book.pdf

Guide to Exempt Offerings

2015 © Private Placement Publishing, Inc.

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Guide to Exempt Offerings Author: Douglas Slain, J.D., M. Publisher: Private Placement Publishing, Inc. 2015 © Private Placement Publishing, Inc. Price: $79.00



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Chapter One: First things first …………………………………………………………….4 Chapter Two: Rule 506 and General Solicitation………………………………….5 Chapter Three: What is a Private Placement?.........................................6 Chapter Four: Direct Private Offerings Using Rule 504/SCOR…………… 9 Chapter Five: Partnerships ………………………………………………………………..11 Chapter Six: EB-5 Programs…………………………………………………………………13 Chapter Seven: Regulation A Questions and Answers…………………………15 Chapter Eight: Private Placement Memorandum ……………………………….18 Chapter Nine: Regulation D’s Three Exemptions …………………………….….20 Chapter Ten: Going Public with Private Offerings ……………………….………27 Chapter Eleven: Is a REIT for You? ………………………………………………………28 Chapter Twelve: SCOR/West states …………………………………………………… 30 Chapter Thirteen: Regulation S ……………………………………………………………32 Chapter Fourteen: S Corporation or C Corporation or LLC? ………………..38 Chapter Fifteen: Pitch Decks …………………………………………………………….…45 Chapter Sixteen: Rule 506(c ………………………………………………………………..49



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Chapter Seventeen: The Problem ……………………………………………………….54

Appendix: Model letter to use to verify investors as accredited…………. 55

About the author.……………………………… ……………………...57



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Chapter One: First things first When doing an equity or debt raise for an early stage business, you need to:

Reduce to writing an executive summary, business plan, and financial projection

Determine the structure for the proposed offering Incorporate or form a limited liability company or other entity Prepare a private placement memorandum, investor questionnaire and

subscription agreement File exemption documents with regulators Identify and present to investors Prepare term sheet(s) Execute appropriate investor documents Find the money



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Chapter Two: Rule 506 and General Solicitation Start-ups and other companies can now use general solicitations to fund private placements -- for the first time in 80 years. The new Rule 506 may prove to be the answer to the prayers of some start-ups frustrated with existing fund sourcing platforms. Observe: · The amount that can be raised is unlimited · There is no requirement for review of the offering under any Blue Sky laws (state securities regulations) · There is no review of the offering by the SEC · Solicitations can be online or offline · Solicitations can be made to anyone Sales (as opposed to solicitations) must be to accredited investors, and issuers must be able to verify that any actual investor is in fact “accredited.” Also, proposed rules will require issuers to send the SEC all marketing copy; as of September 23, 2013, however, there is no need to send copies of solicitation materials to the SEC (or to state regulators). Companies will continue to need to use private placement memorandum and related offering documents. They also will have to rely on an appropriate non-disclosure agreements to keep details of their business plans confidential. Investment funds now will have access to a much wider pool of potential investors than before, subject to separate rules and regulations promulgated by their own regulators.



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Chapter Three: What is a Private Placement? What is a "private placement" or private offering? They are fund raises that have not been registered with the SEC. When doing either an equity or debt "raise" for an early stage business, you need to:

Reduce to writing an executive summary, business plan, and financial projections

Determine the structure for the proposed offering Form a limited liability company or other entity Prepare a private placement memorandum, investor questionnaire and

subscription agreement File exemption documents with the necessary regulators Identify and present your business to investors Prepare term sheets Verify to the SEC that money is only coming from accredited investors (see

"Verification Letter" below) Execute investor documents and receive funding

Offering Documents Once you have prepared an executive summary, a business plan and financial projections, you need offering documents. I. Private Placement Memorandum A private placement memorandum is a document that discloses all relevant and material information that a reasonable investor would want to know before deciding whether or not to engage in a proposed transaction. A PPM is different from a prospectus. The term "prospectus" is used when referring to an offering document for registered securities whereas the term "private placement memorandum" is used in reference to securities that are exempt from registration under Regulation D.



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Checklist of what can be in a PPM: › Securities Legends › Suitability Standards for Investors › Summary of the Securities Offering › Risk Factors › Capitalization of the Company › Use of Proceeds from the Securities Offering › Dilution › Plan of Distribution of the Securities › Selected Financial Data › Analysis of Financial Condition and Results of Operation › Business of the Company › Management and Compensation › Certain Transactions (transactions between the Company and its shareholders, officers, directors or affiliates) › Principal Shareholders › Terms of the Securities Offered › Description of Capital Stock of the Company › Tax Matters › Legal Matters › Experts › Documents Available for Inspection › Financial Statements › Projections › Exhibits II. Investor Questionnaire is crucial for private placement offerings. Each type of offering has its own requirements for investors. A company must have a reasonable belief that its potential investors meet those requirements. That determination should be made before the potential investor is given offering documents or specifics regarding the offering. III. Term Sheet is a non-binding agreement setting forth the key terms and conditions of the proposed transaction. A term sheet serves as a template for a more developed and detailed legal document. Once the parties agree on the



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details laid out in the term sheet, a binding contract that conforms to the term sheet details is drafted. According to Investopedia: "A term sheet lays the groundwork for ensuring that the parties involved in a business transaction are in agreement on most major aspects of the deal, thereby precluding the possibility of a misunderstanding. It also ensures that expensive legal charges involved in drawing up a binding agreement or contract are not incurred prematurely. They generally cover the more important aspects of a deal, without going into every minor detail and contingency covered by a binding contract. For example, a term sheet from a venture capital company that is investing in an early-stage company may contain details as the amount of investment, the percentage stake sought, anti-dilutive provisions and valuation." IV. Subscription Agreement is the "investment contract" for purchasing the securities. Typically an investor will complete this document with a signed copy of the Investment Questionnaire before writing a check.



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Chapter Four: Direct Public Offerings Using Rule 504 and SCOR If a business files a state level registration that includes a formal offering document, such as a SCOR disclosure statement, it can make an exempt 504 intrastate public offering in one or more states. These offerings can be for up to $1,000,000, usually offered in multiple states inside one of the five national regions the SEC has designated for this purpose. Both the federal exemption and the state filing limit the raise amount to $1,000,000 in a one year period; a follow up offering cannot be made for 6 months. Unlike other public offerings, 504/SCOR offerings have few onerous restrictions. General solicitation is permitted and there are no restrictions on type or number of investors. The SCOR filing is an actual registration, not an exemption. The form used is uniform so essentially the same form can be completed and submitted to each state. As of this writing, the following states do NOT accept a SCOR filing: Hawaii, Alabama, Florida, Delaware, Kentucky, and New York. Most other states are “merit review” states. The following merit review states have a reputation for being less tolerant in their review of SCOR filings: California, Massachusetts, and Texas. The following states have a reputation for being more tolerant in their review of SCOR filings: Arizona, South Carolina, Iowa, and Washington. The following states do not conduct a merit review: Connecticut, Georgia, Illinois, Maryland, New Jersey, and Vermont. In these states, the offering will be automatically approved as long as all the state forms are completed. A start-up or other small business may want to offer securities only in the non-review states and the "more tolerant" states, if practicable. These offers are sometimes known as direct public offerings (DPOs) or “self under written” offerings. Agents and finders are permitted. Any type of advertising directed to any level of investor is permitted. The investor can invest as much as he wants.



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The biggest negative is the fact that real estate blind pools and other investment pools are not permitted. Financial statements for the last fiscal year should be attached to the Form SCOR and audited statements are encouraged (if not required).



