CROWDFUNDING

{2016}
 Crowdfunding

Overview

Crowdfunding: defined as the use of small amounts of capital from a large number of individuals, can
support entrepreneurship by exponentially increasing an entrepreneurs ability to finance a new business and
having cash available on day one.

The term "crowdfunding" is fairly recent; Michael Sullivan coined it in 2006, and most people have only
become familiar with it through the rise of Kick-starter, which was initially focused on creative projects--
think indie films or albums. But as a practice, crowdfunding has a much longer history. The construction of
the Statue of Liberty was financed in France by a combination of public fees and lottery sales, and the
statue's pedestal was paid for by a campaign that solicited small donations from the American people. Trick-
or-Treat for UNICEF--a campaign that asked children to collect spare change instead of candy on their
Halloween rounds and send the cash to the United Nations Children's Fund--is a form of crowdfunding.

But crowdfunding as a venture financing mechanism was made illegal as part of the raft of finance reforms
made in the wake of the 1929 stock market crash. In addition to the limits on numbers of investors, current
regulations forbid the solicitation of equity investments outside a circle of "accredited investors" and require
extensive disclosures before such investments can be sought.

In the U.S. now, there are approximately 60,000 angel investors. Crowdfunding is likely to create 60 million
new angel investors in the U.S. alone. This is a powerful transformational development that alters the
landscape of financing forever as companies looking for funding in the neighborhood of $5,000 to $500,000
can draw from a larger pool of investors offering much smaller investment amounts, which can range
anywhere from $25 to $2,000 depending on the investment. Since most crowdfunding investments will be
small, it will enable new experiments to be tried. With micro-financing, testing new ideas and testing new
investments can be done with a minimization of individual pain in the case of failure. People may gamble a
$25 bet on a long shot that normally would never get funded if the minimum investment venture capital
style was expected to be $250,000.

Internet-based crowdfunding is a merger of two distinct antecedents: crowdsourcing and microfinance.

Crowdsourcing is, quite simply, "collecting contributions from many individuals to achieve a goal." It divides
"an overwhelming task ... into small enough chunks that completing it becomes ... feasible." Wikipedia is
probably the most prominent example of crowdsourcing - an entire encyclopedia consisting of articles
written and edited by the general public. Linux, the open-source computer operating system, was developed
through crowdsourcing, and other software companies, including IBM, have adopted the open-source
model. From astronomy to stock photography to "prediction markets" to eBay, platforms based on the
collective contributions of a large number of people are commonplace today. Even the all-pervasive Google
search system is crowdsourcing; Google's algorithm captures the sites that everyone collectively is linking to
and visiting. The Internet significantly reduces the transaction costs of decentralized group action and
"opens ... the economy to new Linux-like projects every day." The "rigid institutional structures" previously
required to organize economic action are, in many cases, no longer necessary.

The other antecedent of crowdfunding is microlending, sometimes called microfinance. Microlending

involves lending very small amounts of money, typically to poorer borrowers. Microlending can be traced
back to Irish loan funds in the 1700s, but it became prominent in recent times through the work of
Muhammad Yunus and the Grameen Bank. Yunus's project began when he loaned $27 of his own money to

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42 villagers in Bangladesh. He subsequently established a multi-branch bank, the Grameen Bank, that
specialized in such loans. In 2006, Yunus and the Grameen Bank shared the Nobel Peace Prize. Micro-lending
has its detractors, but it has ballooned into a multi-billion-dollar industry.

Micro-lending is defined primarily by the recipient - very small entrepreneurial ventures. Crowdsourcing is
defined primarily by the contributor - small contributions from a large number of people to achieve a
common goal. Crowdfunding is just a combination of those two ideas - small contributions from a large
number of people to fund small entrepreneurial ventures.

Benefits

Crowdfunding has great potential to spark growth among small businesses. Even in its current form, many
entrepreneurs have successfully started and developed their business ventures relying in part on
crowdfunding. One of the primary challenges faced by small businesses is a capital gap: small businesses
have very limited financing options. Bank loans are often denied due to a lack of collateral, operating
history, and a proven track record. Private financing from venture capital and angel investors only fund a
small number of businesses. Crowdfunding could bridge this gap by connecting small businesses, which are
marginalized from the traditional sources of funding, to the general public.

In addition to crowdfunding's financial benefit, entrepreneurs also use this fundraising method to market
their products or services and obtain feedback. Crowdfunding becomes a tool for innovators to improve on
their business models or products and services before they are offered to the public. By coupling
crowdfunding with crowdsourcing, the public can participate in creating these products or services.

Not only does the growth of small businesses benefit the entrepreneurs themselves, it also benefits society.
Small businesses accounted for 60%--75% of new jobs created between 1993 and 2009, and small
businesses provide consumers with more product and service options.

Costs

Crowdfunding has its downsides as well. From the investor protection perspective, it is likely that some
fraud will occur through crowdfunding. The Internet, which replaces real-life encounters with virtual
meetings, could make it more difficult for investors to know whether an issuer's business is legitimate. An
additional crowdfunding risk is inherent in the general nature of small businesses: uncertainty about the
development of unproven products or services. Start-up companies are traditionally riskier and have a
higher rate of failure than other businesses.

From the business perspective, crowdfunding issuers may encounter administrative and accounting
challenges, since this capital formation strategy involves a large number of investors becoming
shareholders. This would require meticulous and laborious bookkeeping of all investments and shares in the
business to determine the share of profits to which each investor is entitled to. Even with the current form
of crowdfunding where donors merely receive rewards, fundraisers are finding the administrative work of
recording donor contributions and sending the respective rewards to be onerous.

