Crowdfunding Presentation

MORRISON & FOERSTER LLP

Crowdfunding Offerings Wednesday, May 16th, 2012

Speakers: Anna Pinedo, Morrison & Foerster LLP

David Lynn, Morrison & Foerster LLP

Presentation Materials: 1. Presentation: Crowdfunding

2. The JOBS Act: Opportunities and Risks for Broker-Dealers

3. JOBS Act Summary Overview

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CROWDFUNDING

Anna PinedoDavid Lynn

May 16, 2012

This is MoFo. 2

The JOBS Act - Backgroundy The “Jumpstart Our Business Startups Act,” H.R. 3606 (the “JOBS Act”), was

passed by the House of Representatives on March 8, 2012.y On March 22, 2012, the Senate passed H.R. 3606 with an amendment to

Title III (the crowdfunding exemption).y On March 27, 2012, the House of Representatives accepted the Senate’s

amendment.y On April 5, 2012, President Obama signed the JOBS Act.y The JOBS Act was the culmination of a year-long bipartisan effort in both the

House and Senate to address concerns about capital formation and unduly burdensome SEC regulations.

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Crowdfunding – Background y Crowdfunding permits entrepreneurs to pool money from individuals

who have a common interest and are wiling to contribute to a venture.y Crowdfunding may or may not involve the sale of securities.y To the extent the effort involves the sale of securities, then the

offering must be registered or must rely on an exemption.y SEC Crowdfunding Action: In the matter of Michael Migliozzi II and Brian

William Flatow, Release No, 33-9216 (June 8, 2011). y Migliozzi and Flatow established the BuyaBeerCompany.com website, and then

used Facebook and Twitter to advertise the website. y They sought pledges from participants in the crowdfunding effort, and in return

participants were told that if the $300 million necessary to purchase the Pabst brewery was raised, the participants would receive a “crowdsourced certificate of ownership” as well as beer of a value equal to the amount of money invested.

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Crowdfunding - Backgroundy Prior to the enactment of the JOBS Act, crowdfunding advocates had

called on the SEC to consider implementing a new exemption from registration under the federal securities laws for crowdfunding efforts. y For example, it was suggested that the SEC exempt crowdfunding

offerings of up to $100,000, with a cap on individual investments not to exceed $100.

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JOBS Act - Crowdfunding

Funding Portal or Broker

CrowdfundingEntrepreneur

$$$ $$$

The “Crowd”

• An “all or none” offering.

• No limits on the number or sophistication of investors.

• Issuer information (including financial information) required.

• All offering activities must be conducted through an intermediary.

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JOBS Act - Crowdfundingy Title III provides an exemption that could apply to crowdfunding

offerings, to be implemented by SEC rules adopted within 270 days.y The aggregate amount sold to all investors by the issuer, including

any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000.y The aggregate amount sold to any investor by the issuer, including

any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, does not exceed:y the greater of $2,000 or 5 percent of the annual income or net worth of the

investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; ory10 percent of the annual income or net worth of an investor, as applicable, not to

exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.

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JOBS Act - Crowdfundingy Information will be filed and provided to investors regarding the

issuer and offering, including financial information based on the target amount offered. y The provision would prohibit issuers from advertising the terms of the

exempt offering, other than to provide notices directing investors to the funding portal or broker, and would require disclosure of amounts paid to compensate solicitors promoting the offering through thechannels of the broker or funding portal.y Issuers relying on the exemption would need to file with the SEC and

provide to investors, no less than annually, reports of the results of operations and financial statements.

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JOBS Act - Crowdfundingy The transaction must be conducted through a registered broker or

“funding portal.”y Funding portals would not be subject to registration as a broker-

dealer, but would be subject to an alternative regulatory regime, subject to SEC and FINRA authority, to be determined by rulemaking by the SEC and FINRA. y A funding portal is defined as an intermediary for exempt

crowdfunding offerings that does not: yoffer investment advice or recommendations;ysolicit purchases, sales, or offers to buy securities offered or displayed on its

website or portal;ycompensate employees, agents, or other persons for such solicitation or based on

the sale securities displayed or referenced on its website or portal;yhold, manage, possess, or otherwise handle investor funds or securities; oryengage in other activities as the SEC may determine by rulemaking.