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Chapter Five: Partnerships The evolution of start-up enterprises is generally: a) first, a partnership; b) second, an LLC; and c) finally a C Corporation or S Corporation. There are two types of partnerships: general and limited. General Partnership A partnership is a business relationship between at least two or more persons to carry on a business or a project. Each partner contributes money, property or skills and in exchange receives a share of the partnership’s profits and losses. The partnership agreement specifies how the partnership will operate, the purpose of the partnership, how decisions will be made, and when distributions will be made. · Each partner has an equal right to participate in the management and control of the business. The partnership files an informational only annual income tax return. All profits and losses of the business pass to the personal income tax returns of the partners. Partners are not considered employees of the partnership. · Partnerships are easy to form and do not require formal document filings as do a corporation or a limited liability company. Partners are held personally, jointly and severally liable for all debts of the partnership, regardless of the percentage of ownership in the business. ·Upon the death, withdrawal, disability or resignation of any partner, the partnership by default will terminate. · All money or property contributed to the partnership becomes an asset of the partnership. All profits are shared with each partners. Limited Partnership The general partners deal with the day-to-day management of the business, and do not need to consult with or involve the limited partners for most business decisions. The profits and losses flow through the business to the partners, and pass to the personal income tax return of each partner. ·



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A limited partner's liability for the debts of the partnership is limited to the amount of money or property she or he contributed to the partnership. Limited partners can leave or be replaced without the partnership being dissolved. General partners are held personally, jointly and severally liable for the business debts of the partnership. Limited partners are not responsible or liable for the general partners' misconduct or negligence. · Limited partners have liability protection from debts of the business similar to that of shareholders in a corporation. Each partner is responsible only for the amount of money he/she has contributed to the partnership. Like an LLC, a partnership files an informational only annual income tax return, and all profits and losses of the business will pass to the personal income tax returns of the partners. Some states restrict the types of professions that may form a limited partnership. A limited partnership differs from a general partnership in that the partners do not share equal responsibility or liability for the business. This may be the ideal business model if you have investors who only wish to provide capital but not assume the responsibility of running a business. Limited partners usually provide money and nothing else. This person will not have any say in how the business is run, but he/she will not have responsibility should something go wrong. In the case of more than one general partner, they will share the responsibilities. In a certificate of limited partnership, the general partners are named, while the limited partners are often kept anonymous. A certificate of limited partnership should include the following information:

The name of the partnership Must include the words “limited partnership” Cannot use the name of a limited partner

Address of the company office Name, address and written permission from the agent for service of

process Name and business address of each general partner The date when the limited partnership will dissolve



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Chapter Six: EB-5 Visa Program

The EB-5 Visa allows an investor and family members to obtain lawful permanent residency based upon an investment in the United States. If the alien entrepreneur is able to meet the investment and job creation requirements for two years, she or he, and her/his children, can be granted permanent residency status in the United States, leading to citizenship. Private placement memorandum and other offering documents are required as a part of the process.

The EB-5 Visa has four primary requirements. Each alien entrepreneur must:

(a) Invest $1.0 million (or $500,000.00 in rural and high employment areas) of lawfully acquired capital into a new commercial enterprise; (b) Place the entire capital investment at risk for the purpose of generating a return on capital; (c) Create ten (10) new or additional full-time jobs through such investment, and

(d) Be engaged in the management of the commercial enterprise. Two or more alien entrepreneurs may invest in the same new commercial enterprise; however, each of them must invest the requisite amount. Documentation for EB-5 projects includes private placement memorandum and other offering documents.

Investment of Capital

If the investment is made into a regional center, indirect job creation may be used to satisfy the job creation requirement. One example might be if a developer—as a general partner—enters into limited partnership agreements with alien entrepreneurs to develop a large property with each entrepreneur investing $1 million dollars. Each entrepreneur can then petition for permanent residence status.



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Filing Procedures The alien entrepreneur must first file a Petition for Alien Entrepreneur (USCIS Form I-526) and supporting documentation with the USCIS. The supporting documentation – which includes a detailed business plan – will show that the investor has met or will meet each of the necessary requirements. If the petition is approved and the alien is currently living abroad, he can then apply for an immigrant visa at the U.S. Embassy or Consulate in his home country. If the alien is in the U.S. as a lawful non-immigrant, he should file an Application to Register Permanent Residence or Adjust Status (Form I-485) to adjust his status in the United States to that of a conditional permanent resident. He then will be granted the status of conditional permanent resident for two years. Ninety days prior to the two-year anniversary of becoming an alien entrepreneur, he or she must file with the USCIS a petition to remove the conditional basis of his or her permanent residence. The alien must again prove that he/she met all the requirements described above and has sustained the investment and the ten job requirement for two years. Therefore, it is important that the entrepreneur meet all the requirements described above until the conditional status is removed and the alien and his family have obtained the status of lawful permanent residents of the United States.



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Chapter Seven: Regulation A: Questions and Answers Q: What is the main difference between the new Reg A and the old one? A: $5 million versus $50 million. Q: Limitations on investors?

A: None, under either new or old Reg A. State laws may apply.

Q: Filing requirements? A: Form 1-A to the SEC for review is necessary for old Reg A. With new Reg A, you file the same offering documents you are distributing to investors. Q: States?

A: Blue Sky laws apply to both, ameliorated somewhat by the streamlined “registration by coordination” process—although if securities are sold on a national securities exchange (or are offered or sold to a qualified purchaser) state law does not apply.

Q: How about re-sales? A: No restrictions either way. Q: What does “test the waters” mean? A: It means you can use sales literature before filing your Form 1-A. With the new Reg A, it means you can use sales literature before filing the offering statement.

Q: Financial statement requirements?



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A: Under old Reg A, you need a current balance sheet and income statements for the last two years and for any interim period. Financial statements must be prepared in accordance with GAAP but do not have to conform to Regulation S-X and do not have to be audited. Under the new approach, audited financial statements must be included in the offering documents, unless the SEC approves differently.

Q: Disqualifications?

A: Felons and bad actors as defined by Securities Act Rule 262 are disqualified under old Reg A. Felons and bad actors as defined by Section 926 of the Dodd-Frank Act are disqualified under new Reg A.

Q: Reporting requirements?

A: Under old Reg A, there are no reporting requirements other than to disclose use of proceeds. Under new Reg A, audited financial statements must be filed and given to investors annually (and the SEC is permitted to ask for periodic disclosures). Q: Other differences? A: The new Reg A, Section 12(a) (2) of the Securities Act has heightened civil liabilities for misrepresentation in offering documents such as PPMs. Further, the issuer must file audited financial statements with the SEC each year. Q: What is wrong with Reg A offerings? A: Reg A offerings are expensive, especially with state compliance uncertainties, and they are seldom cost effective for an offering under $5 million. Ideally, this is for a $50 million real estate fund, say, looking for a relatively inexpensive form of IPO.



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Q: Nomenclature confusion?

A: “New Reg A” is actually Reg A under 3(b) (2) of the Act. It is also referred to as “Reg A+”—while the old Reg A remains simply as Reg A. The new Reg A is also known as Title IV of the JOBS Act.

Q: Pros and cons?

A: New Reg A is expensive and time consuming. It the most similar to full registration for an issuer. It also has the most potential for the right issuer. Initiating a Reg+, while also pursuing a Reg D 506 offering using Rule 506(b or the new Rule 506(c), is proving to be the way to go for some issuers. Q: Can I do a Reg S offering at the same time as a Reg A offering? A: Yes. Q: Can I register and offer securities on foreign stock exchanges, such as the BSE? A: Yes. Regulation S provides a safe harbor for offers and sales of securities outside the United States and includes a resale safe harbor. Securities must be sold in offshore transactions and there can be no selling efforts directed toward the U.S. The SEC has said it will not integrate Reg S offerings with domestic unregistered offerings that are in compliance with Rule 506, Rule 144A and other applicable rules. Rule 144A permits general solicitation for re-sales as long as sales are to qualified institutional buyers. Q: How do I go about doing any of this? A: Contact us. Private Placement Advisors LLC has lawyers, paralegals, and securities professionals available to help you design a program for raising funds.



