Equity Crowdfunding & THE JOBS Act: A Presentation by Kendall Almerico

Check out the video above to hear from Kendall Almerico, one of the country’s leading crowdfunding and JOBS Act attorneys, and learn more about equity crowdfunding.

Transcript

Kendall:
I’m Kendall Almerico, crowdfunding and JOBS Act attorney. I’m here today to talk to everyone about the JOBS Act and to explain to you things that relate to how the JOBS Act works, so you’ll understand the law itself as it relates to equity crowdfunding, but also more importantly so you’ll understand as to the world of marketing how it fits in. One of the things you have to know is a little bit about the law before you actually can apply the marketing to it. There are several different ways this law works and there are several different ways people will use the law. I’m going to go through all of that. Some of it may be a little bit technical and wonky. I’ll answer questions later, but I’m going to make it as easy as possible because it’s really not that complicated.

Just by way of to prove that I really am kind of a big deal, I’m one of the top crowdfunding and JOBS Act attorneys in the country according to Forbes. Of course, I may well be the only JOBS Act and crowdfunding attorney in the country, at least when they said that. I’ve been recognized as an expert in this stuff for quite some time. I’ve known Roy for quite a while and I’m here to try to educate you the best I can, but the reality is, that’s me. My little [inaudible 00:01:10] every now and then. I’ve got 27 years’ experience helping people start and grow businesses, and that’s not just as a lawyer. I’ve always been involved as an entrepreneur. I’ve always been involved in the marketing end of things. I get involved with people from the top to bottom. When I get involved with their company, it’s not just, “Here’s your legal documents,” and go away. I like to stay involved and be a part of everything because getting them funded is only part of the problem. Once you get that done, then there’s a whole another world that needs to be taken care of.

Let’s start off and everyone in this room knows what rewards crowdfunding is, but I’m going to use this as a very simple example first to start and talk about why crowdfunding and equity crowdfunding came to be because this is something you may actually get asked at certain points in time, people historically are sometimes interested. Crowdfunding has been around forever. People have passed the hat at churches forever, that’s crowdfunding. The base of the Statue of Liberty was crowdfunded. Actually, Joseph Pulitzer was the editor of the New York World newspaper and famously went to his readers and said, “We don’t have money to put the Statue of Liberty on something,” and got 100,000 readers to give a dollar or less. They raised $125,000. They gave away a reward, a little Statue of Liberty to people. They actually did like on Kickstarter, and they built the base.

It’s been around for a long time. It really had its stride in response to 2007-2008 when the country went through a financial crisis. Banks simply stop loaning money to people. Before 2007 and my practice for 20 years, I would, if Jessica came to me and said, “I want to start a business Kendall.” She gave me a business plan and I liked it, and I signed on to be a part of it. I could go to any of the banks in Tampa where I lived, go to the bank president and say, “Jessica needs $100,000 line of credit to start her business.” Now, Jessica doesn’t have a house. She doesn’t have collateral, but she has a great business plan. I like it. I’m going to be a part of it. They would write her a line of credit to be able to start her business. I probably caused the entire financial crisis by doing that. The reality is, it was easy to get money from a bank.

Once 2007-2008 came around, banks stopped lending to everyone. Small businesses had no way to raise money initially if they weren’t B, C funded or something else. They weren’t getting money. Crowdfunding came out of that interestingly. Indiegogo launched in 2008. Kickstarter launched in 2009. They really hit their stride with … I’d like to tell the story of the $10,000 watch. That’s a Breitling Bentley. I happen to be wearing one right now, mine cost $80. I bought it in Times Square for my [inaudible 00:03:51]. This is the $10-million watch which we’ve all heard the story of the Pebble watch. The Pebble watch of course was one of the first really big Kickstarter rewards campaigns that kind of put Kickstarter on the map.

You started reading about crowdfunding. You started reading about these types of rewards crowdfunding campaigns in the news. The Wall Street Journal covered it. All the big press covered it because all of a sudden, a company had gone out and done what you guys do all the time. They raised money for something that doesn’t exist. A product that is going to be made. You were pre-ordering a product. They raised $10 million doing this. When I first heard about this, and I was trying to explain this to people. I just show this picture if I’m trying to explain this to my grandmother if she were still around. “Grandma, you’re going to send $150 to this company for a watch they haven’t made yet. In 6 months, if they figure out how to do it and make it, they’re going to send you the watch.” Her head would have exploded.

This concept was very foreign to people. However, it started to catch on. As a result, the success is in the rewards world. People like me who are lawyers started going, “Why can’t we start selling securities like this? If you can get people to send you $150 to buy something, why can’t they send you $150 for a couple shares of stock in your company?” They can’t. It was blatantly, totally illegal. For 80 years in the United States, the securities laws said you’re not allowed to sell securities to the general public online. You’re not allowed to advertise that you’re selling securities unless you’re a publicly traded company. Those companies you see in the New York Stock Exchange or those kinds of companies, they can do it, but private companies couldn’t.

The whole thing started as a result of this. Now, I’m going to give you an example of a company that I represent right now that’s about to do an equity crowdfunding campaign to kind of illustrate how it can work, and how it’s a little different than doing something on Kickstarter. BrewDog is a client of mine. In about 7 to 10 days, they’re going to launch their first equity crowdfunding campaign in the United States. There’s already equity crowdfunding going on in the UK. Their law went into effect at about the same time as the US laws. However, US laws didn’t get, put into effect by the SEC for over 3-1/2 to 4 years. The law was passed, but you couldn’t use it.

In UK, the law got passed and people are allowed to use it. BrewDog has done 4 equity crowdfunding offerings over the last 4 years and has raised 26 million pounds from 46,000 investors using their law. They went from 2 guys and a dog, in the back of a pickup truck to now the largest craft brewery in all of Europe. They have 44 brew pubs that are from São Paulo to Tokyo, all of which are profitable. They employ over 600 people, and they are the fastest growing food and drink company in the UK, the past 4 years straight. That all started with equity crowdfunding. They didn’t raise a dime from venture capitalists, or equity, or angel investors that all shows how this can work. They’re about to do one here in the United States. It’s going to be what we call Regulation A offering. I’ll talk about that in a minute.

They’re going to use this to build their own brewery here in Columbus, Ohio, which by the way is now 80% done. They’re raising the money to not only finish it, which they’ll finish it without the money. They are building this thing because they want to take their beer which when you … Anybody who doesn’t know about craft beer, a little education. Craft beer is not like buying Miller beer or buying Budweiser. There’s no preservatives in it. It’s not built to last on store shelves. You can’t ship it somewhere, sell it 6 months later. It has about a 90-day shelf life max, because there’s no preservatives. They would take their beer from the UK. They were in Whole Foods in all over the United States. They would ship it to the United States. It would sit in the port. By the time it got through customs, and it got under trucks, and got to the stores, half of the shelf-life was gone.

These guys are master brewers. These are not jokers that just decided to do this. 3 of the top 11 Master Cicerones which is ultimately the same thing as a sommelier, 3 of the 11 work for BrewDog. These guys are very serious about their beer. They didn’t like the way their beer taste in the United States. They said, “It’s the biggest market. We’re going to go into that market. We’re going to build our own brewery,” which is twice the size of their brewery in the UK. They’re going to employ 3- or 400 people the day it opens in the UK. They’re going to fund the entire thing through equity crowdfunding. It’s just a great example of how the stuff kind of work. It’s on a scale that could be much, much larger than anything that can be done on Kickstarter.

What’s the JOBS Act? The JOBS Act interestingly enough, people look at this and say, “Oh, it must have something to do with jobs.” JOBS Act stands, it’s actually an acronym for the Jumpstart Our Business Startups Act. This is the law that legalized equity crowdfunding in the United States. It was signed into law on April 5th, 2012 after passing through congress, both sides of congress, bilateral support, very few people objected to it. The brilliance of this law is that it really was like 7 different laws crammed into 1 that don’t make a lot of sense to each other. I’ll talk about some of those in a minute. They put it all under this heading called the JOBS Act.

There was a congressional staffer who named it because they’re having trouble getting support for this in congress, because they were all these different weird laws that didn’t make sense together. Congressional staffer said, “If we call it the JOBS Act and come up with something that has the word jobs in it, everyone’s going to vote for it.” That’s how it ended up be called the JOBS Act, even though as you’ll see the parts we’re going to talk about today, 3 different laws all of which involved equity crowdfunding, all of which have totally different rules that make no sense together. That’s where it gets complicated for all you guys.