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Structure

Donation Sites

The contributions on donation sites are, as the name would indicate, donations. Investors receive nothing in
return for their contributions - not even the eventual return of the amounts they contributed (the JOBS Act
changes this). However, although the contributor's motive is charitable, the recipient's motive need not be.
Donations may fund for-profit enterprises.

Pure donation sites are rare, and those that exist focus on requests by charities and other non-profit
institutions, rather than requests by businesses. Some of the reward and pre-purchase sites also allow
unrewarded requests for donations, but one study found that only 22% of all crowdfunding initiatives were
requests for donations, with no rewards offered.

GlobalGiving is an example of a pure donation site. It allows donors to direct contributions to development
projects around the world. The GlobalGiving Foundation, which operates the site, takes a 15% fee and
guarantees that the remainder of the donation will reach the project within sixty days. However,
GlobalGiving, like other pure donation sites, is limited to non-profit organizations. None of the leading
crowdfunding sites available to business entrepreneurs uses the pure-donation model.

Reward and Pre-Purchase Sites

The reward and pre-purchase crowdfunding models are similar to each other, and often appear together on
the same sites. The reward model offers something to the investor in return for the contribution, but does
not offer interest or a part of the earnings of the business (The JOBS Act will change this see Regulations)
The reward could be small, such as a key chain, or it could be something with a little more cachet, such as
the investor's name on the credits of a movie.

The pre-purchase model, the most common type of crowdfunding, is similar. As with the reward model,
contributors do not receive a financial return such as interest, dividends, or part of the earnings of the
business. Instead, they receive the product that the entrepreneur is making. For example, if the
entrepreneur is producing a music album, contributors would receive the album or the right to buy the
album at a reduced price upon completion.

Kickstarter and IndieGoGo are the leading reward/pre-purchase crowdfunding sites. The two sites are
similar. Kickstarter requires its projects to offer what it calls "rewards," typically of the pre-purchase variety.
According to Kickstarter, "Rewards are typically items produced by the project itself - a copy of the CD, a
print from the show, a limited edition of the comic." Typically, the "donation" required to receive the
product is below the planned retail price. For example, Dan Provost and Tom Gerhardt, who designed a
tripod mount for the iPhone, offered one of the mounts to anyone who donated $20. They planned to sell
the mount for a retail price of $34.95. But Kickstarter's rewards are not limited to pre-purchase. Other
suggested rewards include "a visit to the set, naming a character after a backer, or a personal phone call."
The creators of the iPhone tripod mount, for example, offered to dine with anyone who contributed $250.

IndieGoGo, unlike Kickstarter, does not require campaigns to offer what it calls "perks," although it does
recommend them. Many of the perks offered on the IndieGoGo site follow the pre-purchase model, but

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some go well beyond that. The table below lists some of the perks that Josh Freese of the band Nine Inch
Nails offered to help fund an album:

Both Kickstarter and IndieGoGo take a cut of the money collected. Kickstarter uses an "all-or-nothing"
funding model and does not allow projects to be funded unless they reach their stated funding goal. If a
project reaches its funding goal, Kickstarter collects a 5% fee; if not, Kickstarter does not charge a fee.
IndieGoGo allows project creators to draw on pledged funds immediately, whether or not the funding goal is
reached, but the fee depends on whether the funding goal is met. IndieGoGo charges a 4% fee if the funding
goal is reached and a 9% fee if it is not.

Lending Sites

The lending model of crowdfunding is often called peer-to-peer lending. Peer-to-peer lending involves loans.
Contributors provide funds on a temporary basis, expecting repayment. In some cases, investors are
promised interest on the funds they loan. In other cases, they are only entitled to receive the return of their
principal.

Sites Not Offering Interest

Kiva is, without a doubt, the leading crowdfunding site using the lending model, and probably the leading
crowdfunding site of any type. One source calls Kiva "the hottest nonprofit on the planet." Kiva does not
lend directly to entrepreneurs, but instead partners with microfinance lenders around the world, which Kiva
calls "field partners." The local institutions make loans to entrepreneurs, often before the loan request is
even posted on Kiva. Each entrepreneur's loan request is posted on the Kiva web site, where potential
lenders can browse the requests and fund each one in any amount from $ 25 to the full amount of the loan.
Kiva collects and distributes this money back to the field partners and credits lenders with any repayments
the entrepreneurs make. Lenders on the Kiva site only receive their principal back; the field partners use any
interest received to cover their operating costs.

Sites Offering Interest

Prosper and Lending Club are the two leading peer-to-peer lending sites that offer interest. Not all of the
loans on these sites are for business purposes. Most of the loans are for personal expenses, but the amount
of the small business lending on these sites is increasing.

Prosper and Lending Club operate similar, but not identical, platforms. Borrowers submit requests for loans
in amounts ranging from $ 1,000 to $ 25,000. Potential lenders review those requests and decide which to
fund. The minimum investment for each loan request is $25. When a loan receives sufficient commitments
to close, the borrower executes a three-year unsecured note for the amount of the loan.

The nature of investors' participation in these loans has changed since Prosper and Lending Club first
launched. Originally, borrowers on both sites issued notes directly to the crowdfunding lenders, with the site
maintaining custody of the notes and servicing them for a 1% fee. Now, however, lenders on the two sites
do not make loans directly to the underlying borrowers. Instead, lenders purchase notes issued by Prosper
or Lending Club themselves, and the sites use those funds to make loans through WebBank to the
underlying borrowers. Although the sites are the issuers of the notes that the lenders purchase, the sites are

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obligated to pay only if the underlying borrowers repay the corresponding loans. In effect, the sites act as
conduits for borrower payments, taking 1% of the payments before passing them along to the lenders. Both
Prosper and Lending Club also charge borrowers an origination fee on each loan; the amount of the fee
depends on the borrower's credit risk.