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Chapter Eight: Private Placement Memorandum

A private placement occurs when an individual or company secures funding from an investor, whether equity or debt. A private placement memorandum (PPM) is a disclosure document that outlines the terms and conditions of that offering. The document is similar to a business plan except the emphasis is on disclosure of facts rather than projected results. If you are trying to raise capital by offering debt or equity to private investors you need a private placement memorandum that allows the advantages of SEC Regulation D exemption rules 504, 505, or (most likely) 506. The PPM must contain all relevant information about your company and its business as well as any other information that might possibly be considered material by a potential investor. The PPM should be accompanied by a subscription agreement and an investor questionnaire. The subscription agreement is a contract to purchase a specified number of securities at an agreed price. It must contain a statement that the investor has received and reviewed the PPM and that she/he is aware of the risk factors and is a suitable investor. The investor questionnaire solicits information about the investor's background, employment and investment experience. It is used to confirm the investor's investment sophistication. There are two common types of securities that companies offer via a regulation D: equity and debt.

Equity Offering Equity securities consist of shares for a corporation or membership units for an LLC. They represent a portion of the ownership interest in the company. Stockholders are entitled to vote on company matters and must receive all key information about the company, including financial statements, on a regular basis. Debt Offering Debt securities usually consist of notes representing debt obligations of the



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company, with a specified interest rate, maturity date, and repayment amount. A company should only offer debt securities if it can demonstrate that it has the ability to repay the debt.



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Chapter Nine: Regulation D’s Three Exemptions from Registration

a) Rule 504 Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. The company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. As with other Regulation D exemptions, you may not use public solicitation or advertising to market securities, and purchasers receive "restricted" securities--meaning they may not sell the securities without registration or an applicable exemption.

This exemption may be used for a public offering for which investors will receive freely tradable securities under these circumstances: The offering is registered exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

The registration and sale takes place in a state that requires registration and disclosure delivery and the buyer is in a state without those requirements as long as the disclosure documents mandated by the state in which he/she is registered to all purchasers are delivered; or The securities are sold according to state law exemptions that permit general solicitation and advertising and you are selling only to accredited investors. (However, accredited investors are only needed when sold exclusively with state law exemptions on solicitation.) Rule 505 offerings need to be certified by an independent public accountant. If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited. Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, securities may be sold to an unlimited number of "accredited investors" and up to 35 "unaccredited



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investors" who do not need to satisfy the sophistication or wealth standards associated with the other exemptions. Purchasers must buy for investment only, not for resale. The securities are restricted in sense that investors may not sell them for at least two years. General solicitation or advertising to sell the securities is not allowed.

Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under federal income tax laws. Financial statement requirements applicable to this type of offering: Financial statements need to be certified by an independent public accountant. If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited. Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under federal income tax laws. Rule 506 (Highly Recommended in Almost all Cases) Seller must be available to answer questions by prospective purchasers; Financial statement requirements as for Rule 505; and They receive restricted securities which may not be traded in the secondary market after the offering. Can raise an unlimited amount of capital; Does not use general solicitation or advertising to market the securities; Sale of securities can be to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be “sophisticated” - meaning they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.



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Rule 506 (c Recent History

Companies raise capital to start or expand operations by selling stock or debt securities. Offerings are regulated by federal and state securities laws which require registration. Since registration is costly and time-consuming, many offerings are made pursuant to exemptions to registrations using private placements. Start-ups and other firms commonly rely on the exemption found in Rule 506 of Regulation D under the federal Securities Act of 1933, and on corresponding exemptions under state securities laws, for a “safe harbor” from registration. Effective September 23, 2013, new Rule 506 (c) allows you to make general solicitations with respect to private sales of securities for the first time in 80 years. And Rule 506(c) puts no limit on the amount of funds you can raise from friends, family, and strangers.

The SEC also added provisions to restrict those with a history of regulatory issues. The "bad actor" provisions preclude general partners, managing members, executive officers, promoters or other representatives participating in a 506 offering (as well as anyone who owns 20% of the company) who have been convicted of any felony or misdemeanor involving securities or who is guilty of certain SEC regulatory matters. II. Finding Investors under Rule 506 (c), you can now advertise an offering using general solicitation, including: · NEW Websites and online advertising; electronic mail; social media, such as Facebook and Twitter; all other online activities·

OLD Press releases; television; radio; direct mail marketing; rolodex You should have a process in place to communicate with possible investors. It may be helpful to say in your initial response that an intermediary, such as Private Placement Advisors, will be engaged to assist with distributing and collecting investor questionnaires and determining whether potential investors will qualify to purchase the securities you are offering.



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III. Who may be an Investor? If you are offering 506 securities pursuant to a general solicitation, you can only sell them to "accredited investors." Individual investors are accredited investors if they have either: Net worth of at least $1 million, excluding the value of primary residence, or,

Income of at least $200,000 in each of the last two years (or $300,000 with a spouse), and have the expectation to earn at least the same amount in the current year.

Other, less common, types of accredited investors may include: A corporation, business trust, trust or partnership, not formed for the specific purpose of purchasing your company's stock or other securities, with total assets in excess of $5,000,000;An investment company registered under, or a business development company as defined in, the U.S. Investment Company Act of 1940;A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the U.S. Small Business Investment Act of 1958; a private business development company as defined in the U.S. Investment Advisers Act of 1940; an entity in which all of the equity owners are accredited investors; an ERISA employee benefit plan if the plan has total assets in excess of $5,000,000 or if the investment decision is made by a plan fiduciary that is a bank, savings and loan, insurance company or registered investment advisor; or self-directed employee-benefit plans that are controlled by an accredited investor.

IV. Issuers’ Caveat

Selling securities to non-accredited investors can result in an automatic

right of rescission, a permanent future status as a "bad actor,” and other penalties. You must take reasonable steps to verify that the each purchaser is an accredited investor. Issuers using a third-party verification service should initially respond to inquiries with a form letter that identifies the various categories of accredited investor and suggests a time and



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opportunity for a telephone conversation. A subsequent letter should describe the services of the verification and intermediary service you have chosen. V. Which verification tests should you select? The certifications required by the SEC depend on the status of each investor. An investor often qualifies under more than one test. The verification tests below appear in order of ease of effort under most circumstances. Many investors qualify under more than one test; always choose the least intrusive and most expeditious test(s) whether or not you use a verification service. Income Verification Individual earns more than $200,000 a year or $300,000 with spouse

Net Worth Verification Investor is an individual with more than $1 million in net worth, excluding residence Asset Verification

Investor is an entity with more than $5 million in good will or assets Look-Through Verification Investor is a member of an entity all of whose members are accredited investors Entity Verification Investor is a member of a special type of qualifying regulated entity Affiliate Verification



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Investor is a director, executive officer or general partner of a qualified issuer Whichever certification services you select, you must have policies in place to protect confidential information of potential investors and ensure compliance with all applicable privacy laws and regulations. Alternatively, you can use an accredited investor verification service that has these policies in place. VI. Documents You should use professionally prepared offering documents that describe:

a) The type of security your company is offering (limited partnership interests, limited liability company interests, promissory notes, and common stock.

b) The price of the security; c) The terms and economic rights such as dividends or interest payments, anti-dilution protections, and grounds for exemption from registration; and d) Representations about the investors' accredited investor status. You must provide investors with annual reports or financial statements (or reasons not to have such documents) as well as a private placement memorandum, describing your company and its business operations and setting forth risk factors such as your limited operating history; risks related to the industry in which your company operates; risks specific to your company's products, technologies or services; and, finally, state that investors may lose their entire investment. You also need to make sure to tell investors that because the securities were sold under the exemption in Rule 506(c), they are "restricted securities" and re-sales are not permitted for six months. VII. Completing the sale The closing will occur when the investor delivers the purchase price and you issue the securities to the investor pursuant to the terms of the subscription agreement. You may decide to hold one closing or you may hold multiple closings throughout a pre-determined period of time.



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VIII. Post-closing filings You will need to make informational filings with the SEC and also with one or more state regulators after the closing. Although the securities sold under Rule 506(c) will be "covered securities” -- meaning state securities registration requirements are preempted by federal laws – you or a qualified intermediary, such as Private Placement Advisors will need to make periodical, informational filings with each state regulatory authority in all states where the investors have a primary residence. Since each state has different filing requirements and some states have pre-filing requirements. It is helpful to know where each investor resides before any securities are sold, if at all.