There’s 3 different parts of it we’re going to talk about today. There’s Title II, Title III, and Title IV. I’ll talk about this specifically one at a time here so you have an understanding of what they actually are. Title II was the first part of the JOBS Act to go into effect. Title II is also known as a Private Placement, Regulation D, section 506(c). These are all the magical terms people use, but I call it accredited investor crowdfunding. What you’re allowed to do with a Title II offering is you can raise money, but only from accredited investors. Accredited investors are people that qualify. They have to either make $200,000 a year in income, have a net worth of over a million dollars, or with their spouse of over $300,000 a year in income.

You’re talking about a limited number of people. They have to prove that they have the money. They have to prove that they meet this criteria, or they’re not allowed to invest in these deals. It’s been legal since September of 2013. There’s actually been about $70 billion go through this method of raising money since it happened which is a lot of money, but a fraction of the money that actually goes through the private placement world at this time. The big thing that this law did, it opened the doors for the other things that you guys will do a lot more of, although I’m sure you’re involved in some of these before. I know Roy and I worked on a couple. The big part about this law was, it was the first securities law ever to allow general solicitation for private companies. The means, you’re allowed to advertise.

General solicitation simply means, you can market and advertise. It was 80 years of that’s totally illegal. If you sent an email to somebody saying, “I’m selling stock.” Your company had violated securities laws. If you took an ad out, a press release saying you’re selling stock as a private company, those were all violations that could get you in a lot of trouble with the SEC. This was the first part of the JOBS Act that said, “Hey, we live in 2012. People advertise online. People have social media. Let’s let them use it.” This opened the door for the things that we’ll talk about later, but this was the first law that ever allowed general solicitation.

What’s interesting about this law is you can raise as much money as you want. There’s no limit. If you want to go out and try and raise a billion dollars, you can raise a billion dollars through a private placement. There’s no cap on it. Accredited investors can invest as much money as they want. If they want to put in 10 million, 20 million, $30 million, they can invest anything they want because the theory is, they’re rich. They’re smart enough to know if it’s a bad deal. That’s the theory behind it. You realize as we grow into these other ones that the congress and the SEC seem to think that anyone who’s not rich isn’t smart enough to figure out what to do. They’re just going to throw all their money away on some horrible investment. They put all kinds of caps and things like that.

Title III, or as we call it the True Equity Crowdfunding Law, or Regulation CF, it’s been in effect for now almost 60 days. The law was passed in 2012, 4 years, 5 months, and 6 days later, but who’s counting? The SEC finally made it legal to actually use this law literally 2 months ago. I waited that long for this law to go into effect. It’s exactly like going on Kickstarter. It looks just like a Kickstarter campaign. The only difference is instead of you saying, pushing the button and donating, you push the button that says I’m investing. When you go into the checkout process, you’re not allowed to use credit cards. It’s not legal to use credit cards to buy securities. You have to either wire the money, write a check, type in your bank account information and ACH the money. They’re just starting to let people use debit cards which just happened in the last week literally. Ultimately, it’s almost the exact same thing as going on Kickstarter and doing something.

Anyone can invest. Under these Title III rules, anyone can invest, not just accredited investors. You’re limited to raising a million dollars as a company under this law. There’s a cap. You can only raise a million dollars, and the most important thing is, it’s very much like a Kickstarter campaign and that it is an all or nothing campaign. When you do a Title III campaign, if you set a goal and don’t hit your goal, you don’t get any of the money. I want to show you or talk to you about some of the examples of the early stages of people doing this wrong which you guys already know I’m dealing with Kickstarter before, very, very important part of the process is setting a goal that’s reachable. The difference is, you screw up in Kickstarter, the worst thing that happens is some people get mad at you. Maybe some attorney general somewhere might come after you for false advertising, but that rarely ever happens.

Here, when you set a goal, you better be able to do what that goal money, what you say you’re going to do if you’re a company. If you’d go in and say, “I need to build a brewery and I need $500,000 to build the brewery.” You’ve got to set a minimum of $500,000. You can’t say, “I have to build a brewery. I’m going to raise $25,000 right now, and then hopefully I’ll somehow get the other money and build a brewery.” If you do that, you are going to get sued by a whole lot of people, and you are going to get an enforcement action by the SEC which can include criminal charges. You wouldn’t be making those decisions.

When companies talk to you about this, it’s a little bit more dangerous on the all or nothing. I encourage clients to set their number as low as possible. Then create what we call a Use of Proceeds where you tell people we’re going to use this money for X, Y, and Z, but make it something you can do with that money. Don’t say, “I have to build a brewery.” If you need $500,000 to build a brewery you say, “We’re going to raise $50,000 or $25,000 and that’s going to be used for X. If we get to $100,000, we’re going to use that for Y. If we get to $500,000, we’re going to build the brewery.” As long as you do it that way, you’re okay.

Title IV, this is my favorite part of the JOBS Act. This is Regulation A or regulation A+, they actually mean the same thing, the mini-IPO. This went into effect last year in June. Again, it looks exactly like a Kickstarter campaign or Indiegogo campaign online. Anyone can invest in the general public. There’s a limit of $50 million you can raise with this law, not 1 million. It’s not all or nothing. If you want to raise $20 million but you only raised $10 million, you get to keep it if you’re a company. You’re probably sitting there looking at these 2 going, “Well, why in the hell would anybody use Title III? It makes no sense this law is clearly better. Everything about it is better.” The problem is, it cost a small fortune to do this.

Title III cost not a lot to do. There’s a lot of regulation that goes with this that you don’t have with Title III. We’ll talk about some of those things later because if the JOBS Act were just, here are 3 different ways to do and all the rules are the same, nobody would use anything but this. There would be no reason to. However, this is the hardest one from a legal standpoint, an accounting standpoint, a cost standpoint to do. Good news for you guys, all the marketing is the same for any of these things. We’ll talk a little bit about Title II which is a little different.

The ones where you’re going to the general public, what you’ve been doing for Kickstarter campaigns or Indiegogo campaigns is the same. It’s not going to change. You’re still trying to do the same types of things, build a crowd, get people excited, get pressed for the thing, drive people to a certain page to invest all the things you already do, building social media. None of that’s going to change except you have to follow new rules which you have to deal with, which we’re going to talk about. You will want to take notes when we get to that part because I even have to look at these things and I’m going off. A little scary.

This is just an example of what a page would look like. It doesn’t look much different. This is what BrewDog’s page will look like when it launches in 7 days. The only difference is I wanted you to see the Invest Now button. Pretty much every site has a button that says invest now instead of donate. They all pretty much look the same when you get them online. With Title III, this is something that’s kind of interesting, so I wanted to point it out. This is a live offering on a site called Wefunder right now, which is sort of taken the lead in the Title III world. Title III again, up to a million dollars that you can raise from anybody in the public. One of the things that Title III requires is that you have to have a communication section on the site where people can communicate with the company. People can post questions. You can have a chat room. You can have a question and answer. However you do it, it’s required by law.

As marketing people who are involved in this, this is going to become a very important part of what you do, because the only place a company is allowed to communicate back and forth with investors about an offering is on the actual website. This is the place where everything has to be public. You’re going to have a whole list of people making comments. Guess what? If you go on as the company’s marketing firm and you post some things, “Oh, this is great. I love this. This is wonderful.” You just committed a giant securities law violation. Any communications that are done on here by the company have to be identified as coming from the company. You have to say, “I’m the president of the company, I’m posting this,” or “I’m the neighbor of the president of the company.” Any relation you have to disclose. This is very important because as marketing people, as we all know, people like to post some negative things.

This was the very first comment on which I thought was great. That’s why I picked this very first comment for this Legion M offering that’s going on right now on Wefunder. It’s “I don’t understand what happens after investment. Everything is very vague. I’d like to know 100% of what my investment is getting me.” Imagine, this is going to be very common. I would imagine one of the things you guys would want to do is come up with a pretty standard Q and A with your clients and make sure that you have things that addressed the common questions that people would have. This is an opportunity to sell also. You take that question. You turn it into a positive. “Now that you asked, here’s what you get.” It’s a great opportunity to address problems publicly, and like many people used Twitter as their customer service now. It’s all public, so use it. Use it as a positive.

Who can invest? Each of these laws is different. I’m going to go through a few slides here. I go through each of the laws and talk to you, so you can kind of see how they all work together. Who can invest in a Title II private placement? Again, Title II is just to the accredited investors. People in the general public, not allowed to invest. What does that mean? If you go to a site that’s running a Title II private placement, you have to check a button, a little box before you’re allowed to even see most of the offering. You can see a little bit of it. If you actually want to invest and see the documents, you have to check a box that says, “I’m telling you, I’m an accredited investor,” to be able to even see it.