Prosper and Lending Club set interest rates on the notes (and on the underlying loans) differently. Lending
Club evaluates each borrower and sets an interest rate on each loan based on the "loan grade" it assigns to
the loan. Prosper also rates each potential loan, but those scores are used only to set a minimum rate. The
actual interest rate is determined by an auction process. Each lender bids the minimum percentage he is
willing to accept, and the interest rate on each loan (and on the notes issued by Prosper) is the minimum
percentage acceptable to enough lenders to fund the entire loan.

Equity Sites

Equity crowdfunding offers investors a share of the profits or return of the business they are helping to fund.
The equity model is the model that most clearly involves the sale of a security. Because of the regulatory
issues it raises, the equity crowdfunding model is not common in the United States. Equity crowdfunding is
more common elsewhere, however. One study found that one-third of all crowdfunding sites that offered
investor rewards offered stock.

Until recently, ProFounder was the leading equity-model crowdfunding site in the United States. However,
ProFounder announced in June 2011 that it would no longer be offering securities on its site. The reason for
the change became apparent when the California Department of Corporations subsequently issued a
consent order barring ProFounder from selling securities on its web site unless it first registered as a broker-
dealer under California law. As a result of this change, there are now no major, publicly accessible equity
crowdfunding sites in the United States, although there are sites that facilitate private equity offerings to
sophisticated and accredited investors.

When it was operating, ProFounder offered two different types of investment, which it called "public
rounds" and "private rounds." The types of offerings differed in two ways: (1) the return offered to
investors; and (2) the investors allowed to participate. In public rounds, the amount paid back to investors
was limited to the amount they contributed, without any return on their investment; investors in private
rounds could receive more than what they invested. Public rounds were open to the general public while
private rounds were limited to friends, family members and existing acquaintances of each entrepreneur -
an attempt to fit within the SEC's Rule 504 exemption from registration.

Investors on ProFounder were promised a percentage of the gross revenues of the businesses in which they
invested. The exact percentage of revenues to be paid to investors and the period over which investors were
to receive those funds was left to the individual entrepreneur to determine, but the maximum payout
period was five years. This share of revenues was the only equity interest investors received - they received
no stock or any other ownership interest.

Entrepreneurs had to pay to list on ProFounder, but the amount and structure of those payments is a little
unclear. According to the ProFounder web site, entrepreneurs had to pay an initial fee of $ 100 to post a
fundraising appeal. But, according to ProFounder's CEO, the initial fee for a private round was $ 1,000. For a

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public round, the entrepreneur had to pay 5% of the amount raised if the fundraising succeeded. If a private
round was successful, both the ProFounder web site and one interview of its CEO indicated that the
entrepreneur had to pay an additional $ 1,000. But the CEO indicated in another interview that no additional
fee was charged for a private round - that entrepreneurs paid a flat $ 1,000 fee, whether or not the offering
succeeded.

Entrepreneurs had thirty days to raise the funds needed. If entrepreneurs failed to reach their goal, they
received none of the pledged funds. Investors did not sign term sheets or make any payments until the goal
was met.

Regulations

The Securities and Exchange Act of 1934 limited the number of investors a company may have before it
must go public and subject itself to the significant bureaucratic burdens and intensified scrutiny accorded to
public companies.

The Jumpstart Our Business Startups Act (or JOBS Act) is designed to change that. Signed into law by
President Obama on April 5, 2012, the JOBS Act loosens regulatory requirements for small businesses on a
number of fronts. It reduces the level and complexity of required SEC filings for businesses below a set
income threshold, raises the number of shares a company can issue before it must go public, and offers
other regulatory rollbacks. Among them is a provision to legalize crowdfunding--the kind of thing Kickstarter
has been facilitating for small projects--as a source of startup financing. Beginning in 2013, entrepreneurs
will be able to solicit funding from small investors and offer equity in return.

The JOBS Act, originally a small part of Obama's jobs program, attracted bipartisan support by building on
the one thing both parties can agree on: small businesses provide most of the new jobs in the U.S. economy,
and start-ups are needed to catalyze long-term economic recovery. With conventional financing sources
drying up, small businesses are desperate for new ways to get the funding they need. By establishing
mechanisms and regulatory responsibilities to support crowdfunding while protecting potential investors
from fraud, the JOBS Act is intended to allow start-ups to access the power of crowds. Described by
President Obama as a "potential game changer," the act will, the president said, allow "ordinary Americans
to go online and invest in entrepreneurs that they believe in."

The Act seeks to bring some structure to what some now call a "Wild West." Companies will be limited to
raising $1 million annually through crowdfunding, and they must provide some basic information to the SEC;
the level of disclosure required is calibrated to the amount of funding being sought via crowdfunding.
Intermediary organizations seeking to support crowdfunding offers--such as Kickstarter, should the site
choose to move into venture funding--must register with the SEC. And businesses only get to keep the
funds they raise if they hit their targets. If investors don't promise enough to make the target, all
investments must be returned. The regulatory structures will become clearer in coming months, as the SEC
conducts a regulatory review mandated by the law; the agency has already opened a public comment
period.