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JOBS Act - Crowdfundingy Among the requirements for exempt crowdfunding offerings would be that an

intermediary:yRegisters with the SEC as a broker or a “funding portal,” as such term is defined in the

amendment;yRegisters with an applicable national securities association;yProvides disclosures to investors, as well as questionnaires, regarding the level of risk involved

with the offerings;y Takes measures, including obtaining background checks and other actions that the SEC can

specify, of officers, directors, and significant shareholders;yEnsures that all offering proceeds are only provided to issuers when the amount equals or

exceeds the target offering amount, and allows for cancellation of commitments to purchase in the offering;yEnsures that no investor in a 12-month period has invested in excess of the limit described

above in all issuers conducting exempt crowdfunding offerings;y Takes steps to protect privacy of information;yDoes not compensate promoters, finders, or lead generators for providing personal identifying

information of personal investors;yProhibits insiders from having any financial interest in an issuer using that intermediary’s

services; andyMeets any other requirements that the SEC may prescribe.

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JOBS Act - Crowdfundingy A purchaser in a crowdfunding offering could bring an action against

an issuer for rescission in accordance with Section 12(b) and Section 13 of the Securities Act, as if liability were created under Section 12(a)(2) of the Securities Act, in the event that there are material misstatements or omissions in connection with the offering.y Securities sold on an exempt basis under this provision would not be

transferrable by the purchaser for a one-year period beginning on the date of purchase, except in certain limited circumstances. y The exemption would only be available for domestic issuers that are

not reporting companies under the Exchange Act and that are not investment companies, or as the SEC otherwise determines is appropriate.

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JOBS Act - Crowdfundingy Bad actor disqualification provisions similar to those required under

Regulation A would also be required for exempt crowdfundingofferings.y The provision pre-empts state securities laws by making exempt

crowdfunding securities “covered securities,” however, some state enforcement authority and notice filing requirements would be retained.

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Funding Portalsy SEC and FINRA to adopt rules regarding registration and regulation

of funding portals.y The JOBS Act provides that state securities or “Blue Sky” laws are

pre-empted with regard to registered Funding Portals; however, pre-emption does not extend to the laws of the state in which the principal place of business of the registered Funding Portal is located. yAny applicable Blue Sky law must not be in addition to, or be different from, the

requirements for registered Funding Portals established by the SEC.

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Broker-Dealer BasicsyMost "brokers" and "dealers" must register with the SEC and join a

"self-regulatory organization," or SRO.

y Section 3(a)(4)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”) generally defines a “broker" broadly as: “any person engaged in the business of effecting transactions in securities for the account of others.”y Unlike a “broker,” who acts as agent, a “dealer“ acts as principal.

Section 3(a)(5)(A) of the Exchange Act generally defines a "dealer" as: “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.”

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Broker-Dealer Basicsy Questions for determining if you are a broker:yDo you participate in important parts of a securities transaction, including

solicitation, negotiation, or execution of the transaction? yDoes your compensation for participation in the transaction depend upon, or is it

related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation? yAre you otherwise engaged in the business of effecting or facilitating securities

transactions? yDo you handle the securities or funds of others in connection with securities

transactions?

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Broker-Dealer Basicsy Questions for determining if you are a dealer:yDo you advertise or otherwise let others know that you are in the business of

buying and selling securities? yDo you do business with the public (either retail or institutional)? yDo you make a market in, or quote prices for both purchases and sales of, one or

more securities? yDo you participate in a "selling group" or otherwise underwrite securities? yDo you provide services to investors, such as handling money and securities,

extending credit, or giving investment advice? yDo you write derivatives contracts that are securities?

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Broker-Dealer Registrationy Section 15(a)(1) of the Exchange Act generally makes it unlawful for

any broker or dealer to use the mails (or any other means of interstate commerce, such as the telephone, facsimiles, or the Internet) to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless that broker or dealer is registered with the SEC in accordance with Section 15(b) of the Exchange Act.

y “Associated persons” of a broker-dealer usually do not have to register separately with the SEC, however they must be properly supervised by a currently registered broker-dealer.

y A broker-dealer that conducts all of its business in one state does not have to register with the SEC.

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Intermediary Comparison

Availability of Crowdfunding Exemption

Costs

Conduct of Business

Regulatory Environment

Available for issuers using funding portal’s platform.