Then once you decide to invest, and you’re checking out in the process and saying I’m putting this money in, you actually have to be verified. There’s an independent process that takes place behind the scenes to make sure you’re an accredited investor. I won’t go in all the details, but that all happens behind the scenes on these websites. If you’re not an accredited investor, you’re not allowed to invest at all. With Title III and Title IV, with a million dollar and the $50 million, anyone can invest. There are some limits on what you can invest that we’ll get into. This is my most complicated slide. I actually put an arrow and just to be as complicated as possible. Let’s talk about the easy one first. Title II, accredited investors can invest as much as they want, as little as they want. There’s no limits whatsoever on what they can invest.

With Title III, the one that goes up to a million dollars, it’s a complicated formula. I actually have to read it every time to figure it out. Now on the sites, this will all get taken care of automatically. How much do you make? What’s your net worth? How much do you want to invest? You’re allowed to invest $100. It will tell them. The reality is, there’s 2 different categories. If you have an annual income or net worth of less than $100,000 you can invest 5% of the lesser of the 2, or $2,000. It’s just like I need an abacus, I’m going to the diagram to keep this … If you actually have a net worth, an income both over $100,000, you’re allowed to invest up to 10% of whichever is less. Again, don’t try to memorize this. I just keep a little chart on my desk because I can’t remember it.

Regulation A, mini-IPO, the one you can raise up to $50 million. There’s no limit on accredited investors. By the way in Title III, that applies to accredited investors also. Even though you’re smart, and sophisticated, and a billionaire, you can only invest a certain amount of money on a regulation they’re offering. You’re limited to what you can invest. In Title IV, when you’re doing the mini-IPO, accredited investor is going to invest as much as they want, but everyone else is limited to pretty simple formula, 10% of your income or net worth is the max you’re allowed to invest. Again, that’s all done on the site.

How much can you raise? In a Title II offering, private placement from accredited investors, there’s no limit. Whatever you can raise, you’re allowed to raise. Title III, it’s a million dollars. Title IV it’s $50 million. I put a little star, a little asterisk there because there’s actually 2 parts of Title IV. There’s a part where you can go on a local level and just stay in one or 2 states, and the law is a little different. That one, you’re capped at $20 million, but most people don’t use that. If you ever get into a situation where somebody’s using that, it’s a different world altogether. It’s actually very useful for certain things, but most people are shying away from it and just going to the $50 million cap.

Is it all or nothing? Again, the only one that’s all or nothing here is Title III, the million dollar one. Now, the reason I put the asterisk next to the other 2 is something I said before. You can pretty much make a private placement or make a mini-IPO into all or nothing because if you really have a minimum in your offering, “Look, I got to raise $500,000 or I can’t keep the money,” you sort of de facto create your own minimum. The reality is most people that have good lawyers don’t do that. They figure out a way around it, so that they can keep the money that they raise from the very beginning.

SEC, what do you have to do with the SEC? What do you have to file? This probably isn’t all that important to what you do but it’s good to know because you will get questions from people that ask you about, “Oh, do I have to file something at the SEC and all of that?” Just really lawyer questions do, but there’s a specific form for each one of these that gets filed. With the private placement, there’s something called Form D which you don’t file in advance. You file once you’ve gotten your first check in from somebody, the first investment. You file a simple 2-page form that anybody, a third grader could fill out that says, “We got our first money in.” You never file another thing. The SEC just wants some record that you’re raising money, but it’s totally private. There’s no disclosures, not even records. Nothing is in the public record for you.

Title III on the other hand, you file a form C. In Title IV it was called a Form 1A, both of which are extensive forms that give a lot of details about your company, all of your financial records. A lot of that stuff is all public record. Both of those have to be filed with the SEC and qualified by the SEC, meaning the SEC has to kind of check off, “Yeah, you filed this and all the paperwork. It’s here.” They don’t actually approve what you’re doing. They don’t say, “Yeah, this is okay. We like it.” They just say, in fact it’s a felony to say that the SEC approved any of these offerings. The SEC says, “Yeah, you filed all the paperwork. You did it right. Check box off. Now you’re allowed to go and raise money.”

Ongoing SEC filings, so after you’ve raised money, you don’t have to file anything if it’s a private placement, just that one form and nothing else. With the other 2 with Title III, a company has to file an annual report every year. With Title IV, they have to file a lot of stuff. It’s almost like being a public company. It’s cheaper. It’s not as much, but they’re still quite a bit of compliance ongoing. If there’s change in management, you have to file something. If you change the auditors of your company, you have to file something. Twice a year, you have to file audited financial records. It can be a very expensive process to do.

Speaking of expensive, least expensive, not too expensive, and very expensive. The reason I say that is across the board here with the exception maybe of Title II, the marketing expenses really don’t change. The marketing is the marketing. It’s always going to be a huge piece of all of these. I’m talking here about legal, accounting compliance, all of the things you have to do to just start the process. Typical private placement, you can probably get going for about $25,000 may be less. Typical Title III depending on what you’re doing if you have to get some financials done, it’s probably less than that, but it’s probably about the same amount, it looks at it. Title IV typically, if people don’t have a budget in the 6-figure range, they can’t afford to do it. Between the legal fees, the compliance cost, they have to get 2-years of audited financial records which in of itself could cost 30- or $40,000. It’s a very expensive process to go through, but you can also raise $50 million.

What’s the role of marketing? In the private placement world, I’m saying it’s not as important. It’s important but I’ll talk about that in a second. It’s incredibly important in the other 2. When I met with clients, the first thing I talk to them about is not the legal part, the compliance part, the SEC. The first thing I talked to them about is marketing, because if they don’t understand that this is all about marketing, they’re not going to succeed. I make that very clear from the very beginning. When somebody comes in to me and they say, “I want to go raise money.” They don’t come in and say, “I want to do a private placement. I want to do equity crowdfunding.” They just say, “I want to raise money.” I vet their process and see what it is they have. The things I look for are, do you already have a crowd? Same things you guys look for. Do you already have a big following on social media? Do you already have a bunch of customers?

You’re a startup, you don’t have anything. If you don’t have anything, you’re going to have hire someone, command partners to come in and build the crowd for you, because if you don’t where’s this money going to come from? People in the traditional investment world will look back and like … We all hear about the IPOs, Facebook IPO. They raised $14 billion whatever it is. I don’t even know what the numbers are. IPOs are driven by investment banks. The investment banks out there, the Goldman Sachs of the world and those people, they come in. They guarantee a certain amount is going to be sold. They create the market. They go to their hundred thousand brokers around the country and say sell this for us. Nobody’s doing that for anybody here.

You as a company, and you as marketers are the ones who are creating the people who are going to invest. A lot of people will come in thinking, “I just created a stock. All of the sudden people are going to show up and start. It’s just like Kickstarter. If you build it, they will come.” People think I’m going to put this on Kickstarter, all of the sudden people are going to come out start … No, it’s the exact same thing. The reason I say it’s not as important in Title II, it’s a little different in importance because in Title II, where it’s a private placement and you’re just looking for accredited investors, it’s a lot harder as a marketing company to say, “I’m going to go out and find very, very rich people and just market to them.”

You put out a press release. If you get an interview with a newspaper or a broadcast source, you’re going to hit those people. It’s really hard to target the people and it’s a little different story because those people, and when I say those people, I’m talking about accredited investors. I for example get 20 or 30 private placements sent to me a week. Just there are thousands of these things out there. People are trying to raise money from accredited investors. I didn’t even open them; delete, delete, delete. Now if someone I know, if Roy sends me one of those, “Kendall, this one’s kind interesting. I’m thinking about investing in it.” I’ll open that one. If it’s not a personal recommendation or someone who I know, I just delete them all. If I saw an ad for one, man, it would have to be compelling for me to even look at it. “Wow! That’s an interesting company.”

We get bombarded with opportunities to invest in these companies. The more marketing you do, the marketing really should be for those more of a branding marketing where you get people excited about it. Where you’re helping them build their company also. Doing stuff that would peak the interest of people, make it look unique to an accredited investor as opposed to the other ones where you got to do all that. You can spray it out there like buckshot and get as much as you can. Then target people with Facebook and all the other things. Title II is a little different in the marketing world than everything else.

Here’s where you need to take some notes. We’re going to talk about the minefield of marketing in equity crowdfunding. You guys obviously have a copy of this to be able to look at, but anytime you have any questions, feel free to call me about this. Specifically what I want to do is let’s talk about the easy ones first. Title II when you’re just going to accredited investors, you’re allowed legally to generally solicit. You can do anything. You can run ads. You can go over to the stadium and have a plane drag something behind it. You can do smoke signals. You can do whatever you want. There’s no limits on it as long as it’s not false or misleading. Keeping in mind when you’re doing this advertising, you guys are advertising for the sale of securities.