Although many have hailed the JOBS Act as an essential element in revitalizing the economy and fueling
innovation, others warn of the potential for fraud presented by the loosened restrictions. New York Times

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Dealbook Editor-in-Chief Andrew Ross Sorkin said, in an April 2 post, "the legislation, in the name of
creating jobs, dismantles some of the most basic protections for the most susceptible investors apt to be
drawn into get-rich-quick schemes and too-good-to-be-true investment 'opportunities.'" Sorkin's largest
point of concern is the reduced requirement for public disclosures, which could allow companies to conceal
their true financial status. Sorkin's warnings echo those issued by SEC chair Mary Schapiro, who believes that
the law weakens investor protections. Others hold out the possibility of serial fraudsters who start
companies with crowdfunding, make token efforts to build the enterprise, then shut them down, having
paid themselves the balance of the funding as salary.

Proponents argue that the very nature of crowdfunding makes such schemes unlikely to succeed. The
current crowdfunding efforts seem to bear this out; most platforms have seen little or no fraud, and the few
fraudulent projects have been quickly detected and shut down. As Sherwood Neiss, cofounder of Startup
Exemption, told Crowdsourcing.org in a recent interview, like all other crowd-powered endeavors,
crowdfunding must begin with the entrepreneur's personal social networks. That means that potential
perpetrators of fraud will have to begin with their friends and family--a source that will quickly be exhausted
by serial attempts--and investors will know who they're investing with, or have the means to find out more
about the entrepreneur and the enterprise online. The investor education requirements embedded in the
law will also help to alleviate fraud.

Others are concerned that entrepreneurs miss out by skipping the venture capital round. Venture capitalists
provide more than just money; they also offer mentorship, advice, a network of contacts, and other
resources nearly as critical to a young company's growth. Those are the kinds of "soft" assets that can keep
a small company afloat when the going gets tough, and going the crowd-funding route may mean that
company founders don't have access to them.

One of the primary goals of the JOBS Act was to make it easier for private companies to raise capital by
amending the Securities Act and Exchange Act and requiring the SEC to amend its rules and regulations as
follows:

The SEC is to revise Rule 506 of Regulation D and Rule 144A to eliminate the prohibitions on general
solicitation and general advertising in private offerings conducted pursuant to these rules.
Previously, companies using the Rule 506 Exemption were allowed to raise an unlimited amount of
money if they did not use general solicitation, advertising, or fraudulent materials to market
securities by simply fulfilling the requirement of filing Form D, a brief notice including the names and
addresses of owners and stock promoters. Rule 144A provided a safe harbor from the registration
requirements of the Securities Act of 1933 by allowing large institutional investors to trade
restricted securities among themselves, thus eliminating restrictions imposed to protect the public.
The Securities Act will be amended to provide that trading platforms (software through which
investors can open, close, and manage portfolios offered by brokers in exchange for maintaining a
funded account and specified number of trades per defined period) involved with the sale of
securities in a Rule 506 private placement are not subject to registration as a broker or dealer as
long as certain conditions are met (including the condition that no such person receives
compensation in connection with the purchase or sale of securities and that the platform does not

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have possession of customer funds or securities in connection with the purchase or sale of
securities).

The SEC will increase the amount of securities that can be issued in a 12-month period under
Regulation A which regulates whether offerings of $5 million or less can qualify for simplified
registration from $5 million to $50 million (or promulgate a new Regulation A-like exemption from
registration similar to Regulation A permitting such increased amounts).

The Exchange Act will be amended to raise the registration trigger at which private companies are
required to register a class of securities and become subject to public company reporting obligations
(shareholder thresholds will increase to 2,000 holders of record or 500 persons who are not
accredited investors, excluding shareholders who acquired securities through an employee
compensation plan or in connection with the crowdfunding exemption).

Here is how crowdfunding works under the JOBS Act. Securities laws will be amended to provide a new
crowdfunding exemption from registration, meaning that private companies will be allowed to raise up to
$1 million over a 12-month period from an unlimited number of investors, including unsophisticated
investors, through crowdfunding. The specific requirements for the crowdfunding exemption are as
follows:

The aggregate dollar amount of securities that an issuer (a domestic or foreign government,
corporation or investment trust that develops, registers, and sells securities for operational
financing) can sell in a crowdfunding transaction is up to $1 million over a 12-month period.

Individual investor limits, limiting the amount an issuer can sell to an individual investor in any 12-
month period, will be limited to the maximum of:
o the greater of $2,000 or 5 percent of the annual income or net worth (for investors whose
net worth or annual income is less than $100,000), and
o 10 percent, not to exceed $100,000, of annual income or net worth (for investors whose
annual income or net worth is equal to or greater than $100,000).

Issuers utilizing the crowdfunding exemption to raise capital must sell the securities through an
intermediary (either a registered broker or a person registered with the SEC as a funding portal).

Issuers must make financial and other information available to both the SEC and investors, both in
connection with the offering and on an annual basis, under a disclosure regime (a transparent and
structured reporting system) that enhances the disclosure and likely increases the expense with the
size of the offering.

The JOBS Act will significantly streamline the IPO process, making it more attractive for emerging growth
companies (EGCs) to go public. An EGC is a company with less than $1 billion in annual gross revenue

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during its most recent fiscal year (other than any such company that first sold common equity securities in a
transaction registered with the SEC prior to December 8, 2011). It should be noted that, in addition to not
necessarily being emerging or growing, EGCs are not particularly small companies. According to industry
sources, over 90 percent of the companies that conducted IPOs in 2012 had annual revenues of less than $1
billion.