Available for issuers using broker-dealer’s platform.

Expected to be less ongoing obligations, thus less costs involved.

Significant registration costs, as well as ongoing compliance costs

Restrictions on activities traditionally considered to be those of a broker-dealer.

Handling customer funds and securities, making recommendations, compensating for sales of securities, etc.

To be-established SEC and FINRA rules regarding registration and ongoing obligations.

Well-established SEC and FINRA rules regarding registration and ongoing obligations

Funding PortalBroker-Dealer

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Client Alert. May 14, 2012

The JOBS Act: Opportunities and Risks for Broker-Dealers By Hillel Cohn

In April 2012, President Obama signed the Jumpstart Our Business Startups Act (the JOBS Act) into law. The Act focuses upon stimulating economic growth by making it easier for smaller businesses to raise capital. Among the measures included in the JOBS Act are a number of provisions creating new opportunities for broker-dealers. Such measures include:

! Facilitating initial public offerings by emerging growth companies (less than $1 billion of annual gross revenues);

! Increasing the ceiling for exempt public offerings under Regulation A to $50 million;

! Permitting use of general solicitation and advertising in private placements under Rule 506 if the purchasers in the private placement are all accredited investors; and

! Allowing companies to raise up to $1 million through crowdfunding.1

PUBLIC OFFERINGS BY EMERGING GROWTH COMPANIES

The JOBS Act facilitates public offerings by emerging growth companies by, among other things:

! Permitting pre-filing communications with institutional investors to gauge their potential interest;

! Permitting the publication of research reports about an emerging growth company that is conducting a public offering of its common equity securities;

! Permitting a registration statement for an IPO to be filed on a confidential basis;

! Relaxing restrictions on research analysts’ participation in discussions with IPO underwriting clients;

! Prohibiting timing restrictions on distribution of post-IPO research reports and public appearances by research analysts; and

! Paring back certain disclosure requirements for emerging growth companies.

Certainly the prospect of more public offerings by emerging growth companies presents attractive opportunities for broker-dealers. Indeed, a significant majority of companies likely to consider an IPO will qualify as emerging growth companies and the opportunity for pre-filing communications with institutional investors and more robust research should result in an enhanced IPO process. It is not clear if the liberalized rules on post-IPO research reports and analyst involvement with IPOs will apply to follow on offerings by emerging growth companies. On April 27, 2012, SIFMA wrote to FINRA urging revisions to the FINRA rule governing research reports2 to effectively extend such provisions of the JOBS Act to any public offering by an emerging growth company.

1 MoFo Client Alert, The JOBS Act: http://www.mofo.com/files/Uploads/Images/120326-The-JOBS-Act.pdf. 2 See NASD Rule 2711 and NYSE Rule 472.


Client Alert. Of course, new opportunities are accompanied by new risks. There is nothing in the JOBS Act which eliminates the obligation of broker-dealers to disclose material conflicts and certain other matters which could impair the integrity of research reports. Restrictions on research analyst compensation and the prohibition on promising favorable research remain in place. Nor is there any relaxation of the requirements of Regulation AC, an SEC rule intended to ensure that research reports reflect the author’s views. The fact that research reports regarding an emerging growth company will not be considered “offers” and therefore may be distributed prior to or during a public offering by such companies, does not eliminate the risk that such reports fail to meet FINRA standards for customer communications (NASD Rule 2210) or that such reports run afoul of SEC Rule 10b-5.

Thus, with the unwinding of certain restrictions on analysts and research reports, broker-dealers will need to enforce measures to prevent reoccurrence of the very abuses which led to the restrictions in the first place. In this regard, investment banks will be well-served to rigorously maintain the independence of their research function and their compliance personnel should remain alert for any actions that might compromise such independence. Written supervisory procedures should be updated to address conduct that had been previously prohibited, such as the publication of research reports during an IPO. Broker-dealers may eliminate or modify restrictions on research reports and public appearances by research analysts during the “quiet period” imposed on selling group members by NASD Rule 2711 (40 days following the IPO for managers; 25 days for other underwriters and selling group members, with a further quiet period for managers covering the period from 15 days before through 15 days after the expiration, termination, or waiver of any lockup). Restrictions on analyst communications with investment banking clients and related chaperoning requirements may be modified. Information barriers should be reviewed, although consideration should be given to the importance of maintaining the independence of research personnel when modifying information barriers. It would be prudent for broker-dealers to accompany liberalized rules with enhanced scrutiny of communications with research personnel and stepped up testing of supervisory procedures intended to prevent improper influences on a firm’s research department.

