaries and issuers must
comply with prior to opening any accounts and accepting any investment commitments from
investors.
No intermediary may accept an investment commitment until the investor has opened an
account with the intermediary and the intermediary has obtained from the investor consent
to electronic delivery of materials. All information required to be delivered by the intermediary
under Sections 227.300 through 305 (including educational materials, notices, confirmations,
etc.) must be delivered through electronic means.
The educational materials required to be delivered to investors must effectively and accurately
explain in plain language:
(i) The process for the offer, purchase and issuance of securities and the risks associated
with a Section 4(a)(6) offering;
(ii) The types of securities offered and sold in a Section 4(a)(6) offering and the risks
associated with each type of security;
(iii) The restrictions on the resale of a security offered and sold in a Section 4(a)(6)
offering;
(iv) The types of information that an issuer is required to provide, the frequency of the
delivery of that information and the possibility that those obligations may terminate in
the future;
(v) The limitations on the amounts an investor may invest pursuant to Section
227.100(a)(2);
(vi) The limitations on an investor’s right to cancel an investment commitment and the
circumstances in which an investment commitment may be cancelled by the issuer;
(vii) The need for the investor to consider whether investing in a security offered and sold
in reliance on Section 4(a)(6) is appropriate for that investor;
(viii) That following completion of an offering conducted through the intermediary, there
may or may not be any ongoing relationship between the issuer and intermediary; and
(ix) That under certain circumstances an issuer may cease to publish annual reports and,
therefore, an investor may not continually have current financial information about the
issuer.
In connection with establishing an investor’s account, an intermediary must inform the
investor that any person who promotes an issuer’s offering for compensation must clearly
disclose, in all communications on the platform, (a) the receipt of the compensation and (b)
that such person is engaging in promotional activities on behalf of the issuer.
Additionally, an intermediary must clearly disclose the manner in which the intermediary is
compensated in connection with the Section 4(a)(6) offering. (Rule 227.302)
Intermediary Requirements – Transactions
An intermediary must make available to the Commission and to investors any information
required to be provided under Section 227.201 (Disclosure Requirements) and 203(a) (Form
C-Offering Statement and Amendments). This information must (1) be made publicly
available on the intermediary’s platform, (2) be in a manner that reasonably permits a person
accessing the platform to save, download, or otherwise store the information, (3) be available

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for a minimum of 21 days before any securities are sold in the offering, and (4) remain publicly
available on the intermediary’s platform until the offering is completed or cancelled.
Prior to accepting any investment commitment, an intermediary must:
1) Have a reasonable basis for believing that the investor satisfies the investment
limitations established by Section 4(a)(6)(B) and this Regulation CF; and
2) Obtain from the investor: (i) a representation that the investor has reviewed the
educational materials and understands the risks involved in the offering, and is in a
financial condition to bear the loss of the investment; and (ii) a questionnaire
completed by the investor demonstrating the investor’s understanding of the Section
4(a)(6) offering.
An intermediary must provide on its platform communication channels by which persons can
communicate with one another and with representatives of the issuer about offerings made
available on the intermediary’s platform, provided:
1) If the intermediary is a funding portal, it does not participate in these communications
other than to establish guidelines for communication and remove abusive or potentially
fraudulent communications;
2) The intermediary permits public access to view the discussions made in the
communication channels;
3) The intermediary restricts posting of comments in the communication channels to
those persons who have opened an account with the intermediary on its platform; and
4) The intermediary requires that any person posting a comment in the communication
channels clearly and prominently disclose with each posting whether he or she is a
founder or an employee of an issuer engaging in promotional activities on behalf of
the issuer, or is otherwise compensated, whether in the past or prospectively, to
promote the issuer’s offering.
An intermediary must promptly, upon receipt of an investment commitment from an investor,
give or send to the investor a notification disclosing: (1) the dollar amount of the investment
commitment; (2) the price of the securities, if known; (3) the name of the issuer; and (4) the
date and time by which the investor may cancel the investment commitment.
An intermediary that is a registered broker must comply with the requirements of 17 CFR
240.15c2-4 (“Transmission or maintenance of payments received in connection with
underwritings”). An intermediary that is a funding portal must direct investors to transmit the
money directly to a qualified third party that has agreed in writing to hold the funds in escrow.
A “qualified third party” includes certain registered brokers or dealers, banks or credit unions.
An intermediary must, at or before the completion of a Section 4(a)(6) offering, send notice
to each investor disclosing: (i) the date of the transaction; (ii) the type of security that the
investor is purchasing; (iii) the identity, price, and number of securities purchased by the
investor, and sold by the issuer in the transaction; (iv) if a debt security, the interest rate and
the yield to maturity calculated from the price paid and the maturity date; (v) if a callable
security, the first date that the security can be called by the issuer; and (vi) the source, form
and amount of any remuneration received or to be received by the intermediary in connection
with the transaction, including any remuneration received or to be received by the
intermediary from persons other than the issuer. (Rule 227.303)