With this streamlined IPO process, crowdfunding will offer expanded investment opportunities for investors
and help bring new and innovative products to the market that otherwise might not have been possible with
the old regulations. The process of accelerating EGCs for economic developers could move much faster as
connecting local opportunities with local money just got easier.

Everyone wants to improve the communities they live in, particularly if their pocketbooks have the
opportunity to profit financially by doing so. Crowdfunding sites that offer local investment opportunities
will have a strategic advantage over those that offer investment opportunities far away as due diligence can
be performed more easily. In addition, cities and states with accredited research universities in their midst
will have the added benefit of having an established pipeline for startups and EGCs based on research.
Lastly, investors who live near the location of a startup or EGC investment offered through crowdfunding
have opportunity to meet the entrepreneur and literally watch their investment being built from the ground
up.

Under the JOBS Act, EGCs will benefit from the following changes to the IPO process:

EGCs will be able to make pre-filing (oral or written) solicitations of interest, requests made to
prospective investors that involve no monetary obligation or commitment until a final offering by
the issuer, to qualified institutional buyers and accredited investors (within the meaning of Rule
144A and Regulation D, respectively) to determine whether such investors might have an interest in
a contemplated IPO or other securities offering.

EGCs will be permitted to submit a quiet draft registration statement (preliminary prospectus of
pertinent information to shareholders filed by a firm prior to proceeding with an initial public
offering of securities) to the SEC for a confidential nonpublic review, provided that such draft
registration statements are publicly filed no later than 21 days before the date on which the issuer
conducts a road show.

EGCs will need only two (rather than three) years of audited financial statements in their
registration statements to go public.

Brokers or dealers will be permitted to publish/distribute research reports covering an EGC prior to
or following the filing of a registration statement even if the broker or dealer will participate in the
offering.

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The JOBS Act also requires the SEC, within 180 days of the JOBS Acts adoption, to conduct a review
of the disclosure rules contained in Regulation S-K which lays out reporting requirements for various
SEC filings used by public companies, in order to update, modernize, and simplify the requirements
of the IPO registration process for EGCs.

The JOBS Act will also create a simplified entrance or on-ramp to access the public capital markets for
EGCs by phasing in certain public company disclosure requirements over time. Once public, an EGC will have
a limited transition period of one to five years (depending upon the size of the EGC) during which the
regulatory requirements will be relaxed in order to reduce the cost of compliance. During such transition
periods, an EGC will be:

Exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002 passed by the U.S. Congress to
protect investors from the possibility of fraudulent accounting activities by corporations in response
to accounting scandals like Enron, which requires auditor attestation of internal control over
financial reporting on Form 10-K.

Exempt from the detailed narrative disclosure requirements of compensation discussion and
analysis.

Exempt from the executive compensation voting requirements of the Dodd-Frank Wall Street
Reform Act of 2010 which increased government oversight of trading in complex financial
instruments restricting the type of proprietary trading activities that financial institutions are
allowed to practice with the intent of preventing major collapses, including the requirement for say-
onpay, say-on-frequency and say-on-golden parachute shareholder votes and the executive
compensation disclosure provisions requiring the pay-for-performance graph and CEO pay ratio
disclosure.

Exempt from complying with new Generally Accepted Accounting Principles (GAAP)
pronouncements otherwise applicable to public companies until the pronouncements become
applicable to private companies. These new GAAP principles require significant disclosure and
expand the definition of a service being offered to a customer as anything that has value. Their
purpose is to give financial statement users a better picture of how a company is earning its money.

Exempt from any rules that the Public Company Accounting Oversight Board may adopt relating to
mandatory audit firm rotation and any requirement to include an auditor discussion and analysis
narrative in the audit report.

Permitted, with some exceptions, to opt in and comply with the disclosure rules otherwise
required of issuers under the federal securities laws on an a la carte basis.

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New Section 4A(a) requires that intermediaries relying on the Section 4(6) crowdfunding exception register
with the SEC and any applicable SRO as either (a) a broker or (b) a funding portal (defined below). Once
registered, Crowdfunding Intermediaries must comply with numerous disclosure and due diligence
requirements for each crowdfunding transaction effected on their platform, including:

providing investors with educational materials and disclosures regarding the risks of crowdfunding
transactions;
ensuring that crowdfunding investors
o review investor-education materials
o affirm that they understand the risk of losing their investment and can bear the loss and
o answer questions demonstrating an understanding of the risks associated with
crowdfunding transactions, including the volatility of startups, the potential illiquidity of
Section 4(6) exempted securities and any other risks the SEC by rule requires
taking measures to reduce the risk of fraud, including obtaining background checks and securities
enforcement regulatory histories on principals of the issuer
taking steps to ensure that investors do not exceed their annual investment limits for Section 4(6)
excepted crowdfunding transactions
distributing all issuer disclosures to the SEC and investors at least 21 days before the first sale
satisfying any other requirements the SEC establishes by rulemaking.

Section 4A(a) also restricts certain activities of Crowdfunding Intermediaries and their principals. Both
brokers and funding portals are prohibited from compensating promoters, finders, and other agents for
providing personal identifying information on potential investors. Moreover, principals of Crowdfunding
Intermediaries are prohibited from investing in issuers that conduct crowdfunding transactions through
their platforms.

Funding portals are a new type of intermediary created specifically under Title III of the JOBS Act. Funding
portals are defined under new Section 3(a)(80) of the Exchange Act as intermediaries that offer or sell
securities for the accounts of others solely pursuant to Section 46 of the Securities Act. New Section 3(h)
of the Exchange Act requires that the SEC conditionally or unconditionally exempt funding portals from
brokerdealer registration. Nevertheless, funding portals must:

register with the SEC

submit to SEC examination, enforcement and rulemaking
become members of a national SRO registered under Section 15A of the Exchange Act.