EXEMPT OFFERINGS UP TO $50 MILLION

The exemption for small public offerings provided by Regulation A had largely fallen into disuse given its $5 million cap. There may be renewed interest in Regulation A offerings given the increase in the cap to $50 million. While private placements often raise far more than $50 million in transactions under Regulation D’s Rule 506, securities issued in Regulation A offerings are unrestricted and may be freely resold by the purchasers. Therefore, institutions that have limitations or concerns with respect to holding restricted securities may participate in Regulation A offerings, and the securities sold may not be subject to an illiquidity discount comparable to the discount associated with many private placements.

Increased interest in Regulation A offerings could generate new business for investment bankers, particularly those who work with smaller companies. However, broker-dealers will need to bear in mind that the liability provisions of Section 12(a)(2) of the Securities Act of 1933 will apply to Regulation A offerings. Under this provision, brokers can be held liable for material misstatements and omissions in the sales process, even if the misstatements result from good faith mistakes rather than any intention to deceive. The principal defense against a Section 12(a)(2) action is the due diligence defense: the broker must prove that it did not know the statement was untrue or misleading and, in the exercise of reasonable care, could not have known. Companies seeking to raise funds through Regulation A may be less mature than companies undertaking a full IPO. Their internal controls may be less reliable and their financial reporting may be less rigorous. Under these circumstances, broker-dealers participating in Regulation A offerings will want to proceed with care and will


Client Alert. likely impose the same diligence requirements and comfort letter procedures that they would employ in undertaking a fully registered public offering.

REGULATION D OFFERINGS AND PRIVATE PLACEMENT PLATFORMS

While private placements under Rule 506 of Regulation D have long been a popular method for raising significant amounts of money, the ability to seek investors through general solicitation may significantly expand use of Rule 506 as a means of raising capital. Historically, companies have raised substantial funds from institutional investors in Rule 506 offerings, often relying on established relationships between such institutions and the issuer’s placement agent to avoid Regulation D’s prohibition on use of advertising and general solicitation to find investors. Elimination of the prohibition on general solicitation will likely result in Rule 506 offerings targeting a broader spectrum of potential investors. While some companies may undertake such offerings on their own, the SEC’s prohibition on paying issuer employees for selling securities3 may result in many issuers working through broker-dealers when undertaking a Rule 506 offering.

General solicitation and advertising is only permitted if all of the ultimate purchasers in the private placement are accredited investors. The JOBS Act directs the SEC to adopt rules implementing this provision. Such rules must include requirements for the issuer to take “reasonable steps” to verify that the purchasers are in fact accredited investors. It is not clear if the SEC will determine that the widely accepted practice of obtaining detailed representations from the prospective investors will suffice as “reasonable steps” to verify accredited investor status. Once the SEC rules are released, broker-dealers participating in Rule 506 private placements will need to ensure their understanding of the verification requirements.

While the verification obligation falls on the issuer, a failure to meet this obligation would likely result in the purported private placement being deemed an unregistered public offering in violation of Section 5 of the Securities Act of 1933. In order to avoid the potential liabilities and reputational damage associated with selling securities in violation of Section 5, broker-dealers participating in Rule 506 offerings that employ general solicitation should independently evaluate the adequacy of steps taken by the issuer to verify accredited investor status. Some broker-dealers may prefer to prepare their own template for such verification efforts and require its use as a condition of the broker-dealer participating in the private placement.