Unlike, “Hey, we’ve got this really cool product, it’s the best product in the world. It really works phenomenally great, because when you buy this, it’s going to change your life.” You start saying that about a security, “Hey, we’re selling stock. It’s the greatest stock in the world. You’re going to triple your money. You’re going to quadruple. You’re going to become a billionaire.” You have to be very careful to not overpromise and be misleading because the one thing that can happen in any kind of securities, the SEC will come out and say, “This is just false and misleading.” What they mean is you exaggerated. Stick to being truthful. Stick to being not misleading in any way. If it looks like it might be misleading, don’t do it. Things you could probably pull off with a product on Kickstarter, you got to think twice. If anybody [inaudible 00:31:32] “That look a lot …” It’s the best product in the world? You got to be really careful about these things.

Regulation A+, the mini-IPO where you can raise up to $50 million, again you can generally solicit. You can advertise. You can do whatever you want. Same rules as what we just talked about, but there’s one thing that’s a little different about this one. There’s a provision called testing the waters. Before you launch the campaign to raise the money, so this is only before. Once the campaign is launched, same rules as everything else, you can do whatever you want as long as you’re not false and misleading. Before you launch the campaign, anything you do to advertise or to do lead generation which is a typical part of the process, it’s called testing the waters.

There’s part of this law that basically says, before you’re going to spend all the money hiring lawyers and everything, you can go out create a splash page, go on a website, and see if there’s interest in what you’re doing. If people all of a sudden come to you and say, “We want to invest,” and you got millions of people come in and say, “They want to invest.” “Okay, I’ll just spend the money to do this.” It’s a great provision although as a practical matter, it really doesn’t work because who’s going to find this on some website to determine if they want … You have to spend the same money to market, to get people to the testing the water’s page. If you can do that, you might as well done it this time with the page when you’re live, where you can actually keep the money.

Here on the testing the water stage, people are just going … They hire you guys and they spend thousands of dollars. You drive a bunch of people to a page that, “Yeah, I’ll give you $100 in 6 months when the SEC approves,” because of the process. My personal feeling is they shouldn’t do a lot of that. However keeping in mind, if you’re doing any pre-marketing lead page generation, anything like that, there’s a simple legend of little paragraph disclaimer that you put at the bottom of every page, every email, everything that’s approved by the SEC. The exact wording is on there. As long as it’s on there, you can do this. There’s the testing the waters legend that you have to put on every page. As long as you do that, you’re totally clear.

Now, we’re going to talk about the scary one. Title III is really scary when it comes to marketing. Up until about a week ago when I got some new information from talking to some people at the SEC, and talking to some colleagues of mine, there were a lot of attorneys out there who are saying you cannot do any marketing whatsoever. Not just about what’s coming, but even for your company in general because the SEC may come in if you do it before you do a crowdfunding offering and say, “You were doing this to promote your crowdfunding offering and it’s not legal.” There were people that said that. I wasn’t one of them, but there were very smart people saying, “You can’t do anything to market your company when you’re getting ready to launch a campaign.” I’m going to go through this with you. This is the important part, because these Title III things are brand new. No one’s really doing them yet. When you start getting them, you got to follow these rules.

Keep in mind, we’re only 60 days into this. There’s no precedent. Some of the stuff I’m going to tell you right now, there’s nothing in writing. These are things I’ve been told by the SEC. These are things that I’m interpreting as to how I would feel comfortable having a company do it. A lot of this could change. I do want to walk you through with it because it’s very important. That yellow language that says that’s the law, itself. The JOBS Act itself actually says an issuer, an issuer is just the company raising money. “An issuer may not advertise the terms of the offering except for notices which direct investors to the funding portal or broker.” When you read that you’re thinking, “What am I allowed to do?” Nothing. All I can do is say, “Go look at the place where it’s all online and read it there.” You can do whatever you want on that page by the way. Once you’re on the funding portal, that’s fine. You can have the videos and everything there.

How do you get people there? The first time I read that I went, you can’t. You literally can’t do anything other than to say, “Go look on here.” I’m not even sure if you could say we’re raising money. It’s really kind of a scary thing to look at. What it’s kind of evolved into is 2 different things. You have to analyze this when somebody comes in as to what can you do before you launch a campaign and after. That’s the step number 1. Number 2 is, are you going to be discussing the terms of the offering in what you should do in the market? I’m going to go through this very detailed, so you’ll understand it. Pre-launch, before you launch, what can you not do? Number 1, you can’t do anything that the SEC would consider to be an offer. You can’t send something out that says, “Hey, we’re going to raise money. We want you to invest in this. It’s coming soon. Go look at this page. We’re going to give you information about it.”

Anytime you sort of tell people you’re going to be selling something, that the SEC considers to be an offer. You have to be very careful about the wording you use, pre-launch. Any communication that’s made before you file the paperwork, now that’s basically the same thing there. Now keep in mind, this only applies to Title III. This doesn’t apply to the other ones, only applies to that $1 million new law. No meetings with potential investors. You cannot sit down with somebody and say, “Hey, this is going to be coming. We’d like you to invest on day 1. Boy, can you guys? We really want to hit 25 or 30% of our goal on day 1. Can you come in and make sure you …” You cannot do any of that. You can’t talk to them. You can’t communicate with them. No sneak peeks or first looks. “Hey, here’s the page that we’re going to launch in a couple of weeks. We just want you to see what it looks like.” You can’t do that.

No public announcements about it. You can’t set out a press release and say, “Next week, we’re launching this.” You can’t even call the journalist up and say, “Next week, we’re launching this.” You’re not allowed to do any of that. Last one, no discussions at a conference or demo day about the intentions to do a crowdfunding offerings. In other words, if you’re out there at a demo day, or someone’s demoing the product or something, you can’t say, “Oh, by the way next week we’re launching a funding campaign.” You can do the demo day. You just can’t talk about the facts. Pretty much the general rule is, before the thing launches, you really can’t do much. Keeping in mind, a lot of what you do in the rewards world that you built the way that you do your business practices on, you cannot do here right now. Now, these will also probably change. The one thing you have to keep your mind is you will be able to do all the things you did. You’re just going to have to do it after the launch happens.

Pre-launch, what can you do? First thing you do is, you can have all the communications you want as long as they don’t mention the offering. You can do your normal advertising, your normal marketing of the business, your normal building of social media. You just can’t do it saying we’re about to launch a crowdfunding campaign. There’s nothing to prevent you from doing that. Up until a week ago, there were literally lawyers that said you couldn’t even do that which was absurd. Prior to filing the forms in, this is the magic wand that you have to kind of think about when you’re helping craft messages. There’s this term called conditioning the market. When you guys go out on a Kickstarter campaign and you build a crowd, that’s conditioning the market. You’re actually building the market. You’re getting people ready to invest.

Anything that could be seen as you creating a crowd or getting people ready to invest in any kind of communication, publicity, whatever, that’s a problem. You cannot do that. Regular marketing and advertising is okay. The SEC has made it pretty clear to me that you can have conversations amongst yourselves. People can come in and talk to you about we’re going to do this offering and create things. They can talk to their lawyers. They can even, kind of look and build things if they want to do. They just can’t. It’s okay if you later on, even invest in the product or the company. What you can’t do is, you can’t do that type of thing purely for the purpose of having someone invest.

All right, what are the terms of the offering? This is the magic thing that these 4 things, you definitely need to know because the difference of what you can market and cannot market, this is after the launch. After their campaigns are out there, if any of these 4 things are in what you create as marketing materials, you have a totally different set of rules. If none of these are in what you’re creating, you can pretty much do whatever you want after you launch. It’s the amount of securities offered. In other words, we’re selling 500,000 shares. The nature of the security of common stock in our company, the price of the securities for $30 a share, and the closing date of the offering. This is available until July 30th, 2017.

Those 4 things are considered the terms of the offering by law. If you don’t put those in what you’re doing, you can do pretty much whatever you want after you launch. These are very, very important. This is not an area where I would like the amount offered. We’re really not talking about the amount offered if we talk about the number of ship … Don’t play games with this. If it looks like a duck and smells like duck, this is a duck. Stay away from it. Don’t do something stupid here. If you’re not going to mention those 4 things in terms of the offering as a marketing company, you can [inaudible 00:40:40] whatever that means. You can market whatever way you want to as long as it’s truthful. All the different things that you guys do, you can do. There’s no problem with that.

One of the other things to keep in mind is whatever you do on the funding portal itself, the site where this is live, that can have whatever you want, videos, pictures, all of those things. You can do all of those things on social media. All of those things on advertising as long as you’re not mentioning the terms of the offering after it’s launched. If you want to mention the terms of the offering, we get into what we call the tombstone ad. For anybody who’s ever seen typical securities, related banks, there are something called the tombstone ad. That’s a classic example of line words that’s as boring as hell, white on black. Chrysler Corporation a division of American Motors raised a million dollars from such and such bank, very, very basic simple information.