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Chapter Ten: Going Public with Private Offerings Private offerings can be made with online press releases and sponsored links; online brochures, investment profiles, promotional emails; as well as business plans, private placement memorandum, offering documents, profiles of key corporate officials, and other promotional material. Private offering shares that do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext), or other registered national securities exchanges, may be quoted on an over-the-counter (OTC) quotation platform such as the FINRA operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc. Generally, there are few standards that a company must meet to have securities quoted in the OTC market as long as full disclosure is made in the right fashion. Companies file reports with the Securities and Exchange Commission (SEC) via SEC's EDGAR database and with the states via their respective securities commissioner's office. Not all financial information filed with the SEC, or published elsewhere, needs to be independently audited. An investment advisor, if any is used, must be properly licensed and his/her firm must be registered with FINRA, with the SEC, and with at least one state securities regulator, depending on the type of business the firm conducts. For due diligence, an investor can and should contact at least one applicable state securities regulator directly

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Chapter Eleven: Is a REIT for you? In order to qualify as REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements. A REIT that distributes 100% of its taxable income therefore will have no federal income tax liability. Although state tax laws relating to REITs vary, most states with an income-based tax regime follow the federal law and permit a REIT "dividends paid deductions." A REIT must be formed in one of the 50 states or District of Columbia as an entity taxable for federal purposes as a corporation. It must be governed by directors or trustees; its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 different shareholders (the "100 Shareholder Test"), and 5 or fewer individuals cannot own more than 50% of the value of the REIT's stock during the last half of its taxable year (the "5/50 Test"). A number of "look through" rules apply when determining whether the REIT meets the 5/50 test. In an attempt to ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Most REITs do not permit any one shareholder to own more than at most 9.9% of a REIT's stock without a waiver by the REIT's board of directors. The REIT must satisfy two annual income tests and a number of quarterly asset tests that are designed to ensure that the majority of the REIT's income and assets are derived from real estate sources. Annually, at least 75% of the REIT's gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. Additionally, 95% of the REIT's gross income can also include other passive forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT's income can be from non-qualifying sources such as from service fees or a non-real estate business.



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A REIT can own up to 100% of the stock of a "taxable REIT subsidiary" ("TRS"), a corporation with which a REIT makes a joint election that can earn such income. Quarterly, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. Although a REIT can own up to 100% of a TRS, a REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, TRS, or qualified REIT subsidiary ("QRS"), a wholly-owned subsidiary of the REIT whose assets and income are considered owned by the REIT for tax purposes. A REIT cannot own stock in a corporation other than another REIT, or a TRS or a QRS, the value of whose stock can comprise not more than 5% of a REIT's assets. Finally, the value of the stock of all of a REIT's TRSs cannot comprise more than 25% of the value of the REIT's assets. In order to qualify as a REIT, the REIT must distribute at least 90% of the sum of its taxable income. To the extent that the REIT retains income, it must pay tax on such income just like any other corporation. In order to qualify as a REIT, a company must make a REIT election. The REIT election is made by filing an income tax return on Form 1120-REIT. Because this form is not due until, at the earliest, March 15th following the end of the REIT's last tax year, the REIT does not make its election until after the end of its first year (or part-year) as a REIT. If it desires to qualify as a REIT for that year, it must meet the various REIT tests during that year, with the exception of the 100 Shareholder Test and the 5/50 Test, both of which must be met beginning with the REIT's second taxable year. Finally, the REIT annually must mail letters to its shareholders of record requesting details of beneficial ownership of shares. Significant monetary penalties will apply to a REIT that fails to mail these letters on a timely basis.



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Chapter Twelve: SCOR/West States

Coordinated Review/SCOR/West CR-SCOR-West is a program for issuers of Private Issuers Publicly Offerings (PIPRs) and others to sell equity securities in multiple Western states under SCOR/504 or SCOR/Regulation A.

This process coordinates registration in all of the states in the region. Eleven western states are currently participating in the program. California has a separate application process. States currently participating in the CR-SCOR-West program are Alaska, Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming. Colorado does not review Regulation a filings, so it participates only insofar as 504/SCOR filings are concerned. Arizona and Washington have a reputation as being progressive toward SCOR filings in general. California, with its own manner of coordinating SCOR filings, is viewed as being often hostile to SCOR filings. CR-SCOR-West is only available to SCOR/504 and SCOR/Regulation A (Model A or Model B) offerings.

Forms: The issuer submits to each state in which it wishes to register the forms required by that state. These typically include the Form U-1 (Uniform Application to Register Securities); the Form U-2 (Uniform Consent to Service of Process); the Form U-2A (Uniform Form of Corporate Resolution); the Form CR-SCOR-West-1 (Application for CR-SCOR-West); and a copy of the completed SCOR Form or Form 1A (PDF) and exhibits.

Financial Statements: The CR-SCOR-West states differ in their requirements. For offerings of $1,000,000 or less, most states do not require reviewed or audited financial statements, but simply use generally accepted accounting principles (GAAP) with appropriate footnotes. Other states in the region require compliance with NASAA’s Policy Statement Regarding Small Company Offering Registrations, which requires at least reviewed and, in some cases, audited financial statements. For offerings in excess of $1 million all states require audited financial statements.

Licensure: Securities offered under the CR-SCOR-West program must be sold through licensed securities salespersons; however, most states do not

http://www.dfi.wa.gov/sd/bdformsaps/coordination.pdf

http://www.dfi.wa.gov/sd/bdformsaps/consent_to_service.pdf

http://www.dfi.wa.gov/sd/bdformsaps/consent_to_service.pdf

http://www.dfi.wa.gov/sd/businessformsapps/scorwest_application.pdf

http://www.nasaa.org/wp-content/uploads/2011/08/1-SCORForm92899.doc

http://www.sec.gov/about/forms/form1-a.pdf

http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-statement-of-policy/

http://www.nasaa.org/industry-resources/corporation-finance/scor-overview/scor-statement-of-policy/



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require examinations for officers and directors of the company! Therefore, founders can raise funds without paying broker-dealers. They simply need to do the paperwork to register themselves (or ask Private Placement Advisors to do it).

Detailed Information concerning the filing requirements of each of the CR-SCOR-West states may be found in CR-SCOR-West Filing Requirements

http://www.dfi.wa.gov/sd/scorwestfr.htm



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Chapter Thirteen: Regulation S Regulation S is a safe harbor that occurs when an offering of securities is deemed to come to rest abroad so as not to be subject to registration imposed under Section 5 of the Securities Act. Section 5 includes offers and sales that occur within the United States and do not include offers and sales that occur outside the United States. Regulation S also includes several safe harbor exemptions for specified transactions. Each safe harbor is subject to two general conditions:

1. The offer or sale must occur in an “offshore transaction" and the seller must have reason to believe that the buyer is offshore at the time of the offer or sale or the transaction must occur on certain “designated offshore securities markets" and the transaction is not pre-arranged with a buyer in the United States.

2. No directed selling efforts may be made in the U. S. by the issuer, a distributor, or any of their respective affiliates, including efforts reasonably expected to condition the U.S. market for the securities. In addition, Rule 903 provides three for offerings by issuers, distributors and their respective affiliates:

Category 1:

(a) securities of a “foreign issuer” for which there is no “substantial U.S. market interest”; b) securities offered by a “foreign issuer” in “overseas directed offerings”; (c) non-convertible debt securities of a domestic issuer offered in overseas directed offerings that are denominated in a currency other than U.S. dollars,; and (d) securities backed by the full faith and credit of a foreign government. In these cases, only the two general conditions referred to above must be observed.

Category 2:

(a) Equity offerings by reporting foreign issuers; and



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(b) Offerings of debt securities and non-convertible, non-participating preferred stock by reporting issuers or non-reporting foreign issuers. To be treated as a qualified reporting issuer, the issuer must have filed all required reports for at least twelve months prior to the offer or sale, or such shorter period during which the issuer was subject to the reporting obligation. Offering restrictions include prohibitions on resale’s to U.S. Persons during the distribution compliance period, in addition to the application of the two general conditions. Generally, a 40-day distribution compliance period obtains.