Broker-dealers participating in a general solicitation with respect to a Rule 506 offering will also need to consider whether their conduct complies with FINRA requirements governing communications with the public. General solicitation materials will most likely constitute sales literature under NASD Rule 22104 and, depending on the method of dissemination, may also constitute an advertisement under the same rule. Broker-dealers will need to ensure that use of general solicitation materials complies with the approval, record keeping and content standards set forth in Rule 2210. The contents of any general solicitation materials will also need to be reviewed in order to determine if they could be construed as a “recommendation” to purchase the subject securities. Under applicable case law and regulatory requirements, a broker-dealer may not recommend an investment unless the broker-dealer has a reasonable basis to determine that the recommended investment is suitable for the investor.5 “Recommendation” has been broadly construed to include a “suggestion” that a customer take action. See FINRA Notice to Members 11-02 for a discussion of what constitutes a recommendation. The fact that a general solicitation by its nature is not tailored to any individual customer argues against

3 See SEC Rule 3a4-1 promulgated under the Securities Exchange act of 1934. 4 To be replaced by FINRA Rule 2210. 5 See, e.g., SEC v. Hanley, 415 F. 2d 589 (2d. Cir. 1969), FINRA Rule 2111 and FINRA Notice to Members 10-22.


Client Alert. a conclusion that the communication constitutes a recommendation. Nonetheless, broker-dealers should review the contents of any general solicitation materials to ensure that no portion could be construed as a recommendation.

The JOBS Act includes a provision which may impact the role of broker-dealers in Rule 506 offerings. The Act provides that certain platforms which are intended to facilitate private placements need not register as broker-dealers. Such platforms may provide an Internet portal or other mechanism facilitating the offer and sale of securities in a Rule 506 transaction. In addition, the platforms may provide certain ancillary services such as conducting diligence or providing standardized deal documents. In order to avoid broker-dealer registration, neither the platform nor its associated persons may be compensated based on the sale of securities, nor may they receive separate compensation for investment advice. In addition, they may not hold customer funds or securities and none of their associated persons may be subject to statutory disqualification as defined in Section 3(a)(39) of the Securities Exchange Act of 1934.

The JOBS Act provision on Rule 506 platforms represents to some extent a codification of SEC no action letters on matching systems. In this regard, the SEC Staff has historically considered whether or not the matching system receives transaction-based or contingent compensation, provides advice, participates in negotiations, or handles customer funds and securities in determining if the matching system must register as a broker-dealer.6 In its analysis, the SEC has consistently emphasized the centrality of transaction-based compensation as a key factor in determining whether or not a matching system would need to register as a broker-dealer. The JOBS Act provision requires that the Rule 506 platform and associated persons receive “no compensation in connection with the purchase or sale” of a security. This language appears to be consistent with the SEC Staff’s broad interpretation of transaction-based compensation and encompasses any fee linked to securities transactions, even if the fee is not calculated as a percentage of the value of the securities transactions. Thus, even an “items processed” fee may run afoul of the prohibition and Rule 506 platforms will likely need to utilize subscription fees, membership fees, and other forms of compensation that are not linked to actual securities transactions.

It should be noted that the JOBS Act does not include a provision pre-empting state law with respect to broker-dealer registration as it may relate to private placement platforms. Thus, any Rule 506 platform, particularly one which facilitates transactions with retail investors, will need to consider whether the nature of its operations might trigger the broker-dealer registration requirements in the states where it operates.

CROWDFUNDING

The JOBS Act permits private companies to raise up to $1 million in a 12-month period through crowdfunding. Securities sold in such transactions will be deemed restricted securities. In order to qualify for this exemption, the transaction must be effected through an intermediary, who may be a registered broker-dealer or a “funding portal.” Issuers, as well as any person who offers or sells securities in a crowdfunding transaction, are subject to potential liability based on the Section 12(a)(2) standards discussed above.

A “funding portal” is a new legal category for intermediaries added by the JOBS Act. Funding portals must register with the SEC, but are not subject to the full regulatory scheme applicable to registered broker-dealers. Funding portals must also be members of a national securities association; at this time it is not clear if FINRA will establish a membership category for funding portals or if a new national securities association will be formed for funding portals. The JOBS Act pre-empts state regulation of funding portals.

6 See, e.g., Progressive Technology, Inc., 2000 WL 1508655 (Oct. 11, 2000); Stock Power, Inc., 1998 WL 423019 (July 24, 1998); Angel Capital

Electronic Network, 1996 WL 636094 (Oct. 25, 1996).


Client Alert. A funding portal is defined in the JOBS Act as any person acting as an intermediary in a crowdfunding transaction who:

! Does not offer investment advice or recommendations;

! Does not solicit the purchase or sale of securities;

! Does not compensate its employees based on the sale of securities;

! Does not hold customer funds or securities; and

! Does not engage in such other activity as the SEC may by rule prohibit.