What the SEC has said and what the law says is, if you want to mention the terms of the offering, you have to do a tombstone ad. That’s what you have to put on Facebook. That’s what you have to put on the scoreboard at the stadium, a tombstone ad. No one’s going to do this. Just the reality is, why do it? Do your normal marketing, send them to the website where they can have all the information about the terms of the offering. They can invest. Just do your marketing. Hey, we’re selling stock. You don’t have to say how much. You don’t have to say when it ends. You don’t have to say what kind. We’re selling stock. Go to fundingportal.com and check out the details. All of that is okay. Beautiful video, fun graphics, whatever you want to do, all of that’s okay. If you want to do the terms of the offering, you have to do a tombstone ad. Just don’t use the terms of the offering. It’s really simple process.

I put in some of those little thing from the actual law that says what you can put into a tombstone ad. I’m not going to go through all the boring details. Basically, it’s things like factual information. You’re also allowed to put like name of your company. One of the things that’s in the law, it says a brief description of your business. You’re allowed to put into the tombstone ads so you could kind of say something like, ‘We’re a digital marketing firm.” You wouldn’t be able to say, “We’re the best digital marketing firm and our success rate is X. We have raised a zillion dollars for people.” Brief means brief. Again my advice would be, don’t mess with this. Stay away from the terms of the offering and you’re okay.

A few tips and tricks of things that these are right now my opinion. This is based on conversations I’ve had. This is based on my research. This is based on what I tell clients today, July 11th, 2016. Tomorrow, I may have a conversation with an examiner of the SEC and change these things. This is a very fluid situation. My disclaimer, don’t rely on my legal advice on this. This is what I’m doing right now. I think it gives you a good basis of ways to look at this, all right? After the launch, after you’re live, it looks like you can talk off the funding portal about the offering as long as you don’t mention the terms of the offering. What I told you before, I think you can use every tool in your trick. Everything you have, I think you can do that and I tell people they can.

In all communications, there’s only one place you can link. This is very important. You always want to have whatever you link you have, go to offering page and no place else. You do not want to link people to your website, and then have a little splash page on your website. Your own little glorified offering page, or anything like that. You don’t want to link that. One of the things that I’m very curious about, and this is the third one here. You guys are in the business of obviously generating publicity. Let’s say you got a wonderful story written about somebody in the USA Today, great story about the offering. The journalist does a bang up job, awesome. You’re so excited about it. You got this great placement for a client. The journalist put some of the terms of the offering into the story. They’re selling 800,000 shares of common stock. If the journalist says that in the story, you cannot link to that story, period. You basically can’t use the story in the market.

Now, that’s the problem. Controlling the messages especially in your press release is to stay away from this terms of the offering. It may be even kind of educating some of the journalists when you’re talking to them about, “Look, it would be really helpful if you didn’t mention these 4 things because if you do, it kind of hurts the business.” Most people journalists, you know how they are. They either will say yes or they don’t listen to you, but part of the process is trying to make sure journalist don’t use the terms of the offering because if they do, you can’t do it. Then I did put down there, obviously don’t put the terms of the offering on a press release. If I’ve beaten one thing into your heads already it’s, “Don’t talk about the terms of the offering.”

Last three of this is if you’re running a tombstone ad, as I said before, stick to the very strict language you have to do, don’t vary from it at all. If you’re going to do something, and let me talk about this middle thing in a second because I think it’s kind of important. A lot of people have, and I think this is going to become sort of a way people do this. You want people to come to your website. When I say your, the company raising money. You want people to come to your website naturally to find out about this offering, all right? You can’t really talk about the terms of the offering on your website. Things we might do with a Regulation A offering or a private placement where we might have, “Hey, learn about investing in our company now. Click here.” You got to be really careful.

I think, my personal opinion, what I’ve been advising clients to do on this is create a splash page at the front of your website. Almost like when you get to an alcohol site, it’s like, “What’s your age? Click here.” Then you can go in. Create a simple splash page at the beginning that says, “Are you interested in learning about our offering? We are raising money through Title III offering. Are you interested in learning about this?” This is after your live, “Click here.” If they click there, they’re taken to the offering page wherever that goes. If it says no, then they come into your website. I’m very concerned about creating pages within the website because if you create a page within the website but does that as opposed to before you get into the site, I think everything on that website is subject to the SEC reviewing.

If somebody comes out on a message board or sends it in a review or something, and talks about the terms of the offering by accident, and it’s on the website after you let people get into the website, you potentially have a problem. Clients, and this is part of the lawyer’s job really more so than what you guys do, but monitoring to make sure that kind of stuff doesn’t happen is very important. Then the last tip is whatever information companies give out, it should be consistent. Don’t play favorites. “Hey, you’re a customer of ours. You’re a good customer. We’re going to tell you a little bit more here.” That’s just securities law 101. You have to be very even-handed about the information you hand out. You don’t play favorites in the world of securities, because if you do, the SEC comes out and then they throw you in jail. That’s no fun for everybody.

These are the questions that Joe sent me that I guess were gathered from the staffs. I’m going to kind of go through these. I’ve got 6 or 7 of these and we’ll be done. I’ll take any questions you have. Number 1 is what are the risks of investing? The risk of investing in these types of deals are almost always very high. Particularly with Title III, you’re going to be talking a lot of startup companies. There’s a good 80%, 60 to 80% failure rate within 5 years of startup companies in general. People that are investing in these types of deals, they are inherently dangerous investments. They’re inherently high risk investments. That’s why the SEC makes every investor check a little box off that says, “I understand that I could lose every dime that I’m investing in this, on every single investment they do.”

As a company, you at least have the assurance that somebody before they gave you 20 bucks, or 50 bucks, or 100 bucks, check the little box and says, “Okay, I realized that I could lose this money.” These are going to always be risky investments. Now, with risk comes reward. Obviously, if you were able to give Facebook $100 in 2004, that $100 might be worth a million dollars today. Those types of risk-reward benefits or what comes with this, but all crowdfunding even on Kickstarter is risky. You give money to people, they may not make the product. It’s just like anything else. High risk, high reward.

How does a company become eligible? In each of these situations, there’s different eligibility. In Title II, the private placement world, pretty much any company. Even foreign companies can raise money. In Title III, the up to a million dollars, you have to be a US company. In Title IV, the mini-IPO, US or Canadian company. You’ll notice in each one of these things I said company, which is very important. People can go on Kickstarter and raise money without being a company. The first thing people need to know is you have to form a company. You’re selling stock in a company. You can’t go, “Anybody want to buy 30% of Kendall Almerico?” You can’t do that, but you can buy 30% of Kendall Almerico LLC, the company that I happen to run or whatever I make up. Other than that, there’s no financial eligibility. There’s no, you have to have been in business for a certain number of years. You have to have so much in assets. None of those things apply. It really is these laws were created to let almost any company use them if they can actually afford to use them.

What kind of company does it work for? This one should be easy for you guys? If it works for rewards-based crowdfunding, it’s going to work for Title III or the mini-IPO. If it’s a product that comes in, and it’s a consumer product, they’ve already got a fan base or they got a really cool thing, they’ve got a good management team, if they got a great video, all the same things you guys look for, it’s the same thing. The one difference is when you’re talking about Title II. When you’re just going to accredited investors, keep in mind what I said before. The guys that are getting pitched these deals are getting pitched hundreds of these things. Something needs to make it stand out. Personally when I invest in companies of things I look at, number 1, I look at the management team. That’s to me, I invest in what they say invest in the jockey not the horse. A lot of times I do that.

If I see people that I can go look and go wow, they’ve created the world’s most tasty ice cream but these people were all car mechanics, I’m not investing in them. On the other hand, if they were from Carnival, and Baskin-Robbins, Ben & Jerry’s, and these guys know a little bit something ice cream. Looking at the management team is very important. Now, how important is that in Title III and Title IV where you’re going to the general public? My personal feeling is, it can be important. If you have a huge name person, if Richard Branson said, “I’m starting a new company and I’m going to the crowd to raise money.” People recognize Richard Branson because he’s been on the news or whatever, that would help.

If you’re a guy who started a tech company that became a billion dollar company but nobody knows your name, I don’t know that the average Joe on the street cares. They are more interested in, “Well, this is a cool company.” With BrewDog for example, “I like craft beer. I like their beer. I get to be part of this culture in this community. That’s I want to do.” It’s the same kind of thing as … Keeping in mind it depends on what you’re raising money for. When you’re going to the general project the same marketing concept that you guys always use, will play us to what kind of company it works for. One other thing to keep in mind and it may not really applies much to you guys is, Title III of the new law, I have been preaching this for people.

