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TitleCrowdfunding: A Guide to Raising Capital on the Internet
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Table of Contents
                            Crowdfunding: A Guide to Raising Capital on the Internet
Part 1: The Business of Crowdfunding
	Chapter 1: Crowdfunding: A Historical Perspective
		Crowdfunding Isn’t New
		Why Crowdfunding Disappeared
		Regulation D, Sarbanes-Oxley, and Regulatory Reform
		The Modern Era
	Chapter 2: Understanding the “Crowd”
		Quality Entrepreneurs and Ideas
		Working on the Fundamentals for Crowdfunding: First Things First
		Finding a Solution, Filling a Need
			What They Did Right
			What They Did Wrong
		How Small Business Owners Can Prepare for Crowd Investing
		A Radically Transformed Environment
	Chapter 3: A Statistical View of Crowdfunding
		The Marketplace
			The Crowdfunding World Map
		Crowdfunding Models
			Financial versus Nonfinancial Return Crowdfunding
			Donation-Based Crowdfunding
			Rewards-Based Crowdfunding
			Lending-Based Crowdfunding
			Equity-Based Crowdfunding
		The Market Outlook
	Chapter 4: Current Market Dynamics
		Rewards-Based Crowdfunding
		Investment Crowdfunding
			Equity Crowdfunding
			Debt-Based Crowdfunding
		Charity/Donation Crowdfunding
		Niche Crowdfunding Platforms
			Real Estate
			Alternative Energy
			Book Publishing
		Market Testing with Rewards-Based Crowdfunding
			Pretail: The Consumer Comes First
			Crowdsourced Feedback
			The Pitfalls of Crowd Wisdom
			Managing the Crowd’s Feedback
			Examples: Pretail in Action
		Broker-Dealers Entering the “Accredited” Crowdfunding Space
		Crowdfunding as a Political Tool
		Fraud in Noninvestment Crowdfunding
			Defining Fraud
			The Risks of Fraudulent Crowdfunding
			Examples of Rewards-Based Crowdfunding Fraud
			How to Protect Yourself
		No Fraud in Investment Crowdfunding? (Not Yet at Least)
		Additional Resources
Part 2: Preparing for Your Crowdfunding Campaign
	Chapter 5: Business Planning in Preparation for a Crowdfunding Campaign
		Writing a Business Plan Disclosure Document
		Basic Information
		Description of the Business
		Description of Financial Condition
		Use of Proceeds and Offering Amount
		Valuing Your Company: Pricing Securities and Understanding Capital Structure
		Reviewed versus Audited Financial Statements
		Budgeting, Projections, and Forecasting
	Chapter 6: Protecting Your Intellectual Property
		The Importance of Protecting IP on Crowdfunding Platforms
		Patents: Protecting Ideas
			The Nuts and Bolts of Patents
			Crowdfunding Risks and the Provisional Patent Application
			The America Invents Act
		Copyright: Protection of Creative Works
			Crowdfunding Risks with Copyrightable Material
		Trademark: Designations of Source or Origin
			Crowdfunding Risks with Trademarks
		Trade Secret Protection
			Crowdfunding Risks with Trade Secrets
		IP Portfolio Management: A Best Practice
	Chapter 7: Understanding Your Investor Options
		The Decision to Bring on Investors
		General Obligations to Investors
			Regulatory Obligations