A funding portal, like a Rule 506 platform, cannot be paid for providing investment advice or effecting transactions in securities. In addition, the funding portal may not pay others to refer potential investors. Thus, there are rather significant constraints on the business model for funding portals.

Under the JOBS Act, all intermediaries in crowdfunding transactions, whether or not registered as broker-dealers, are required to discharge significant duties, including:

! Providing disclosure to prospective investors regarding the risks of investment and such other matters as the SEC might deem appropriate;

! Ensuring that each investor

o Reviews investor education materials as the SEC deems appropriate,

o Affirms his understanding of the risk of total loss,

o Answers questions demonstrating an understanding of the risks of investing in startups,

o Answers questions demonstrating an understanding of the risks of illiquid investments, and

o Answers questions demonstrating an understanding of such other matters as the SEC might deem appropriate;

! Taking measures to reduce the risk of fraud, including conducting background checks on the managers of the issuer;

! Ensuring that offering proceeds are not released to the issuer until the minimum offering requirements have been met;

! Making such efforts as the SEC may deem appropriate to ascertain if the investors in the crowdfunding are complying with the maximum limitations on their investments in such opportunities; and

! Protecting the privacy of customer information.

Note the inherent difficulty in some of these tasks, such as “ensuring” that investors have reviewed appropriate investor education materials. In addition, efforts to ascertain if investors have complied with the limitations on the maximum amount which they may invest will be complicated by the fact that such limitations vary based upon an investor’s income and net worth and investors often fail to update such information.7 Consider also the costs involved in “reducing the risk of fraud” by the issuer and discharging the other obligations of intermediaries.

7 The maximum amount which an investor may purchase through crowdfunding transactions in any 12-month period shall not exceed: (i) the greater of

$2000 or 5% of the investor’s net worth or annual income if either the net worth or annual income is less than $100,000, or (ii) 10% of the investor’s net worth or annual income if either the net worth or annual income is greater than $100,000.


Client Alert. Given the $1 million limit for crowdfunding transactions and the significant responsibilities imposed on intermediaries, it is not at all clear that broker-dealers or funding portals will find this to be an attractive business opportunity. Even if the intermediary pre-qualifies a pool of prospective investors, maintaining up to date information on such investors and monitoring their total investment in crowdfunding transactions, some of which may be effected through other intermediaries, will not be simple.

The prospects may be particularly problematic for funding portals. Under the JOBS Act, they have the same obligations as broker-dealers when acting as intermediaries for crowdfunding transactions. This will require them to retain and train personnel who can conduct diligence on issuers, manage a disclosure process, and obtain current information about prospective investors. Compliance and legal personnel will likely be essential for a funding portal to carry out its statutory obligations. Moreover, funding portals will be subject to an as-yet-undetermined regulatory regime to be imposed by the SEC and a national securities association and will be exposed to investor claims to the extent they offer and sell securities by means of any false or misleading statements. Given the prohibition on receipt of transaction-based compensation, it may be difficult for funding portals to develop an economically viable model for servicing crowdfunding transactions.

Much may depend upon the SEC regulations governing the obligations of intermediaries in crowdfunding transactions. However, it was in part a result of lobbying by the SEC that significant obligations were imposed on intermediaries in crowdfunding transactions. As a result, it is unlikely the SEC will adopt rules which materially reduce the potential compliance burden for crowdfunding intermediaries. Considering the costs of such compliance, it may be difficult to find reputable firms willing to participate in crowdfunding transactions as intermediaries.

Contact:

Hillel T. Cohn (213) 892-5251 [email protected]

About Morrison & Foerster:

We are Morrison & Foerster—a global firm of exceptional credentials in many areas. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life science companies. We’ve been included on The American Lawyer’s A-List for eight straight years, and Fortune named us one of the “100 Best Companies to Work For.” Our lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger. This is MoFo. Visit us at www.mofo.com.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

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JOBS Act—Summary Overview April 2012

EMERGING GROWTH COMPANIES (ECGS)

Qualifying as an ECG EGC defined as an issuer with total gross revenues of less than $1b

Disqualification as an ECG EGC until the earliest of:

