Crowdfunding and alternative funding for startups event october 31, 2012

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CROWDFUNDING AND ALTERNATIVE FUNDING FOR STARTUPS IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter Founders Space Roundtable October 31, 2012 Roger Royse Royse Law Firm, PC 1717 Embarcadero Road Palo Alto, CA 94303 Phone: (650) 813-9700 E-mail: [email protected] www.rroyselaw.com www.rogerroyse.com Twitter: Rroyse00 Skype: roger.royse

Transcript of Crowdfunding and alternative funding for startups event october 31, 2012

Page 1: Crowdfunding and alternative funding for startups event   october 31, 2012

CROWDFUNDING AND ALTERNATIVE FUNDING FOR STARTUPS

IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

Founders Space Roundtable

October 31, 2012

Roger RoyseRoyse Law Firm, PC

1717 Embarcadero RoadPalo Alto, CA 94303

Phone: (650) 813-9700E-mail: [email protected]

www.rroyselaw.comwww.rogerroyse.com

Twitter: Rroyse00Skype: roger.royse

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JOBS ACTJumpstart Our Business Startups Act (JOBS Act)• Improves access to capital markets for emerging

growth companieso Relaxes reporting and disclosure

requirements for public companies with less than $1 billion in gross revenues

• Crowdfundingo Exemption from registration for issuance of

securitieso Securities issued through crowdfunding do

not count towards registration threshold• Increases 500 shareholder registration

threshold• General solicitation in Rule 506 offerings,

provided that all investors are accredited

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CROWDFUNDINGExemption from Registration• Private companies may sell up to $1 million of securities in a 12-month

period• Amount sold to a single investor in any 12-month period cannot exceed:

o The greater of $2,000 or 5% of annual income or net worth if annual income or net worth is less than $100,000; or

o 10% of annual income or net worth (up to a maximum of $100,000) if annual income or net worth is greater than $100,000

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CROWDFUNDING• Investment must be through an “intermediary” broker or funding

portal o Intermediary must register with SEC and any applicable self-

regulatory organization• Issuer disclosure requirements

o File business plan with SECo File financial statements

Audited if offering exceeds $500,000 Reviewed by an independent CPA if offering is between

$100,000 and $500,000o Annual SEC filings and annual reports

• Post fundraisingo Securities cannot be resold within 12 monthso Private right of action for material misstatements/personal liability

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CROWDFUNDINGPoints for Consideration• Crowdsourcing through donations, e.g.,

Kickstarter or IndieGoGo• Public solicitations and use of the internet

and social media• Advertising terms of offer is restricted

o Issuer can only direct investors to broker/funding portal

• Costs of disclosure and reporting• Use of intermediary• Risk of fraud• High number of unsophisticated investors

o Fiduciary duties to all investorso Could be a concern for VCs in future

fundraisings

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PROPOSEDRULE 506

REGULATIONS

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PROPOSED 506 REGULATIONS• Would allow for public advertising and general solicitation in Rule 506

offerings, provided that:o The issuer takes reasonable steps to verify that potential investors

are accredited; ando All investors are accredited (or the issuer reasonably believes they

are) at the time of the sale of securities

• What must companies do to verify the accredited status of an investor?o Issuers are not required to use specified methods of verification

NOT required to review an investor’s tax returnso Whether the steps taken are “reasonable” would be an objective

determination, based on the particular facts/circumstances of each transaction

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PROPOSED 506 REGULATIONS• Third party info an issuer may rely on:

o Purchaser is a natural person and provides copies of Forms W-2;o Industry/trade publications disclose compensation for certain

employees/partners, and compensation for persons at the level of purchaser’s seniority are publicly available; or

o Verification of a person’s accredited status by third party, such as a broker-dealer, attorney or accountant

• In addition, the nature and terms of the offering are important:o Widely disseminated e-mail/social media message (more steps

needed to verify “accredited” status)o Database of pre-screened accredited investors (less steps needed)o High vs. low minimum investment

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PROPOSED 506 REGULATIONS• The SEC had a 30-day public comment period and will soon decide

whether to approve the regulations

• Stay tuned for proposed Crowdfunding regulations next January

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PALO ALTO1717 Embarcadero Road

Palo Alto, CA 94303

LOS ANGELES11150 Santa Monica Blvd.,

Suite 1200Los Angeles, CA 90025

SAN FRANCISCO135 Main Street,

12th FloorSan Francisco, CA 94105

www.rroyselaw.comwww.rogerroyse.com

E-mail: [email protected]: Rroyse00

Skype: roger.royse