I wrote an article on Entrepreneur that if you guys want to look it up, I said there’s 4 different kinds of companies that I really think are great for Title III that most people won’t think of. The Pebble watch kind of company, that’s an obvious one. One of the ones that I think is very important is, like a local business. What was the name of the place we went to lunch at? Savor, awesome burger, great food. Now if Savor said, “You know what? We want to open up a second location here in Charlotte,” but it’s I don’t know, the other side of town. There’s a big population base there. They went to their customer base and said, “We need to raise a half million dollars under Title III and we’re going to open this up. By the way, you’re going to own 10% of our company. You get a coupon for every time you come in to the company. Every time you come in for a dollar off your burger for the next year.”

That’s a very small micro-marketing offering that I think people can raise a lot of money to open up a second location of a successful business in the city. Those kinds of things, they’re no brainers. If you already have the customer base, already have the people that are excited about you, “Wait, I get to actually own a little piece of this?” Then again, most of these companies that fit in that fold probably don’t have any trouble raising money privately anyway. If they wanted to do it, to do it to be smart, to use it not just as let me raise the money, but also let me raise the money and build another 1,500, 2,000 brand ambassadors. We’re going to be bringing all their family members to the other location of Savor to come and eat because that’s where their money is. You got to come to this restaurant. That’s the kind of thing that actually can make it work.

What’s the best way to identify investors? No different than the way that you target people on your rewards campaigns. Again, the same analysis you use as to who would possibly by this product? Who would possibly donate to this product? That doesn’t change. You’re still going to be micro-targeting the people that you think are the target audience of the product, or the business to find the investor especially when you’re talking about going to the general public. It’s a lot more complicated when you’re talking about accredited investors because there, you really just have to get to accredited investors, put the message in front of them, and hope they like it. General public, it’s no different than marketing like you put on Kickstarter.

How long should it take to get funded? In the private placement world, in the Title II world, the average time it takes to get funded is between 6 and 9 months. It’s a long process, sometimes a year. The reason for that is you’re going to people who aren’t going to go on a website, click a button, and wire $100,000 to people. Nobody does that. They want to meet the founders. They want to have a phone call with the founders. They want to do research. They want their broker to look at it. They want their lawyer to look at it. They want to negotiate things that are in the paperwork. It’s a process. Very few people just click the button online, and wire a bunch of money.

Now ultimately when they’re happy, they’ll click the button and wire the money. That process takes time. Everyone thought that this online process would speed that up. I said, “No, it won’t because you got the same people that were 2 years ago, insisting on meeting with people and doing all those things.” They’re not going to change this because they saw a cool video. They’re still going to want to do what they’ve always done for 20 or 30 years. Now, as this generation fades away, 10 years from now, 15 years from now, absolutely it’s going to be a totally different world. People are going to go, “I like this. I did all my research, maybe make a phone call, click the button and do it.” For the next 5 to 10 years, no chance. It’s a longer process.

With Title III because the numbers are smaller, I think it’s going to be just like Kickstarter. The only difference is you don’t have that 3-month, 6-month lead up to your Kickstarter campaign where you built the crowd. Build that into the beginning of the offering, and then 30 to 90 days, you should be able to get funded. You’re really probably talking about 4 months to 6 months to get funded because you have to have that period of time. Now, somebody comes to you and they already got the built-in crowd to go to, you should be able to do in 30 days. You should be able to do it in 30 days. Title IV, the other one, the 50 million one, most of those are going to stay open for a year. $50 million is a lot of money to get from people, 90, 50, $100 at a time. You got to get a lot of people involved. You got to have an ongoing campaign.

I was telling Roy for BrewDog for example, when they launch in a couple of weeks they’ll have their big typical, “Hey, we’re launching this thing. Hey, let’s get some publicity.” Every 30 days for the next year, they will have another event, another media outreach. Something else to go to the media because as with all know in this room, I’m preaching to the choir. Crowdfunding campaign goes off, you get a bunch of hits and then it goes like this. You got to find something to make it go back up. Normally, the only thing people have to make it go back up is either a big media event, or campaigns about to close, and they start going to people, “It’s last chance, last chance, last chance.” When you’re doing this, it’s no different, but $50 million is a lot different than raising $500,000. You got to go a lot more people involved, and lot more people closed. I think the average you’re going to see most people do is at least 6 months and probably 6 months to a year to close most of those big ones.

Do I need an attorney to launch an offering? I love this question. The answer is of course, you need a lawyer, obviously do. Now, the reality is you don’t. I just had to do that. The reality is let’s talk about each one of them. Title II, the private placement, you don’t legally and none of these do, legally have to hire a lawyer. Lawyers charge a ridiculous amounts of money to do things that they shouldn’t charge people ridiculous amounts of money to do. The way I bill people is because they end up using our platform, bankroll to do the raise. I don’t charge them very much for the legal fees. I basically charge them just enough upfront to cover my expenses. Whereas other law firms there was an article that just came out. The average attorney’s fees on a Regulation A+ offering is between 100, and $150,000 right now in the first year. I’ve never charged anybody ever near that. I also know, it’s going to be on my platform. There’s money to be made down the line. I’m willing to take that risk.

Let’s talk about the 3 real quick and then I’ll take questions. Title II where it’s a private placement, there is a document that should be created, it’s not legally required, but there’s a document that should be created called the PPM or a Private Placement Memorandum. It’s basically a big thick document that lawyers draft the company gives to someone that’s all the reasons you shouldn’t invest in the company. It’s literally the cover your ass memorandum. It is a big thick thing of lawyer stuff that says, “Here’s all the risk factors. Here’s all the bad things that can happen. Here’s all the reasons why you don’t want to invest in the company.” Then it talks about how great the company is. The reason you give that to investors in the private placement world is because if the investor loses his money and sues you, you can say, “Remember this thing that you signed? It’s said right in here. One of the things that’s in there is our company may not make any money and make a bankrupt.”

Literally, it says things like that. We may not follow our business plan. We may not do well. We may not hit our market. You put all these things in there. Now the reality is, accredited investors, very sophisticated, they get these things all the time. Nobody reads the risk factors. They don’t even read any of that. They go to 2 or 3 things. Maybe they’re looking at the projections. Maybe they’re looking at the management team. They just skip over that 30 pages of risk factors because they know it’s just in there to cover the company’s butt. A lawyer needs to draft that. The reason you want the lawyer to draft this, if it’s done wrong, you want somebody to go after. You can copy one off the internet and change the names, and hope that it’s right. I can assure you, lawyers are going to do a lot of research to make sure they do it the right way.

Title III, do you need a lawyer? This is a really interesting one. That Form C that you file to start a Title III campaign is created so that you don’t have to have a lawyer. It’s really pretty easy to fill out. If anybody ever looks at it, it’s a little long, 10 pages or so. A company could go in what’s your name? How much are you raising? What kind of stock do you have? A company’s CFO and a CEO could probably fill that out all by themselves without a lawyer. The problem is, there’s a section there called risk factors and disclosures. The exact same reason you have a lawyer did a PPM or Private Placement Memorandum, that thick thing, you want that same thing written in that form because again, anything goes wrong and they sue you, you want to be able to say, “Well, we told you we have these risks.”

Now, can a company come up with 10 or 12 risk factors themselves by copying other ones that are on another offerings? Yeah. I’ll give you a classic example. I was involved with a company once that did business in Brazil. I had 2 or 3 pages of risk factors just about doing business in Brazil that you wouldn’t find it anywhere else. The currency fluctuates. The government changes. They take all the people’s … There’s all kinds of crazy stuff that happens in Brazil. You got to tell that to investors, right? If you don’t tell that to investors and one of those things happens, you get in trouble. That’s the one section that I would encourage people to at least have a lawyer look at and make some suggestions. It shouldn’t cost a lot of money for a lawyer to be involved in the Title III offering.

Title IV offering, the mini-IPO, that is almost like you’re registering as a public company. There’s a lot that goes into that. The BrewDog filing was 267 pages long. It’s a lot of work. It’s a ton of work. There’s all kinds of things in there, not just all the same disclaimers and all those other things. Nobody should try and do a Title IV offering without a lawyer. That would be literally suicide. It’s a terrible idea. I’ll take some questions now, anybody?

Speaker 2:
What’s the secondary market for, like you bought shares and then turn around and try to sell them later? Are there going to be secondary markets?

Kendall:
Great question. That’s the big question about all crowdfunding. Is there a secondary market and what is it? Secondary market is, let me kind of explain it in terms, because I remember the first time I got asked this question, I was like, “Oh that’s great.” I read the JOBS Act. I was like, “There’s nothing in here about a secondary market.” A secondary market is basically if you go buy Disney stock right now from Merrill Lynch or E*TRADE online, and you want to sell your shares, you can sell them. Just go back to E*TRADE and they’ll sell your shares for you to somebody else who wants to buy them because it’s all traded on an exchange. You can see what the price is. “Oh, today it’s $50. Tomorrow it’s …” That’s the way stocks work. Those are publicly traded companies.