A safe harbor exemption is an exemption that is not the exclusive means that must be employed to fall within a more general exemption or jurisdictional limitation. By providing a safe harbor, the SEC is affirming that someone complying with its requirements will have the benefit of the broader exemption. Category 2. . . . which have to be memorialized in a written agreement with each distributor and reflected in the offering documentation and on all confirmations issued to distributors and others receiving transaction-based compensation and to purchasers during the distribution compliance period. Category 3: offerings of all other securities, including

(a) equity offerings by domestic reporting issuers; (b) offerings of equity securities by non-reporting foreign issuers for which there is a substantia U.S. market interest; and, (c) offerings by U.S. issuers that are not reporting issuers. Category 3 offerings are subject to the more stringent conditions than the other two categories.

For debt securities the offering restrictions are the same as for Category 2, plus the need to use a temporary global certificate to support the 40-day distribution compliance period.

For equity securities, the distribution compliance period is increased to one year, and the purchaser must also provide a certification as to its non-U.S. status and must agree not to resell to a U.S. Person except in accordance with U.S. requirements, in addition to compliance with the restrictions applicable to Category 2. The securities of a domestic issuer must bear a restrictive legend, supported by



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stop transfer instructions. The documentation required in the case of such issuers must refer to the prohibition on certain hedging transactions during the distribution compliance period that would have the effect of pre-selling, the securities into the United States and distributors must agree in writing to observe this prohibition. Rule 904 provides a safe harbor for certain resale transactions by persons other than the issuer, a distributor, any of their affiliates (except any officer or director who is an affiliate solely by virtue of such office), or any person acting on their behalf. Re-sales are subject to the following conditions:

1. All permitted sellers are subject to the general conditions.

2. In the case of a seller who is a dealer or a person receiving any remuneration, a resale cannot be knowingly made to a U.S. Person prior to the end of the relevant distribution compliance period. A confirmation stating the applicable securities law restrictions must be sent to any other dealer or person receiving selling compensation person.

3. No special compensation can be paid if the seller is an officer or director of the issuer.

4. The safe harbor is not available to affiliates of the issuer, except where affiliation arises solely from the status of the seller as an officer or director. An “affiliate” is any person controlling, controlled by or under common control with the issuer. “Control” for this purpose means de facto control. An automatic inference of control based upon voting influence arises at the 10% threshold, although other factors may point away from control and exceptions are made.

5. Transactions must be effected through a “designated offshore securities market” in a transaction not pre-arranged with a U.S. Person or in a transaction involving a buyer outside of the United States at the time the buy order is originated.

6. Care must be taken to ensure that the transaction does not involve a scheme to evade the Securities Act registration requirements, including for the purpose of washing off transfer restrictions.

Rule 905 provides that equity securities of domestic issuers acquired from the issuer, distributor, or any of their respective affiliates in a transaction subject to



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the safe harbor rules are deemed to be restricted securities, and re-sales by any offshore purchaser must be made pursuant to the Regulation or another exemption from Securities Act registration. The following definitions obtain: 1. “U.S. Person”: For individuals, based largely on residence, rather than nationality. Entities have residence largely based upon where they are formed, with the exception of identifiable branches of entities, which may themselves be treated as the equivalent of separate organizations. Accredited investor scan form an offshore entity that will be treated as a non-U.S. Person for this purpose. Detailed rules govern trusts and estates, and other professional fiduciaries, which are designed to mitigate disadvantages to U.S. professional fiduciaries by ensuing that, subject to certain conditions, offers to them for the account of non-U.S. Persons will not trigger Securities Act registration, despite the making of an offer to the fiduciary in the United States. 2. “Substantial U.S. Market Interest” or “SUSMI”: This applies to equity securities if: (I) U.S. securities exchanges and NASDAQ in the aggregate constituted the single largest market for such class of securities in the issuer’s prior fiscal year, or

(ii) 20% or more of trading in the class of equity securities during such period occurred in such U.S. markets and less than 55% of trading in such securities took place during that period through the facilities of the securities markets or a single foreign country. Separate SUSMI rules apply in the case of debt securities.

3. A “foreign issuer” is a foreign-organized entity other than such an entity that has more than 50 percent of its voting securities being held by U.S. residents and either: (I) the business of the company is administered principally in the U.S.; (ii) 50 percent or more of its directors or executive officers are U.S. residents; or, (iii) more than 50% of its assets are located in the U.S.



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4. “Overseas Directed Offering”: An offering by a foreign issuer “directed into a single country other than the United States to the resident’s thereof ... in accordance with the local laws and customary practices and documentation of such country.

5. “Offering Restrictions" Offering restrictions require each distributor to agree in writing that all offers and sales of the securities prior to the expiration of the distribution compliance period shall be made only (I) in accordance with the provisions of the applicable safe harbors, (ii) pursuant to registration of the securities under the Securities Act, or (iii) pursuant to an available exemption from the registration requirements of the Securities Act; and, (iv) for offers and sales of equity securities of domestic issuers not to engage in prohibited hedging transactions prior to the end of the distribution compliance period. The offering restrictions also require that all offering documents other than press releases used in connection with offers of the securities prior to the expiration of the distribution compliance period include statements to the effect that the securities have not been registered under the Securities Act and may not be offered or sold in the United States or to U.S. Persons(other than distributors)--unless the securities are registered or an exemption from the registration requirements of the Securities Acts available, and, in the case of equity offerings by domestic issuers, statements concerning the hedging prohibition. Such statements should appear: (I) on the cover or inside cover page of any prospectus or offering circular used in connection with the offer or sale of the securities; ii) In the underwriting section of any prospectus or offering circular used in connection with the offer or sale of the securities; and, (iii) In any advertisement made or issued by the issuer, any distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing. Such statements may appear in a summary form on prospectus cover pages and in advertisements. Broker-dealers must confirm that they are not unlawfully effecting distributions of



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Canadian securities in the United States in violation of Regulation Sand other U.S. securities law requirements. This may result, for example, from purchases of small cap issues by foreign accounts from the issuer, a promoter or affiliated entities ostensibly using Regulation S or some other exemption for resale into the United States for the purpose of effecting a distribution. Such transactions may be found to violate the registration requirements of the Securities Act and have severe consequences.



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Chapter Fourteen: S Corporation or C Corporation or Limited Liability Corporation? Two of the most common legal business structures are the limited liability corporation (LLC) and the S corporation. There is also the C Corporation. Your business will usually find that an LLC offers advantages over both at the outset. Flexibility An LLC allows a business to set up an ownership structure that makes sense for both business and tax purposes. Unlike an S corp in which the share structure follows the amount invested by each shareholder, an LLC has more flexibility. This is important as profits flow through an LLC and are taxed in the hands of the owners. Profit distribution does not have to mirror percentage investment in the company. Transfer of Ownership In an S corp, shares can be sold, gifted or willed to others, creating changes in ownership structure that can alter the direction of operations. An LLC is dissolved upon the bankruptcy or death of an owner; the other owners can then set up a new LLC. Less Paperwork Corporations, including S corps, are required to hold regular shareholder meetings and take minutes. A mandated board of directors makes decisions via formal documented resolutions. An LLC operates under no requirement for minutes, resolutions or even board meetings. This gives the owner/ managers more flexibility to make timely decisions. It also significantly reduces the time spent on administration chores as opposed to strategic planning and just doing business. Lower State Filing Taxes Although LLCs pay no federal income tax, state filing taxes are due. In almost all states, the annual state filing tax is less for LLCs than it is for S corps. In some



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states, LLCs with only two members do not pay any state filing tax. The minimum filing tax is always lower than it is for S corps. Simple to Set Up Forming an LLC is easy. The fees for setting it up are generally low. You gain the limited liability that you need and you get pass-through tax treatment without the "double taxation" of a C -Corp. Now you see why so many businesses start out as LLCs. However, as they grow, they usually change to C-Corporations; we will see why below.