			Nonaccredited versus Accredited Investors
		Investor Education Obligations
		Maximizing Investor Participation
		Capital Spectrum
			Revenue Sharing
	Chapter 8: Communicating with Your Investors or “Backers”
		The Issuer’s Dilemma
			The Value of Building Your Crowd
			Building Your Digital Presence
			Connecting with Influencers
			Building Your Target List
		Reconnecting with Prospective Investors and Backers
			Social Media Matters
			Take It Offline
			The Benefit of the Process
		Investor Relations: Are You Ready to Walk Down the Aisle?
			Pick Your Crowd Carefully
			Good Investor Relations Starts with the Pitch
			Consistent Communication Is Key
			Communicate Like a Pro
			The Changing World of Investor Relations
		Crowd Communications Checklist
	Chapter 9: Alternatives to Crowdfunding
		Basic Types of Finance
			Convertible Securities
			Options and Warrants
		Choice of Entity
		Overview of Securities Laws
			Blue Sky Laws
		Private Placements and Regulation D
			Rule 506 without General Solicitation
			Rule 506 with General Solicitation
			Regulation D Crowdfunding
			Regulation A/A+
		Initial Public Offerings
			Types of IPOs
		Small Business Administration Loans
			SBA 7(a) Loans
			SBA 504 Loans
			SBA Microloans
		Other Sources of Capital
			Trade Credit
			Traditional Banks
			Credit Unions
			Peer-to-Peer Lending
			On Deck Capital
			Letters of Credit
			Owner Financing
		A Note Regarding Finders and Business Brokers
Part 3: Understanding the Framework of Rules and Regulations
	Chapter 10: The Legal Aspects of Crowdfunding and U.S. Law
		Crowdfunding and Securities Regulation
			The Nature of Securities Regulation
			Crowdfunding and Crowdfund Investing
			Securities Regulation Implications
		Crowdfunding Interests in Business Associations
			The Nature of Business Associations Law
			Principal Forms of Business Entity
			Crowdfunding and Business Associations
		Contracts in Crowdfunding
			The Nature of Contract Law
			Contract Law Issues in Crowdfunding
		Other Potential Legal Issues
	Chapter 11: Crowdfunding Laws Based on Global Jurisdiction
		The Emergence of Equity Investing in Europe
		Where Investing Emerges, Regulation Follows
		Crowdfunding Is Born in Europe
		European Platforms in Practice
			United Kingdom
			The Netherlands
		Looking Ahead
	Chapter 12: Living with the New Reg D and Its Impact on Pitch Events and Demo Days
		Key Securities Law Concepts
			What Is General Solicitation?
			What Is an Accredited Investor?
			The JOBS Act
			Rule 506(b): The “Old Way” Preserved
			Rule 506(c): The “New Way”
		Structuring Your Event
			Demo Days
			Company Application Process
			506(c)-Only Events—General Solicitation Expected
			Closed Pitch Events
			Events for Companies Relying Solely on Rule 506(b) and Not Using General Solicitation
			Events for Companies Relying on Rule 506(c) and Using General Solicitation
			Proposed SEC Rules
			Events with Both 506(b) and 506(c) Companies
			Event Series—506(c) Event Followed by 506(b)
About the Author
About the Contributors
Author’s Disclaimer
Document Text Contents
Page 134