None of these companies are public companies. There is no stock exchange. You don’t go online and go, “I just bought these shares and a Title III offering. Now, I can go figure out what they’re selling for?” That doesn’t exist. Now, let me go through the 3 different kinds and tell you what the answer is. With the private placement with the Title II or  just accredited investors, there is no resale of those shares right now, none. You have to wait. It’s a wait and hold. You’re investing in a company. You’re hoping the company that goes public, does an IPO, does something to give you an exit of that, but rich people are assumed that they can hold on to this for a long time. It’s a long term investment. There is no trading of that. Now after a year, there are places where you can find private buyers and selling trade. It can be done but you got to go back to the company, get permission to do it. It’s a very complicated process.

Title III has no liquidity of their shares at all. When you sell shares, on the new law, the million dollar law, you can’t sell them anywhere for at least a year. For one year, you have to hold their shares. After a year, there’s nothing in the law that says what happens to the shares. Nobody knows what’s going to happen to their shares. One of the big questions in front of the SEC is, what happens after a year. Nobody knows. Most people assumed they’re treated like the private shares from a Title II thing where you have to hold on to them. If you could find a buyer that’s an accredited investor, you could sell them, but no one really knows yet.

In Regulation A, the shares are liquid immediate when you sell them. You got and raised money. You get your shares. You can go sell them to somebody if you can find a buyer, but there’s no market place for them yet. Those are being developed. They will be developed. Now, what you can do with Regulation A is, “I just bought these shares. I want to sell them.” You could go on eBay if you wanted to. You could find buyers for them. You could go back to the company and say you want to buy them back or you know someone that wants to buy them. It’s possible to sell them. The magical thing about Regulation A is, you can then go and list them on an exchange.

You can take those shares as soon as the offering is closed, not you but the company could go on and say, BrewDog could close our offerings. Say we got our $50 million. We now have 500,000 investors. Now, we’re going to go list on NASDAQ. All of the sudden your shares are just like Disney or IBM or whatever. They’re traded through online or whatever. One company has done it already. They raised $17 million, took their stock, went to what’s called the OTC markets. They went on, listed their stock. Their stock went from $14 to $70 in about 2 weeks. Their market cap went up to over a billion dollars. Then their stock went down to 13. This is not a good thing.

For most companies that you’ll be dealing with, it’s not the kind of thing. I advise people not to do it, because what happens is when you become a public company, you stop worrying about growing your company and building your company. You start worrying about managing your stock price. Every quarter, you got to be out there saying, “Oh I did this.” Just so your stock price doesn’t go crazy. If you’re in a young company, you’re trying to grow your company. That’s a whole another world. Grow your company. Grow sales. Grow revenues. Grow profits. Then hire the people that know how to do that and go public. To answer your question, no secondary market yet. There are a lot of people developing secondary markets and a year from now you’ll see them. Any other ones?

Speaker 3:
If you run like a Title III campaign and you maxed out of the million. Say, can you run another one after that?

Kendall:
One year. You can do it one time per year. You could then go into a Regulation A offering, or you could do a private placement, but you can only do one Title III campaign per year, per calendar year.

Speaker 3:
What about the other?

Kendall:
The other ones, pretty much … The private placements you can do as many as those as you want. As soon as you close one down, you can start another one. You could do 10 of them in a year if you wanted to. There’s no restriction on those, the Title II. Regulation A is the same thing, one per year.

Speaker 3:
The use of that is a calendar year so you could have one [inaudible 01:06:52]

Kendall:
Yeah. One year from the year you started. It’s not like-

Speaker 3:
Okay, so there using the 12-month period?

Kendall:
12-month period. Yeah, I’m sorry. If you started in June, you could do another one the next July.

Speaker 3:
Okay.

Kendall:
It’s not, “Oh you did one in 2012. Now, you can’t do one in … ” No, it’s not like that. I’m sorry, that’s probably the better way to say it.

Speaker 4:
What typically does well for us on Kickstarter are companies that have a physical good or physical product?

Kendall:
Yes.

Speaker 4:
What other opportunities do you think there are for any type of equity crowdfunding that doesn’t have a physical good?

Kendall:
First of all, one of the things that’s going to happen is you’re going to get people to come in and say … I get asked this question all the time. When I tried to explain to people, because it’s so new. Nobody really knows for sure what’s going to happen. The opportunity to raise more money with the exact same work that you guys do, is much greater with equity crowdfunding. It cost more to do, but it’s much greater because you’re not just looking at people that want to buy the product. You’re looking at people that, the same people that want to buy the product, or going to buy the product, just add on a few shares to it. Now, you got people that are going, “I want to invest also.” The same people that would go in and say, “I want that product.” If they’re getting the product and some shares in a Regulation A offering, they’re going to do the shares.

Then you’re going to get people that are more interested. “I like this company. I want to invest in this company.” They’re not going to just say, “Let me give you $150 for a watch.” They’re going to say, “Let me give you $1,500 because I want 10 shares of the company plus the watch.” The amount of money you can raise should be remarkably bigger for the same amount. Now, your question was, outside of this people. Right now, it’s going to be very hard for any company that doesn’t have a customer base to raise money using these things. If you don’t have a customer base or some big … I think films could do this all day. Do they have a built-in customer base? No. I think if celebrity comes out and goes, “I’m going to make a movie,” like Zach Braff did, or Veronica Mars, or something like that and says, “I’m going to use Regulation A and I want to raise $20 million to finance this film.” I think they could do it in a heartbeat.

Okay, they don’t have a physical product. It’s the same kind of thing as Kickstarter. Outside of that, unless you have a customer base, or a fan base, or a user base, it’s going to be very difficult. If I wanted to open up a consulting business, no one’s going to invest on it. I don’t have anything sexy to sell anybody. Now, if I’ve been consulting and I’ve had 100,000 satisfied customers for years, and I go, “I’m going to open a new consulting business.” I could go to those people. I could raise money. It really just comes out of the same kind of metrics of is there a crowd? If there’s not a crowd, I’m not saying it won’t work for other businesses. That’s where you guys come in. There are may be something that’s really an awesome business idea.

I say this a lot of times when I was speaking. I go, “If someone could come up with the coolest brand new algorithm that Google want to buy and pay a billion dollars for it because it’s incredible what it does to search engines.” It would be the hardest thing in the world to crowdfund because how the hell would you explain that to people? On the other hand, creative marketing campaign that goes, “Google wants to buy this from a [inaudible 01:09:54] dollars, or this is the kind of thing that gets bought for a billion dollars.” You get out to the right people and the right press, you could do that. You could make that marketed. It would just take incredibly creative marketing on your behalf to be able to build a crowd around, or excitement around something that’s not a sexy product. I don’t think it’s going to work in most cases.

I get phone calls all the time. People tell me, “I want to raise money. I want to do this. I want a crowdfunding.” It’s not going to work. I’m not saying, it can’t be built. You want to spend a million dollars on marketing to try and build a crowd? If you got a million dollars to spend on marketing, let’s give it a shot. If you don’t, probably not going to happen. I think anything ultimately, you can build a crowd for it. If it’s the right thing. It’s just not going to be easy.

Speaker 5:
[inaudible 01:10:38] answer this question but can some of those like the mini-IPO to private placement, and private placement and then to Title III, or Title III then go to a mini-IPO?

Kendall:
They can do it. It doesn’t matter. They can do a rewards campaign at the same time. You can do all these, at any order you want to do, but you just can’t do them at the same time. You can go one to the other. You don’t have to go through a progression or anything like that. The rewards thing tying in. If you wanted to do a rewards campaign and then do another one, or do a rewards, the problem there is mixing the marketing message. Where are you going to direct people? Are you going to send them on a Kickstarter, or are you going to send them over here? It really makes sense from a marketing standpoint to just do one thing. You could do, we combine. I’m always telling people, “Let’s combine rewards with the equity because you’re getting the best of both worlds. Why not throw in BrewDog?” Why not throw in, “Hey, you’re getting a free beer on your birthday.” It’s just more things people are going to want to invest more.

Speaker 6:
You’re mentioning cap in terms of the investment allotment for accredited and nonaccredited. Is that based on the individual offering that can invest up to the next amount percent or is that over the course of the offering?

Kendall:
I think it’s Title III, I got to look at it. I’m almost sure Title III. It’s an amount that you can invest per individual offering, but I think I have to get back to it. I got to look it up. I think in Title IV, it’s over the course of the year in all offerings. One of those has a cap that’s for all offerings. I’ll have to look it up and tell you because I’m not sure. I mean right now, no one’s ever had that happen. It’s one of those things we’re like. It’s actually, it is Title III. Now that I think about it because I remember this issue I came up with the SEC when I wrote my comment letter to them. It’s with Title III. There’s a cap on the amount you can invest in all Title III offerings over the course of a year. That cap actually applies to that. If it’s 10% of your income, that’s over the course of the year for all offerings.