The JOBS Act specifically tasks qualifying SROs with creating a separate rulebook to regulate funding portals.
Currently, the Financial Industry Regulatory Authority (FINRA) is the only national Section 15A-registered
SRO. Thus, all registered funding portals will be required to register with FINRA and become subject to its
yet-to-be-created funding portal rulebook. Subject to very narrow exceptions, states are preempted from
regulating funding portals.

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In addition to the restrictions on broker and funding portal activities discussed above, new Section 3(a)(80)
also prohibits funding portals (but not brokers) from:

offering investment advice or recommendations

soliciting investors to purchase securities sold through their platforms
holding, managing, possessing or otherwise handling investor funds or securities
compensating employees, agents or other persons for soliciting investors or for selling securities
displayed on their platforms
engaging in other activities the SEC by rule prohibits

The restrictions on funding portal activities discussed above are included in the definition of Funding
Portal under new section 3(a)(80) of the Exchange Act. Consequently, funding portals that engage in such
prohibited activities may be required to re-register with the SEC as broker-dealers and face potential
sanction for operating as unregistered brokers.

Operating Structure: Title III of the JOBS Act does not specify whether a funding portal must operate as a
website.

Broker-dealer Registration: New Section 3(h) of the Exchange Act requires that the SEC conditionally or
unconditionally exempt funding portals from broker-dealer registration. Under new Section 4A of the
Securities Act, funding portals will still be required to register with the SEC and FINRA and submit to each
regulators enforcement and rulemaking authority. The JOBS Act also prohibits funding portals from
engaging in activities traditionally permitted for brokers, such as offering investment advice, soliciting
customers and holding investor funds.

Advertising: The Jobs Act specifically prohibits funding portals from soliciting investors directly or
compensating finders and others agents for locating potential investors. However, funding portals will need
some flexibility in advertising in order to distinguish themselves from other intermediaries and attract
investors.

Investment Advice: New Section 3(a)(80) of the Exchange Act prohibits funding portals from offering
investment advice or recommending issuers to prospective investors.

Fee Structure: Title III of the JOBS Act is silent on the fees that Crowdfunding Intermediaries may charge for
their services.

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Companies

Kickstarter
http://www.kickstarter.com/

Kickstarter is the worlds largest funding platform for creative projects. Every week, tens of thousands of
people pledge millions of dollars to projects from the worlds of music, film, art, technology, design, games,
fashion, food, publishing, and other creative fields. Since its launch on April 28th, 2009, more than two
million people have pledged more than $300 million to projects by creators who always maintain full
ownership and complete creative control of their work.

Today, despite the outsize impact it's having on multiple industries, Kickstarter remains a lean operation; it
only recently hired its 42nd employee; 3,508 projects are seeking funding on the site--a very small number
on a Web on which 350 million eBay listings are active at any given time. The typical project raises five grand
and is supported by 85 people.

Overambition is a common snag with Kickstarter campaigns, particularly when products need to be
designed, manufactured and distributed. Ethan Mollick, an assistant professor at the University of
Pennsylvania's Wharton School, analyzed 471 projects in the design and technology categories and
concluded that 75% of the ones that promised to send backers physical goods in return for their pledges
didn't meet their own deadlines.

In a worst-case scenario, backers could end up wasting their money on an impossible dream--or at least one
that is impossible to fulfill on anything resembling the original timetable. In July 2011, a company called
ZionEyez raised $343,415 from more than 2,000 individuals, most of whom pledged $150 or more in
exchange for the promise of receiving a pair of eyeglasses with a built-in HD video camera. It planned to ship
the first glasses that winter.

Then its plans slipped. And slipped. And then ZionEyez (which changed its name to Zeyez) stopped posting
Kickstarter updates altogether. In September 2012, the company resurfaced and said it was seeking a
million-dollar investment from traditional sources to proceed. It apologized to its backers for its crummy
communications. It did not offer refunds.

Kickstarter fiascoes are rare: only 3.6% of the creators in Mollick's study were forced to issue refunds or
went incommunicado. But projects carry no guarantees. And when they go awry, Kickstarter won't help. The
site, which receives a 5% commission on funds raised by successful projects, doesn't vet creators for their
ability to accomplish their goals and doesn't mediate when they fail to meet them. A CNN study found that a
84 percent of Kickstarters projects were late to deliver their promised goods or services.

Today, the company claims nearly $1 million in project pledges each day. Kickstarter bypasses traditional
fundraising by collecting funds for projects directly from the public. The site accepts 75% of submissions.

Number of Projects launched:

454: 2009
718: Through August 2012

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 Crowdfunding

Pledges are not collected unless funding goals are met. Of 2012 projects:

44% Met or exceeded funding goals

44% Received pledges but did not meet goal
12% Received no pledges

Most accepted projects fall into three categories:

29% Music
26% Film/video
10% Art

Charity, tuition, "fund my life" projects and open-ended fundraising are not accepted

Here are some of 2012s top Kickstarter projects:

Amanda Palmer: Singer/songwriter Amanda Palmer, formerly one half of the Dresdan Dolls, took four years
to put together a new band and write a new album. This year, she decided to step away from the music
industry entirely and put her album Theater is Evil to Kickstarter, championing that this is the future of
music. She easily surpassed her $100,000 goal, making nearly $1.2 million and topping music charts a few
months later when the album was finally released. Problem was, she tried to launch a tour with equally
crowdsourced (unpaid) musicians, telling the New York Times that she couldnt afford to pay so many
volunteers. She relented by mid-September.