S Corporation The S Corporation is a popular structure for small businesses because the company is taxed like a sole proprietor or partnership. The company itself does not file its own taxes; instead, all company profits and losses are "passed through" and reported on the personal income tax return of the shareholders (or in the case of an LLC, the members). While circumstances vary for each individual and his or her business, the following are general guidelines to help you; 1. Business Formality With its roots as a C Corporation, the S Corporation involves formalities and compliance obligations, which can be burdensome for the solo entrepreneur. If you incorporate as an S Corporation, you need to set up a board of directors, file annual reports and other business filings, hold shareholder’s meetings, keep records of your meeting minutes, and generally operate at a higher level of regulatory compliance than your business might need. LLCs use an informal operating agreement. If you want less red tape and formality, the LLC is for you, at least for now. 2. Who Can Be a Shareholder?



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The S Corporation has more restrictions in terms of who can be a shareholder. For instance, S Corps cannot have more than 100 shareholders. Obviously, this is not relevant to most small businesses. In addition, all individual shareholders of an S Corp must be either U.S. citizens or permanent residents. If you have foreign owners or would like an LLC to be a shareholder you cannot form an S Corporation and probably should opt for the LLC. 3. Income Allocation In an LLC, income and loss can be allocated disproportionately among the owners whereas in an S Corp income and loss are assigned to each shareholder based on their pro-rata shares of ownership. This can be important. Say Joe and Jane open a software business as 50-50 owners. Time flies and Joe needs to focus on other things while Jane does almost all the all the work. Their business becomes profitable and it is time to divide up the profits. They decide Jane should keep 75% of the profits. With an LLC, everything is good, and Joe and Jane will be taxed pursuant to the terms of their LLC Operating Agreement. But this will not work with an S Corporation. Since Joe and Jane are 50% owners, each will be allocated 50% of the corporation’s income when it comes to computing income tax. If you need flexibility when it comes allocating profits among owners, the LLC is the structure for you. 4. Pass-Through Losses With LLCs and S Corporations, members and shareholders pass company losses to their personal income. Note that an LLC lets you pass more loss than does an S Corporation, most notably when it comes to real estate. In an LLC used for real estate investments, members are allowed to add the amount of the mortgage to their basis for the purpose of computing a loss. If the business is real estate investments, the LLC permits writing off more losses on the personal tax returns. 5. Class of Stock



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In an S Corporation, all shareholders own one class of stock. An S Corporation can have voting and non-voting shares but cannot have distinctions such as common stock and preferred stock. In an LLC, however, these priorities and preferences are allowed, and you can have different membership classes. You cannot offer common and preferred stock classes in an S Corporation. Again, if you want flexibility in ownership classification, you need an LLC. 6. Reinvesting Profits As pass-through entities, individual owners of an S Corporation or an LLC are liable for any taxes owed on profits — whether that money is retained in the company or put in their wallets. For example, if you own 50% of an S Corporation and that company makes $100,000 in profit, you need to report $50,000 in income on your personal tax return. It does not matter whether that $50,000 actually ended up in your bank account. This is known as “phantom income” and can obviously cause problems on occasion. If you plan on keeping money in the company and would prefer not to have be personally taxed on this money as a shareholder, you should consider the C Corporation over both the LLC and S Corp. 7. VC Funding If your company is considering raising venture capital down the road, VC firms will most likely demand a C Corporation. Your business does not nee to start as a C Corp, but if: a) you are considering raising venture capital, and b) you start out with an LLC or an S Corp you will need to convert the business to a C Corp at some point. This conversion will require additional filings and fees within your state. If you choose this route, you may want to consider the S Corp as your initial option, since converting an S Corp to a C Corp can be done in a day with a single tax form. And remember that tax treatment varies between states. Consulting with an accountant or CPA can help you determine which business structure offers the biggest advantages.



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LLC vs. C-Corporation The most obvious problem with C Corporations is that they do not offer the pass-through accounting that LLCs and S Corporations do, so the corporation will pay tax on any profits and employees and you will pay taxes on your salaries, and if there are any profit distributions by means of dividends you will be taxed again! The tax code is not friendly to a C-Corporation that wants to provide profits to the shareholders in that if those shareholders are also employees, there will three different points of taxation, as we just saw. LLCs look like they have only one point of taxation but in reality there is a second point of taxation because there is self-employment tax in addition to income tax. Of course paying self-employment tax is still better than paying a C-Corp tax because the C-Corp will need to make an employment tax on salaries which is essentially the same as the self-employment tax. One difference is that with the C-Corp you can hold profits in the corporation rather than pay them out; therefore if you are highly profitable, you will want to hold profits in the corporation and also pay yourself a minimal salary. If you expect to experience losses as things ramp up, as it usually the case, the LLC has advantages. LLCs pass those losses along, and those loses can offset other income. In a C-corp, the corporation will carry those losses (for credit against future profits) but the owner, as a tax-paying employee, does not get to make use of those losses. He or she will have W-2 income and will be taxed accordingly, just as if they were an employee anywhere else. Still, the biggest limitation of LLCs is the systemic problem of how you deal with the ownership structure. LLCs do not have shareholders and shares of stock (instead they have "members" and "units"). It may seem that these are just different names for the same thing, but that is not so. In an LLC, one member is the same as another member. Everyone is working under the same operating agreement. An investor, the owner, and other employees who have been given ownership -- all hold exactly the same share of equity or unit; there is no difference between them.



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C- Corporations can issue different classes of stock, so an entrepreneur might have preferred stock while employees and investors have common stock. Those classes can be subdivided further so an investor today might get "Series a Preferred Stock" with certain rights and privileges, and a later investors get "Series B Preferred Stock" with different rights. You might setup a stock option plan for employees to give them ownership in exchange for their work and loyalty to the company while the owners have a founders stock. Vendors might get stock warrants in exchange for providing discounted services. In short, there is a lot more flexibility. Then there are tax implications. If you have asked an investor to put in money at $10 per unit and later you give 100 units to an employee because you want to give them ownership, then you have subjected that employee to a tax hit. The IRS will say that you "gave" the employee $1000 worth of equity ($10 x 100 units) and he owes income tax--at ordinary income rates. So your employee is out, say, $300 + in taxes. With the C-Corp, however, you can create a stock option plan to give ownership to employees. As long as the option price is equal to the fair market value of the underlying class of stock (at the time the option was granted) there is no taxable event. The expectation is that the company will grow, and by the time the stock vests it will be worth a lot more than when it was granted. The employee will have to pay tax on the gain if and when he/she exercises those options, but she/he does not need to exercise the options until they intend to cash in (and then there is cash to pay the tax!). And it is taxed as capital gain (albeit short term), not as ordinary income. Note that in a C-Corporation all classes of stock are usually not created equal and, therefore, are not priced the same. If an investor buys preferred shares at $10/share that does not mean your common shares are also worth $10/share or that your base option price is $10/share. The preferred shares can have May benefits that make them much more valuable. Nobody would pay $10 for common when the same $10 can get them so much more with preferred. Your board of directors will have set the price of common, as noted in the minutes, with an explanation of why they are worth so much less than the preferred shares. It is not unusual for this discount to be 90% (or more) in a start



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up, so a $10 preferred price might mean $1 (or less) for common shares and their option exercise price! So what to do? When Private Placement Advisors helps form a new company we always start with an LLC. After success and after the entrepreneur wants to grant stock options to new (or old) employees or outside investors, we convert the LLC to a C-corporation. When you are talking to major investors and dealing with employee option pools, C-Corporations are the way to go. When it is only you and one or two partners at the outset, an LLC is what you want. But be careful with that LLC. You do not want to end up with a large number of investors who have invested at different times -- with no flexibility in how those shares/units are priced or structured.