However, there’s no database out there. If you went on one website and put money in, and another website and put money in it. They don’t have to share data. There’s no centralized database. There’s no way to enforce it. That was one of the questions I had with the SEC when they were writing the rules was, how do you enforce this if you’re a funding portal? How do you know if somebody has gone on another site? Where do I look this up? There is no database. Basically what people do to cover to cover their ass, with your funding portal, check a box that says you have not invested more than X on another funding portal, click. That’s what we’re doing. That’s a good question. Anything else?

Speaker 7:
If you’re an investor, how is it treated from tax standpoint?

Kendall:
The same way any other investment will be treated. If you went in and bought shares through Merrill Lynch of anything, if you sell it and make money, capital gains stocks. If you’re investing in something through Title III, or Title II, or Title IV, it’s just an investment. The same tax benefit of any stock that you would buy anywhere else. There’s really no magical benefit. You don’t get to write it off on your taxes. I’m not a tax attorney. I’m not giving tax advice, but you don’t get to say, “I invested in this, and therefore I get some kind of tax credit.” If you lose the money, it depends on whether or not you’re allowed to write off that loss as a business loss or a tax loss. You’d have to talk to your accountants to know that. There’s no magical formula like, “Hey, we want to encourage people to invest in this. If you invest on a Title III campaign. You get a tax …” There’s nothing like that.

For the company, that’s kind of the same question. People have asked me this a lot of times. I raised money on Kickstarter, is that taxable income? Oh yeah. If you’re taking money from someone, there are tax ramifications. Does that mean it’s the same as somebody buying something? I mean there’s a lot of nuances there. People that are raising money, generally or spending the money as part of their business, there’s offset there. They don’t really have taxable income. There’s then more than one story of companies got hit with tax bills because they didn’t think about paying taxes on monies they raised through Kickstarter, very similar process here for a company.

Speaker 7:
[inaudible 01:14:38]

Kendall:
There are. This is very real. What happens is when you get through the process to the end, there’s usually what we call a transfer agent that’s involved. There’s a company that manages the stock for the company that raised the money. They will send out, if you’re issuing stock certificates, they’ll send out stock certificates. At the end of the year there is a K-1 that’s issued just like, or 1099. Any dividend on stocks you get, broker at the end of the year sends you things as how much money you made? How much money you lost on the stock? 1099-Q or R, whatever it is, you’ll definitely get one of those for those too.

Speaker 8:
What is the future of equity crowdfunding look like?

Kendall:
It’s interesting. I think it’s very bright. I think it’s going to be a very slow adaptation. We’ve already seen that. The fact that Regulation A has been out for a year. There has been 103 filings, 44 were qualified with the SEC. I think only 14 actually went live. Probably of those, 4 or 5 raised a lot of money. By a lot of money I mean more than $500,000. For a year it’s taken a long time to do things, but there hasn’t been a big mass commercial product. Elio Motors was probably the closest to that, but it’s a specialized 3-wheeled car thing that unless you’re in the automotive world or something, probably didn’t even read about it or know about it. They raised $17 million, but it’s still pretty specialized product.

It’s going to take 1 of 2 things. Either going to take somebody who just blows the doors off of the marketing world which something like BrewDog could do that kind of brings it into the vernacular of everybody because it’s beer. Everybody knows about beer. What we’re going to see, I can assure you within the next 12 months, some well-known company that already has a well-known product out there is going to look at Regulation A and say, “I can go raise 20 or $25 million from my customer base that I’ve had for 5 years. My millions of customers, let them own a piece of my company and do something really cool to launch a new product. When that happens, it will have to be a private company that does it. It can’t be Mattel or someone like that.

When someone does that, then everyone’s going to know about it. They’re going to realize it. That’s going to happen. I know for a fact there are a couple of very large companies that are talking about doing just that. It’s got to be the right company with the right product and the right thing. Once you see something mainstream like that happen, Title III is the same thing. Think about Kickstarter. They launch in 2008 or ’09. The Pebble watch was really the first big deal. That was 2011. They’re around for 3 years before there was a huge, huge success. Even then, it took them a couple of years to really get to the point where they were iconic.

Title III started 60 days ago. It’s been not a good track record for 60 days, but that doesn’t surprise me. These companies are out there trying to raise money without having any ability to pre-market. The next round that comes out that understands the rules, you’ll start to see some traction. I think it’s going to be a boon for you guys because I think in the next 2 or 3 years, it’s going to become huge. I’ve been saying this for a long time. Now that all the rules are out, I really think what’s going to happen is people are going to go for the right kind of product. First thing they’re going to do is the rewards campaign. They’re going to come to you and they’re going to do a Kickstarter campaign. Then I can say, “Well, that worked. Now we have all these backers. I wonder if those people would like to invest in a company?” Then they’re going to do a Title III campaign if they only need a million dollars. If they need more, they’ll do a Title IV campaign.

I think that’s going to start happening all the time. Then you’ll get people to the point where they then are ready for a real IPO, or they’ll be ready to go in the venture capital route, or they’re already making enough where they don’t need more funding. [inaudible 01:18:34] that has been a normal process [inaudible 01:18:36]. Rewards crowdfunding is not going anywhere. It’s just going to get bigger. Equity crowdfunding is going to step in for the next round for almost everybody, because banks are never going to start lending money. The B, Cs have moved away out of the space now. They’re not talking to companies that are at that level. It’s going to work, but they got to fix some of these laws. These marketing thing is absurd.

Just to give you a little example. Last week, this is kind of funny. Law was passed in 2012. The law said by January 1st, 2013, the SEC has to release these rules to let people use the law. I’m talking about Title III. January 1, 2013, I’m kind of online waiting, wondering what’s going on, nothing. Another year goes by, nothing. Another year goes by, nothing. Finally, 4 years, 5 months, and 6 days later, the law comes out. Two-and-a-half years into this, the guy who introduced the law, Representative McHenry from North Carolina submitted a new law called JOBS Act 2.0. He said, “We know there’s a lot of problems with this law. It’s not even in effect yet. Let’s fix the law before it goes into effect.” It got shoot away. People are like, “What are you crazy? We haven’t even seen what happens.”

Last week, as the law went into effect in May. Last week, McHenry got a bill through the house subcommittee unilaterally. The house voted on it last week. They passed the house bilaterally with no problem. It’s in front of the senate right now to fix some of the problems that are in the law. There’s going to be changes. The marketing is not part of it, but they’re talking about raising the cap up to $5 million which would be great. They’re talking about letting people test the waters with Title III campaigns which would be much better for Title III than it is for … One of the other things from a legal standpoint, they’re building in the ability to put in what we call a special purpose vehicle where you can take all of the investors and put them into one LLC that invests in the company. You don’t have 100,000 people listed on a cap table.

It means nothing to most people but venture capitalist hate going to a company to invest in if there are 100,000 investors. They don’t want to do it. If all those 100,000 investors just show up on a cap table as investor LLC whatever, and they’re all in one little place, that’s one of the legal things that the lawyers were pretty pissed off about that, weren’t allowed to do. That’s in the new law. They’re fixing this as it goes along. Anything else?

Speaker 9:
Have you noticed any sorts of industries that do really well like real estate, or list of products or services, or is it all over the board?

Kendall:
Real estate has done great. Real estate has been the benchmark for crowdfunding. I mean it’s done phenomenally well. It’s developed in its own industry all on its own. There is no question that Title III and Title IV are great for real estate. There was a Title IV campaign in Portland, Oregon that really cool company called Gorilla Construction. I think it’s their name is Gorilla something. These guys built these funky looking buildings that are just awesome looking really. They built 3 or 4 of these in Portland. They’re small office buildings but they’re really kind of funky and cool. They did a Title IV campaign. They said, “We need to raise $750,000.” They just marketed it in Oregon, just in Portland. Their whole campaign was own a piece of the office building in your neighborhood. That’s all they did. They raised $750,000 in 30 days from average everyday people for this coolest [inaudible 01:22:00] building, it’s just looks really cool.

These kinds of things will continue to happen and there’s a whole lot of different ways to do it. Products by all means, a company with a product. The same things that work on Kickstarter. Those are going to be home runs. Everything else is out of area. If you don’t have a crowd … I think no one’s tried a film yet. I’ve got a client that’s Grammy award-winning client who’s talking about doing this to finance her next tour and next album. No one’s done that yet. We’re going to try. All of the stuff that’s happened on Kickstarter, now people are trying to go over here and this. You’ve got also the opportunity to do things that don’t work on Kickstarter. It’s just how good can you guys handle the marketing. That’s what it comes down to.