(A) last day of the fiscal year during which issuer’s total gross revenues exceed $1b; or

(B) five years from IPO; or

(C) the date on which issuer has sold more than $1b in non-convertible debt, or

(D) date on which issuer becomes a large accelerated filer (public float of $750m)

IPOs by ECGs

Confidential submission available

Must file publicly at least 21 days prior to roadshow

2 years audited financials required (instead of 3)

May elect to rely on scaled disclosures available to smaller public companies (such as for exec comp)

May engage in testing the waters with QIBs and IAIs

Ongoing Disclosures/Governance Requirements

May opt into voluntary disclosures

Subject to phase-in for say-on-pay

Subject to phase-in for any PCAOB mandatory rotation or modified audit report requirement

Exempt from Sec 404 attestation (but subject to internal control requirement and to CEO/CFO certification requirement)

Not required to adopt FASB standards until broadly applicable to private companies

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RESEARCH REPORTS

Permitted communications

Research report on EGC not an “offer”

Research report on ECG not subject to quiet period or lock-up period restrictions

Distribution participants may publish research before commencement, during, or post offering

Conflicts/separation/disclosures

Reports subject to required conflicts disclosures and certifications

Modifies separation/chaperoning requirements in connection with certain activities for EGCs

REGULATION D

Rule 506 Offerings General advertising/general solicitation permitted provided that the issuer verifies purchasers are all AIs.

BROKER-DEALER REGISTRATION

Platforms/Matching Services Not required to register as broker-dealers solely as a result of participation or involvement in Rule 506 offerings that use general solicitation or general advertisement, provided that platform does not receive transaction-based compensation, handle customer funds or securities or participate in documentation

REGULATION A

Eligible issuer Non-reporting issuer with principal place of business in Canada or the United States

Offering threshold $50m in issuer’s securities in a 12-month period. SEC required to review threshold and report on threshold to Congress

Status of securities Covered securities for NSMIA if either:

Listed/traded on a securities exchange; or

Sold through a registered broker-dealer

Liability Subject to Sec 12(a)(2) liability

Other Conditions The SEC is empowered to impose additional conditions, including, a requirement to file annual audited financial statements

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EXCHANGE ACT THRESHOLD

Issuer not a bank or bank holding company

Becomes subject to reporting within 120 days after last day of fiscal year ended in which issuer had:

Total assets in excess of $10m, and

A class of equity securities (other than exempted securities) held of record by either: (1) 2,000 persons, or (2) 500 persons not AIs

Issuer is a bank or bank holding company

Becomes subject to reporting within 120 days after last day of fiscal year ended in which issuer had:

Total assets in excess of $10m, and

A class of equity securities (other than exempted securities) held of record by 2,000 persons

May deregister if class of equity securities held of record by fewer than 1,200 persons

Held of record Excludes: securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from Section 5 registration requirements

REQUIRED STUDIES

Decimalization SEC, within 90 days of enactment; SEC also must consider within 180 days of enactment any recommendations regarding the minimum trading increments for EGCs

Regulation S-K SEC, within 180 days of enactment, must report to Congress on its review of S-K and its recommendations concerning changes to S-K requirements for EGCs to simplify burdens

Blue Sky Laws and Regulation A Comptroller General, within 3 months of enactment, must report to Congress on its study of the impact of blue sky laws on Regulation A offerings

Sec 12 SEC Enforcement Authority SEC, within 120 days of enactment, must report to Congress on its assessment regarding additional enforcement tools that may be needed for it to enforce anti-evasion provision in Sec 12(b)(3)

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SHAREHOLDER TRIGGERS

Companies other than banks and

BHCs Banks and BHCs

Total assets at fiscal year end that trigger reporting requirement if shareholder trigger is breached

$10 million $10 million

Total number of holders of record that trigger reporting

2,000 holders of record OR

500 non-accredited holders of record

2,000 holders of record

Total number of holders of record to exit reporting

300 or fewer holders of record 1,200 or fewer holders of record

Effectiveness Immediately effective At the end of the issuer’s first fiscal year following enactment of the JOBS

Act

Crowdfunding Presentation

Business

crowdfunding exemption

jobs act crowdfunding

crowdfunding background

jobs act background

crowdfunding efforts

crowdfunding advocates

crowdfunding action

business startups act