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Chapter Fifteen: Pitch Decks Start-ups need to know about pitch decks, term sheets, early stage evaluations, and investor introductions. • What should be in my Investor pitch deck? • Which platforms or funding portals are best suited for my company? • What terms should be in my term sheet? • How much is my company worth? • How do I best distribute my pitch deck on social networks and crowdfunding portals and platforms? ‘Pitch Decks To download a free pitch deck template go to The Ultimate Investor Pitch DeHYPERLINK "http://www.forbes.com/sites/chancebarnett/2014/05/09/investor-pitch-deck-to-raise-money-for-startups/"ck. For a free way to produce a company video, use Google Hang Out. You can apply your company profile to any downloadable pitch deck. If, on the other hand, you are busy with other tasks, you can pay Private Placement Advisors to produce a customized pitch deck, including a slide show and video. For a modest fee, Rule 506 Metrics also distributes clients' pitch decks to selected crowdfunding platforms, funding portals, and peer-to-peer web sites. Examples of pitch decks can be found at: • EnmetricHYPERLINK "https://www.crowdfunder.com/enmetric/about/" Systems • Reid Hoffman’s LinkedIn Pitch Deck

http://www.forbes.com/sites/chancebarnett/2014/05/09/investor-pitch-deck-to-raise-money-for-startups/




https://www.crowdfunder.com/enmetric/about/

https://www.crowdfunder.com/enmetric/about/

http://reidhoffman.org/linkedin-pitch-to-greylock/



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• Aria Retirement Solutions • Buffer • Dave McClure’s ‘Startup Viagra’ Template • Innovative Solar • Sky HYPERLINK "http://www.slideshare.net/Sky7777/the-best-startup-pitch-deck-how-to-present-to-angels-v-cs"FernandesHYPERLINK "http://www.slideshare.net/Sky7777/the-best-startup-pitch-deck-how-to-present-to-angels-v-cs"’ VC Template • Go Greek Yogurt Term Sheets Term sheet resources include: Term Sheets Explained in Plain English, TechStars Docs, Seed Term Sheet and Series HYPERLINK "http://www.entrepreneurship.org/resource-center/sample-term-sheet--series-a.aspx"AHYPERLINK "http://www.entrepreneurship.org/resource-center/sample-term-sheet--series-a.aspx" Term Sheet For equity and convertible term sheets go to TechStarsHYPERLINK "http://www.techstars.com/docs/" Series AA Documents and Y HYPERLINK "http://ycombinator.com/seriesaa/"CombinatorHYPERLINK "http://ycombinator.com/seriesaa/" Series AA Documents, Convertible Note, and “Simple Agreement for Future Equity." For Aalternative financing templates go to Demand Dividend Term Sheet, KohlerKohler, PersonalHYPERLINK "http://emergentfool.com/2009/10/30/investing-in-superstars/" Investment Contracts.

Introductions Many investors want to find their own deals, not get pitched by someone out of the blue. Seek out and ask for introductions to potential investors. Give the

https://www.crowdfunder.com/aria/about/

http://onstartups.com/tabid/3339/bid/98034/The-Pitch-Deck-We-Used-To-Raise-500-000-For-Our-Startup.aspx

http://www.slideshare.net/UTR/how-to-pitch-a-vc-dave-mcclure

https://www.crowdfunder.com/is34/about/

http://www.slideshare.net/Sky7777/the-best-startup-pitch-deck-how-to-present-to-angels-v-cs




https://www.crowdfunder.com/gogreekyogurt

http://www.foundersfund.com/uploads/term_sheet_explained.pdf

http://www.entrepreneurship.org/resource-center/series-seed-financing-document.aspx



http://www.entrepreneurship.org/resource-center/sample-term-sheet--series-a.aspx




http://www.techstars.com/docs/

http://www.techstars.com/docs/

http://ycombinator.com/seriesaa/



http://techcrunch.com/2012/08/31/thefunded-founder-institute-and-wilson-sonsini-debut-startup-friendly-seed-financing-vehicle-convertible-equity/

http://blog.ycombinator.com/announcing-the-safe-a-replacement-for-convertible-notes

http://www.scu.edu/socialbenefit/impact-capital/mobile.cfm

http://www.forbes.com/companies/kohler/

http://www.forbes.com/companies/kohler/

http://emergentfool.com/2009/10/30/investing-in-superstars/





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person making the introduction a very short email ‘blurb’ of suggested language for them to use to make an introduction. Make sure that introduction language includes a link with a call to action. By using a single link, you allow people to forward your pitch and all your core company information in a single URL. When a potential investor clicks on that link, he receives the pitch and the message in a dynamic environment. That message and link can go something like this. “---, I want you to meet -------------, the CEO of -----------------. He is up to something interesting with [mission of company] and the company has great growth opportunities. His pitch deck and other information are on http://-----------------------------------------. Maybe you want to connect with him if this is of interest. ”John” Less data is better Data following bullets on a pitch deck may lack "investor motivation." What matters is your story.Can your story engage the imagination of the investor? You need an overall story emerging from the overall pitch. It could sound like this. “There is a huge opportunity to do [something]. We have cracked the code [or some similar language]. This is how our company does X and why we can dominate the market. Here is who we are and why we are good people to back. X is working; we need money for X to grow and become Y.” Your pitch deck should communicate an overall narrative about you and your start-up--both visually and verbally--as investors scroll through a series of your slides and watch a brief video.



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Customer experience In the pitch deck, try to mention a customer experience or customer success that goes to the mission of your product or service. As in, “John is looking for investors. He goes to Rule 506 Metrics.com and clicks a single button to connect via LinkedIn. This automatically creates a rich and socially connected pitch profile for his company that engages his existing network and is visible to a larger network of active accredited investors.” Ask for the money Many entrepreneurs pitch all the features and forget to ask for the money. Be prepared to describe the use of funds and where it will get you. Make sure you know your numbers and have a timeline. Be clear and direct. Update the pitch Your pitch deck should reflect an ongoing learning curve as you communicate with investors and refine your story. Edit your pitch deck frequently. Pitch investors in person to get feedback to improve your pitch. Finally, turn your pitch deck into a PDF so investors see the deck the way you designed it.



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Chapter Sixteen: What is exciting about Rule 506 (c I. Recent History Companies raise capital to start or expand operations by selling stock or debt securities. Offerings are regulated by federal and state securities laws which require registration. Since registration is costly and time-consuming, many offerings are made pursuant to exemptions to registrations using private placements. Start-ups and other firms commonly rely on the exemption found in Rule 506 of Regulation D under the federal Securities Act of 1933, and on corresponding exemptions under state securities laws, for a “safe harbor” from registration. Effective September 23, 2013, new Rule 506 (c) allows you to make general solicitations with respect to private sales of securities for the first time in 80 years. And Rule 506(c) puts no limit on the amount of funds you can raise from friends, family, and strangers. The SEC also added provisions to restrict those with a history of regulatory issues. The "bad actor" provisions preclude general partners, managing members, executive officers, promoters or other representatives participating in a 506 offering (as well as anyone who owns 20% of the company) who have been convicted of any felony or misdemeanor involving securities or who is guilty of certain SEC regulatory matters. II. Finding Investors under Rule 506 (c), you can now advertise an offering using general solicitation, including:· NEW Websites and online advertising; electronic mail; social media, such as Facebook and Twitter; all other online activities· OLD Press releases; television; radio; direct mail marketing; rolodex You should have a process in place to communicate with possible investors. It may be helpful to say in your initial response that an intermediary, such as Private Placement Advisors, will be engaged to assist with distributing and collecting investor questionnaires and determining whether potential investors will qualify to purchase the securities you are offering.



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III. Who May Be an Investor? If you are offering securities pursuant to a general solicitation, you can only sell them to "accredited investors." Individual investors are accredited investors if they have either: Net worth of at least $1 million, excluding the value of primary residence, or, Income of at least $200,000 in each of the last two years (or $300,000 with a spouse), and have the expectation to earn at least the same amount in the current year. Other, less common, types of accredited investors may include:A corporation, business trust, trust or partnership, not formed for the specific purpose of purchasing your company's stock or other securities, with total assets in excess of $5,000,000;An investment company registered under, or a business development company as defined in, the U.S. Investment Company Act of 1940;A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the U.S. Small Business Investment Act of 1958; a private business development company as defined in the U.S. Investment Advisers Act of 1940; an entity in which all of the equity owners are accredited investors; an ERISA employee benefit plan if the plan has total assets in excess of $5,000,000 or if the investment decision is made by a plan fiduciary that is a bank, savings and loan, insurance company or registered investment advisor; or self-directed employee-benefit plans that are controlled by an accredited investor. IV. Issuers’ Caveat Selling securities to non-accredited investors can result in an automatic right of rescission, a permanent future status as a "bad actor,” and other penalties. You must take reasonable steps to verify that the each purchaser is an accredited investor. Issuers using a third-party verification service should initially respond to inquiries with a form letter that identifies the various categories of accredited investor and suggests a time and opportunity for a telephone conversation. A subsequent letter should describe the services of the verification and intermediary service you have chosen. V. Which verification tests should you select?