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Completion of Offerings, Cancellations and Reconfirmations
Regulation CF contains specific requirements pertaining to an investor’s ability to cancel its
investment commitments.
Generally, an investor may cancel an investment commitment for any reason until 48 hours
prior to the deadline identified in the issuer’s offering materials. During the 48 hours prior to
such deadline, an investment commitment may not be cancelled except as provided in Section
227.304(c).
If an issuer reaches the target offering amount prior to the deadline identified in its offering
materials, the issuer may close the offering on a date earlier than such identified deadline,
provided that:
1) The offering remains open for at least 21 days pursuant to Section 227.303(a);
2) The intermediary provides notice to any potential investors and investors that have
made investment commitments, of: (i) the new deadline; (ii) the right of investors to
cancel investment commitments for any reason until 48 hours prior to the new
deadline; and (iii) whether the issuer will continue to accept investment commitments
during the 48-hour period prior to the new deadline;
3) The new offering deadline occurs at least five business days after the required notice
is provided; and
4) At the time of the new offering deadline, the issuer continues to meet or exceed the
target offering amount.
Section 227.304(c). During the 48-hour period prior to such deadline, an investment
commitment may only be cancelled if there is a material change to the terms of an offering
or to the information provided by the issuer. If there is a material change, the intermediary
must give notice to any investor who has made an investment commitment and cancel such
investment commitment unless the investor reconfirms his or her investment commitment
within five business days of receipt of the notice. If the investor fails to reconfirm within the
five days, the intermediary must, within the next five business days, (i) send notification that
the commitment was cancelled, the reason for the cancellation and the refund amount that
the investor is expected to receive; and (ii) direct the refund of investor funds. If material
changes occur within five business days of the maximum number of days that an offering is
to remain open, the offering must be extended to allow for a period of five business days for
the investor to reconfirm his or her investment.
If an issuer does not complete an offering, an intermediary must within five business days:
1) Send each investor a notification of the cancellation, disclosing the reason for the
cancellation, and the refund amount that the investor is expected to receive;
2) Direct the refund of investor funds; and
3) Prevent investors from making investment commitments with respect to that offering
on its platform.
(Rule 227.304)

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Payments to Third Parties
Regulation CF prohibits an intermediary from compensating any third party for providing the
intermediary with information of any investor or potential investor that can be used to
distinguish or trace such individual’s identity. (Rule 227.305)
Funding Portal Regulation
Regulation CF contains detailed requirements in Section 227.400 for the registration of
funding portals with the SEC. Those requirements include a requirement that funding portals
be licensed through FINRA. FINRA has recently finalized its own rules for the licensure of
funding portals. See Release No. 34-76239; File No. SR-FINRA-2015-040, Self-Regulatory
Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed
Rule Change to Adopt the Funding Portal Rules and Related Forms and FNRA Rule 4518, 80
Fed.
Reg.
66348
(Oct.
28,
2015),
available
at
http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2015-040-federal-registernotice.pdf.

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About Taylor English Duma LLP
Taylor English Duma LLP is a full-service law firm built from the ground up to provide highestquality legal services for optimal value. The firm was founded in 2005 and its attorneys work
each day to provide timely, creative and cost-effective counsel to help clients solve problems
and achieve goals. Taylor English represents all types of clients—from Fortune 500 companies
to start-ups to individuals. More information can be found on the firm’s website at
www.taylorenglish.com.

Authors
Jonathan B. Wilson is a member of the firm’s Corporate and
Business practice group and his practice includes corporate
securities, corporate finance and governance, mergers and
acquisitions, and intellectual property.
Jonathan B. Wilson
[email protected]
678.336.7185

Eric A. Tanenbaum focuses his practice on advising clients of
all sizes on a variety of corporate matters, including mergers,
acquisitions and dispositions, joint ventures, start-ups,
franchising and general corporate representation.
Eric A. Tanenbaum
[email protected]
678.336.7252

Morris O. Little, Jr. is a corporate lawyer focusing in the areas
of aviation, commercial lending, commercial and government
contracting, health care, and hospitality, including alcohol
licensing matters.
Morris O. Little, Jr.
[email protected]
678.336.7297

Kean J. DeCarlo is a leader in both the mechanical and
medical technology sectors and actively counsels clients on
patent, trademark, trade dress, licensing, unfair competition,
copyright, trade secret, and Internet matters.
Kean J. DeCarlo
[email protected]
678.336.7288

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