Goal: $100,000
Pledged: $1,192,793
Backers: 24,883

Double Fine Adventure: Launched in February by video game industry legend Tim Schafer, Double Fine
Adventure surpassed its $400,000 goal in less than 24 hours, ultimately netting more than $3 million. The
projects financial success proved an inspiration for other video game projects, which have dominated the
top tier of Kickstarters most-funded projects ever since.

Goal: $400,000
Pledged: $3,336,371
Backers: 87,142

Ouya: The video game console market has long been dominated by the big three hardware developers,
Microsoft, Sony, and Nintendo, whose iterative versions of the Xbox, Playstation, and Wii respectively have
made game production a prohibitively expensive venture for many aspiring developers. The OUYA console
wants to change that by wedding the experience of console gaming with the openness of Googles Android
operating system. Openness leads to creativity, Ouya co-founder Julie Urhman told me this Fall when we
spoke for a story on Android gaming and the struggling console market. Openness for gamers themselves.
It shouldnt cost so much to play games.

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 Crowdfunding

Goal: $950,000
Pledged: $8,596,474
Backers: 64,416

Pebble: Pebble, one of the first in a new breed of so-called smartwatches that can sync up with the
wearers iPhone, blew past its $100,000 goal, earning $1 million in just over a single day and ultimately
becoming the most highly-funded Kickstarter project to date. A device that has become massively popular
for its seeming simplicity, Pebble could be the first wrist-watch to combine the functionality of a
smartphone with the easy access of wearable devices like the new crop of life bands that popped up this
year.

Goal: $100,000
Pledged: $10,266,845
Backers: 68,929

ArduSat: The ArduSat didnt blow past $1 million dollars like the other Kickstarter campaigns mentioned
here, but the tiny satellite (weighing about 1kg) from NanoSatisfi could play a large role in the future
direction of space research. Surpassing its $35,000 goal and ultimately reaching $106,330, the ArduSat
project promised to let its supporters participate in conquering the final frontier of space in a more
accessible way than becoming an astronaut. How exactly this will pan out remains to be seen, but I for one
am more comfortable putting the future of space exploration in the hands of a handful of small drone-like
satellites than I am handing the reins over to Red Bull.

Goal: $35,000
Pledged: $106,330
Backers: 676

IndieGoGo
http://www.indiegogo.com/

Indiegogo is an international crowd funding site founded by Danae Ringelmann, Slava Rubin, and Eric Schell
in 2008. Its headquarters are in San Francisco, California.Indiegogo is the leading global platform for
crowdfunding, empowering anyone, anywhere, to raise money for anything. Millions of dollars each month
are raised on Indiegogo and almost every country in the world has been represented.

IndieGoGo has found that 93 percent of campaigns that reached or surpassed their targets included perks,
such as presales of the product in development. Seventy percent of successful campaigns included between
three and eight perks, most correlating to levels of funding.

IndieGogo makes money by taking a percentage of the money thats contributed: if you create a campaign
and meet your stated goal, then IndieGoGo charges 4%; if you dont meet that goal, IndieGoGo charges a
higher 9% fee, but you get to keep the remainder of the money. (IndieGoGo competitor Kickstarter, which
has gotten a lot of attention in the press recently, takes a different approach the campaign only gets the
money if it reaches its stated goal).

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 Crowdfunding

Spot.Us
http://www.spot.us/

Spot.Us is a non-profit organization designed to bring citizens, journalists, and news publishers together in
an online marketplace based on crowdsourcing and crowdfunding methods and principles. It was founded in
2008 by David Cohn, who received a $340,000 grant from the Knight Foundation to pursue his idea. In
November 2011 it was bought by American Public Media. While providing a new option for funding
journalism, it also has raised questions about activism and new sorts of conflict of interest.

Spot.Us originally focused on projects in the San Francisco Bay area, where it is headquartered. It expanded
to Los Angeles in 2009 and plans to expand its scope to a national or international level. Stories begin as tips
from the public giving an issue they would like to see covered, or pitches from a journalist to create a story,
including the amount of money needed. Visitors to the website can then donate to fund the pitch.

Smaller stories cost a couple hundred dollars to fund, while the largest cost about one thousand dollars.
Completed stories are available under a Creative Commons license. They can be viewed for free on the
website and used free of charge by news organizations. Once the goal amount is met and the article written,
it is posted on Spot.Us, unless a news organization is interested in purchasing exclusive rights to the story. If
that's the case, the outlet must contribute at least 50 percent of the funding.

Ebyline
https://www.ebyline.com/

Bill Momary and Allen Narcisse, former Los Angeles Times staffers, decided that an online marketplace
between publishers and professional freelance reporters that would guarantee quality results was
necessary. The pair launched Ebyline.com in September 2010. It allows freelance journalists to "self-
syndicate," allowing them to pitch and sell finished work on an a la carte basis to news organizations and
negotiate fees with publishers.

The key is that all Ebyline journalists must have a track record to gain access to the portal. Freelancers must
provide examples of paid freelancing work produced within the last 12 months that are based on reporting
rather than commentary; examples of previous/current full-time editorial/ reporting work; education; and
referrals from news organizations/ editors; and they must be U.S. citizens.

Variety is one of Ebyline's clients - it is selling its film reviews to other publications for the first time. Other
partners of Ebyline include Pulitzer-prize-winning nonprofit ProPublica, Minnpost.com, and The Texas
Observer.