118 Crowdfunding

are not sophisticated in investment matters, a fact that has not been lost on
regulators. It should be noted that in accordance with the Dodd-Frank Act,
starting in 2014 and every four years thereafter, the SEC is required to review
the accredited investor definition in its entirety and to amend the definition as
it deems necessary.14 Thus, platforms and businesses planning to rely on Title
II accredited investor crowdfunding should be mindful that the definition may
change in the coming years, potentially impacting the scope of Title II investors.

Title II crowdfunding can be utilized only if all of the investors are
accredited. The advantage of Title II crowdfunding is that there is no limit on
the size of the offering that can be made, and the restrictions and disclosure
requirements are significantly less than what has been required for offerings to
investors under Title III of the JOBS Act. As a result, the regulatory burden
on a business undertaking an offering to accredited investors (and maintain-
ing ongoing disclosures to such investors) is not as significant as it will be
when nonaccredited investors are involved.

In addition to the aforementioned obligations, businesses will also have
exposure to significant liability. Under Title III of the JOBS Act, the legisla-
tion allows for a cause of action under the new Section 4A(c) of the Securities
Act of 1933 that is specific to crowdfunding offerings, imposing liability on
the issuer for a material misstatement or omission of a required disclosure.
There is no intent/knowledge requirement for the issuer of the securities to
be held responsible. The new 4A(c) liability is in addition to the general anti-
fraud provisions of Section 10(b) of the Securities Exchange Act and Rule
10b-5 thereunder, all of which would apply to a crowdfunding offering.15
A business would be wise to seek legal counsel before undertaking a securities
crowdfunding offering in order to best protect itself from potential liability.

Investor Education Obligations

Before a business decides whether to reach out to retail investors via crowd-
funding, it should consider the potential knowledge base of the investors
since the less an individual understands about investing, the more likely
they will not fully appreciate the risks associated therewith (and thus poten-
tially have unrealistic performance expectations). Research has shown

14. SEC Release Nos. 33-9287; IA-3341; IC-29891; File No. S7-04-11, February 27, 2012.
15. Michael L. Zuppone, “Demystifying the Recently Enacted Crowdfunding and Private
Offering Reforms: Opportunities for Issuers and Investors,” April 2012. www.paulhastings

Page 135

Understanding Your Investor Options 119

that many Americans have a gap in their knowledge of financial matters. In
a 2009 survey of American adults, respondents answered an average of only
2.72 out of 5 financial literacy questions correctly, with 48 percent of those
respondents not knowing that investing in a mutual fund generally provides
a safer return than investing in a single stock.16 In a 2001 survey of American
adults, only 52 percent of the respondents knew that mutual funds do not
pay a guaranteed rate of return; and only 56 percent knew that, over the long
term, stocks offer the highest rate of return.17

Under Title III offerings of the JOBS Act, platforms are required to pro-
vide information about the risks of investing in small businesses and to provide
investor education materials.18 Businesses undertaking crowdfunding, how-
ever, should also be cognizant of the individuals they permit to become
investors in their business, allowing only those investors that have an apprecia-
tion for the risks associated with investing and harbor realistic expectations for
the business and its potential for financial returns. When investors have unre-
alistic performance expectations, it can cause problems for businesses down
the road after funds are raised. It may be prudent for management teams to
utilize crowdfunding platforms that properly educate and screen investors and
that allow management teams to decide the individuals they want to include
as investors in their business.

Additionally, in order to foster knowledge sharing and to help investors
formulate a realistic expectation of the performance of an early-stage busi-
ness, crowdfunding intermediaries can include an electronic bulletin board
that allows potential investors and other members of the public to communi-
cate about each offering.19 An earlier version of the House crowdfunding bill
included this bulletin board requirement, but ultimately it was not included
in Title III of the JOBS Act.20 However, the SEC’s broad authority under

16. Applied Research & Consulting LLC, “Financial Capability in the United States: Initial
Report of Research Findings from the 2009 National Survey, December 1, 2009: 40–41. www
17. Marianne A. Hilgert, Jeanne M. Hogarth, and Sondra G. Beverly, “Household Financial
Management: The Connection between Knowledge and Behavior.” Federal Reserve Bulletin
313, July 2003.
18. Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012), Section
19. Testimony of C. Steven Bradford before the Subcommittee on TARP, Financial Services,
and Bailouts of Public and Private Programs, United States House of Representatives; Hearing
on the JOBS Act—Importance of Effective Implementation, June 26, 2012.
20. See Entrepreneur Access to Capital Act, H.R. 2930, § 2(b), 112th Congress (as passed by
House, November 3, 2011) (proposed sections 4A(a)(12) and 4A(b)(11) of the Securities Act).

Page 267

Index 251

Ubuntu Edge, 67
Uniform Trade Secrets Act (UTSA),

United Kingdom, crowdfunding

platforms in, 206–207

Ward, Rob, 24
Watsi, 56

Web 2.0, 10
Web 3.0, 10–11
WeDemand, 60
Windcentrale, 58
WiSeed, 208

8, 12

Zopa, 55

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