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The certifications required by the SEC depend on the status of each investor. An investor often qualifies under more than one test. The verification tests below appear in order of ease of effort under most circumstances. Many investors qualify under more than one test; always choose the least intrusive and most expeditious test(s) whether or not you use a verification service. Income Verification Individual earns more than $200,000 a year or $300,000 with spouse Net Worth Verification Investor is an individual with more than $1 million in net worth, excluding residence Asset Verification Investor is an entity with more than $5 million in good will or assets Look-Through Verification Investor is a member of an entity all of whose members are accredited investors Entity Verification Investor is a member of a special type of qualifying regulated entity Affiliate Verification Investor is a director, executive officer or general partner of a qualified issuer Whichever certification services you select, you must have policies in place to protect confidential information of potential investors and ensure compliance with all applicable privacy laws and regulations. Alternatively, you can use an accredited investor verification service that has these policies in place.



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VI. Documents You should use professionally prepared offering documents that describe: a) The type of security your company is offering (limited partnership interests, limited liability company interests, promissory notes, and common stock. b) The price of the security; c) The terms and economic rights such as dividends or interest payments, anti-dilution protections, and grounds for exemption from registration; and d) Representations about the investors' accredited investor status. You must provide investors with annual reports or financial statements (or reasons not to have such documents) as well as a private placement memorandum, describing your company and its business operations and setting forth risk factors such as your limited operating history; risks related to the industry in which your company operates; risks specific to your company's products, technologies or services; and, finally, state that investors may lose their entire investment.You also need to make sure to tell investors that because the securities were sold under the exemption in Rule 506(c), they are "restricted securities" and therefor re-sales are not permitted for six months. VII. Completing the sale The closing will occur when the investor delivers the purchase price and you issue the securities to the investor pursuant to the terms of the subscription agreement. You may decide to hold one closing or you may hold multiple closings throughout a pre-determined period of time. VIII. Post-closing filings You will need to make informational filings with the SEC and also with one or more state regulators after the closing. Although the securities sold under Rule 506(c) will be "covered securities” -- meaning state securities registration requirements are preempted by federal laws – you or a qualified intermediary, such as Private Placement Advisors will need to make periodical, informational filings with each state regulatory authority in all states where the investors have a primary residence. Since each state has different filing requirements and some



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states have pre-filing requirements. It is helpful to know where each investor resides before any securities are sold, if at all. Traded Private Placements

Private offerings can be made with online press releases and sponsored links; online brochures, investment profiles, promotional emails; as well as business plans, private placement memorandum, offering documents, profiles of key corporate officials, and other promotional material. Private offering shares that do not trade on The NASDAQ Stock Market (NASDAQ OMX), the New York Stock Exchange (NYSE Euronext), or other registered national securities exchanges, may be quoted on an over-the-counter (OTC) quotation platform such as the FINRA operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc. Generally, there few standards that a company must meet to have its securities quoted in the OTC market as long as full disclosure is made and no fraudulent statements are made. Companies file reports with the Securities and Exchange Commission (SEC). See the SEC's EDGAR database. Not all financial information filed with the SEC, or published elsewhere, needs to be independently audited. A investment advisor or other agent, if any, must be properly licensed and his or his firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts. For due diligence, an investor can look at FINRA's BrokerCheck, and also the contact the applicable state securities regulator.


http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/





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Chapter Seventeen: The Problem Since September 2013 start-ups and other companies have been able to solicit the public for debt and equity financing using exempt or private offerings. This is the first time in 80 years the SEC has permitted general solicitation of “private” placements. As a result, an entire new industry, with a new asset class, has come into being. But the problem is how to find serious investors in this gold rush. There are over 1,000 crowdfunding portals or web sites and thousands more peer-to-peer web sites. So what does the entrepreneur say to whom? How much detail does he or she communicate on which platforms? The Solution For clients seeking funding, Private Placement Advisors (PPA) offer a 4-page web site with an investor-email address; a 4 page pitch deck; a 5 minute audio pitch deck; a 60 second video pitch deck; a summary of the offering at PPA’s LinkedIn discussion group, Crowdfunding for Equity and Debt; and a summary of the offering on our blog, exemptofferings.com. PPA will also provide presentation services by means of Prezi or Sway and selectively use web apps such as Haiku Deck and Canva for investors. Pitch decks and presentations are presented to platforms identified by us. PPA also drafts all the offering documents and files the Reg D federal and state filings, and well as drafts the “verification letter” required under Rule 506(c, as applicable. Contact us at 808-238-0398 or email [email protected].

mailto:[email protected]



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APPENDIX MODEL LETTER: ACCREDITED INVESTOR VERIFICATION [Date] [Client name and address] Reference: Letter of Accredited Investor Verification Dear Sir/Madame: [Client name] (“Client”) has asked Private Placement Advisors to confirm that Client has taken reasonable steps to determine that [name of investor] ("Investor") is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933. Client understands that the SEC has not yet offered either a uniform verification method or a non-comprehensive list of verification methods to satisfy the verification requirement. Client acknowledges that a determination of whether the verification steps taken in a given transaction are “reasonable” are grounded in the particular facts and circumstances surrounding each transaction. Client understands that the determination of whether a person is an accredited investor is a factual question to which a legal opinion does not obtain nor apply. Client understands that in addition to the minimum income and net worth requirements, the Client needs to consider the type of Investor and the amount and type of information that the Client has about the Investor. Client understands that the more information that it has indicating that an Investor is accredited, the fewer steps will be necessary to verify any Investor’s eligibility. Client understands that the methods through which it has publicly solicited investors through general advertising may be relevant in determining the reasonableness of the steps it takes to verify accredited investor status. For



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instance, an issuer that solicits new investors through a website accessible to the general public, or through social media solicitation, will be required to undertake more stringent verification steps than an issuer that solicits investors from a database of "screened" accredited investors maintained by a “reasonably reliable” third-party. Client further understands that the terms of an offering may be relevant. For example, setting a high minimum investment amount requirement per investor, especially with a direct cash investment that is not financed, so that only accredited investors could reasonably be expected to risk losing their entire investment, further verifies accredited investor status. Client further understands that the Client bears the burden of establishing the availability of an SEC Regulation D exemption. Private Placement Advisors does not make any representation about whether this letter is sufficient for Client's purposes. By: ___________________ Douglas Slain Private Placement Advisors LLC



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About Us: Private Placement Advisors LLC has a team available to help you design and implement a securities-compliant action plan for raising seed capital and early stage funding. Visit us at: www.exemptofferings.com www.linkedin.com/in/douglasslain/en

www.privateplacementadvisors.com www.zintro.com/expert/douglasslain

We provide JOBS Act solutions. Call 808-238-0398 for a free consultation.

Author Douglas Slain served as the secured transactions adviser to the Ministry of Economy for the Republic of Latvia. He was chairman of the American Bar Association Committee on Professional Responsibility for two years. He taught at Stanford law school as an adjunct clinical law professor for one term. His academic background includes degrees from the University of Chicago (MA) and Stanford Law School (JD). Private Placement Publishing, Inc. publishes and narrates handbooks and courses

in the law and practice of private placements and exempt offerings. Connect on LinkedIn: https://www.linkedin.com/in/douglasslain

http://www.linkedin.com/in/douglasslain/en

https://www.linkedin.com/in/douglasslain



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