Buyers pay an 8 percent transaction fee once the sale is final. The company also handles all payment
processing, including 1099 tax forms, for both buyers and sellers. Ebyline received its initial round of funding
from angel investors based in Los Angeles. In November, it received $1.5 million in funding from The E.W.
Scripps Co.

At launch, some of its journalists included members of The Journalism Shop, which was founded by former
Los Angeles Times staffers and Sports Media Exchange, which matches sports publications and organizations
with sports writers to cover events around the U.S. and worldwide.

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 Crowdfunding

First Break Funding

http://www.firstbreakfunding.com/

An online company being established by primary partners Mark Hagar, David Heltzel and others, is a forum
for entrepreneurs and investors to connect with each other. After the SEC writes the rules, the firm will
apply to be a funding portal, a term created by the JOBS Act. When approved. First Break Funding will
provide a structure for the funding process and give visibility to entrepreneurs as well as investors.
Essentially, the firm will be a registered brokerage through which the crowdfunding offering is conducted.

The JOBS Act stipulates that a new business can qualify for a registration exemption from the SEC only if it
uses a funding portal to offer equities. The funding portal will be used by start-ups and companies that are
transitioning and growing, in other words, businesses that lack the equity they need before they can go to
financial institutions for funding. Before launching the equities funding portal, the partners will need
approval by both the SEC and the Financial Industry Regulatory Authority (FINRA), the largest independent
securities regulator in the United States. It's possible that FINRA will have to create a new license for funding
portals. The partners hope that First Break Funding, serving as an intermediary, will provide a much-needed
forum for counterparts in the area to find each other.

The partners anticipate a detailed application process, one that might deter some companies from pursuing
an equities crowdfunding license. Besides added opportunities for business growth that the legislation
provides, the partners are glad to see substantial legal and educational oversight of crowdfunding.

Associations

National Crowdfunding Association

http://www.nlcfa.org/

The mission of the National Crowdfunding Association is to support, educate, and protect the American
crowdfunding market. The NLCFA represents the interests of both the investor and the entrepreneur in
every crowdfunding transaction, whether it is an investment, equity, reward or donation crowdfund
offering.

The NLCFA was formed in March, 2012, prior to the passage of the JOBS Act of 2012 authorizing investment
crowdfunding in America. The NLCFA provides members with opportunities to shape the industry, learn the
details of the marketplace, stay informed and stay ahead, and the opportunity to network with others
involved in this revolutionary new way of financing.

The NLCFA is an inclusive trade association of crowdfunding professionals, portals, VC firms, angel investors,
attorneys, accountants, software vendors, educators and students and many more who are participants in
making crowdfunding work. The NLCFA operates as a traditional trade association, producing an annual
trade conference, providing educational materials and opportunities for members, representing the
member body to the applicable regulatory authorities, providing business opportunities uniquely to
members, obtaining and offering group insurance to members, etc.

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 Crowdfunding

The NLCFA seeks to work with other groups who are equally dedicated to the success of the crowdfunding
market, as well as exhibit goodwill toward all other crowdfunding groups. The NLCFA is a New York non-
profit corporation, owned by its members, run by its board and staff, and filing with the IRS as a 501(c)(6)
non-profit organization.

Crowdfunding Professional Association

http://crowdfundingprofessional.org/

Following the enactment of the historic JOBS Act, which unleashes the potential for a much larger and
expanded crowdfunding global community, a group of pioneering equity and debt crowdfunding platforms
and industry experts has formed the Crowdfunding Professional Association Executive Organizing
Committee. Designed to create a Crowdfunding Professional Association, the organizing committee is
dedicated to building a lasting network and organization that will champion, provide advocacy and
represent the burgeoning crowdfunding global industry.

The goal of the Crowdfunding Professional Association is to facilitate a vibrant, credible and growing
crowdfunding community while also advocating for an industry view versus personal interests or a single
company perspective. By creating a Crowdfunding Professional Association, the committee will unite a
broad-based coalition of industry participants to ensure the credible development of the industry, including
a commitment to the highest ethical standards. The associations collaborations and insights will be shared
broadly to avoid onerous, stifling bureaucracy that can endanger innovation, idea generation and job
creation.

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Sources

Bradford, C. (2012). Crowdfunding and the Federal Securities Laws. Columbia Business Law Review, 2012(1),
1-150.

Gobble, M. M. (2012). Everyone Is a Venture Capitalist: The New Age of Crowdfunding. Research Technology
Management, 55(4), 4-7.

International Business Times. (2012, December 31). The Best Kickstarter Projects in 2012.

Kitchens, R., & Torrence, P. D. (2012). The Jobs Act Crowdfunding and Beyond. Economic Development
Journal, 11(4), 42-47.

McCracken, H. (2012). The Kickstarter Economy. Time, 180(14), 32.

Moran, G. (2012). Mob Money. Entrepreneur, 40(3), 82-87.

Powers, T. V. (2012). SEC Regulation of Crowdfunding Intermediaries Under Title III of the JOBS Act. Banking
& Financial Services Policy Report, 31(10), 1-7.

Ramsey, Y. A. (2012). What the Heck is Crowdfunding? Business People, 25(11), 54-57.

Sigar, K. (2012). Fret No More: Inapplicability of Crowdfunding Concern in the Internet Age and the JOBS
Acts Safeguards. Administrative Law Review, 64(2), 473-506.

Sohn, T. (2011). Spotting New Revenue Sources. Editor & Publisher, 144(2), 30.

TechCrunch: http://techcrunch.com/2011/09/07/indiegogo-raises-1-5-million-for-its-crowdfunding-
platform/

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