Living in the Wild Wild West of Fintech

Living in the Wild, Wild West:
Recent Developments in Fintech
and Crowdfunding
Cliff Ennico
Law Offices of Clifford R. Ennico
2490 Black Rock Turnpike # 354
Fairfield, Connecticut 06825-2400
Tel.: (203) 254 1727
Fax: (203) 254 8195
E-Mail: crennico@gmail.com

Disclaimers
• Views expressed in this program are Cliff’s own, and do not reflect
the views of NYSBA, or indeed anyone else.
• Legal and tax information presented in this program SHOULD NOT
be relied upon as legal or tax advice, which can only be given by a
lawyer, accountant or other professional licensed to practice in your
state.
• Tax-Related Disclaimer: To comply with the requirements of
Treasury Department Circular 230, which provides regulations
governing certain conduct of U.S. tax professionals giving written
advice with respect to U.S. tax matters, please be aware that any
U.S. federal tax advice contained in this communication (including
any attachments) is not intended to be used and cannot be used, by
you or any other person for the purpose of (i) avoiding penalties that
may be imposed under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any tax-related matter
addressed herein.
© 2016-2021 Clifford R. Ennico.
All Rights Reserved.

What is Crowdfunding?
• Raising money from “the masses”
• Base of the Statue of Liberty (1885)
• For a “project” of some type, such as:
– An invention;
– A book or other creative project;
– A surgical procedure not covered by insurance
• Launch a “campaign” on a crowdfunding portal such
as kickstarter.com, Indiegogo.com
• Then promote it aggressively on social media

Types of Crowdfunding
• In “project crowdfunding,” investor gets
something in return (eventually)
• In “gift crowdfunding,” investor gets a
warm, fuzzy feeling (and maybe a tax
deduction)
• Beginning May 16, 2016, there is “equity
crowdfunding” – raising money for your
business, and offering stock or debt in
return!

The JOBS Act of 2012
• In April 2012, President Obama signed the “Jumpstart Our Business
Startups” Act [Pub.L. 112-106, codified in scattered sections of 17
U.S.C.]
• Note the acronym . . . 
• Several major changes:
– Allowed offerings to “accredited investors only” using “general
solicitation/advertising” (Title II)
– Allowed offerings to the masses via crowdfunding portals (Title
III)
– Expanded Regulation A (Title IV)
– Pre-empted regulation at the state level (in most cases)

“Title II” Crowdfunding
Title II of the JOBS Act:
• Added Rule 506(c) to Regulation D
• Can offer securities to an unlimited number of accredited
investors, in an unlimited amount, AND use “general
solicitation/advertising” methods to reach them!
• The catch: every single investor must be “accredited”:
make one mistake and you’re toast (SEC Rule 506(c))
• Can’t rely on an “investor questionnaire” – must do
diligence to verify investor’s “accredited” status (e.g.
review tax returns, brokerage statements)

“Title III” Crowdfunding
Title III of the JOBS Act:
• Added Section 4(a)(6) to 1933 Securities Act and Regulation CF*
• Taking the “friends and family” offering to a new level
– ideal for B2C companies with compelling products/services/stories
• Issuers can raise up to $5,000,000 over a rolling 12-month period via specialized gatekeepers
called “crowdfunding portals”
– All communications with advertisers, and all advertising, must be conducted through the
portal
• Little or no regulation at the state level
• No limit on investment for “accredited investors”
• People other than “accredited investors” can participate, as long as they don’t invest more than:
– $2,200 or 5% of their net worth or annual income (whichever is greater) in crowdfunded
offerings each year if their net worth and annual income are both less than $107,000;
– 10% of their net worth or annual income (whichever is greater) in crowdfunded offerings if
either their net worth and annual income is $107,000 or more;
– $107,000 total in crowdfunded offerings.

• Who is crowdfunding?
– Leading the pack: beer and liquor!
– Next: entertainment, games, medical devices
– Next: inventors with tangible products
• Who is best suited for Title III crowdfunding?
• Probably not tech startups (although this is changing)
• Certainly: issuers with large followings on social media they can pitch to
• Probably:
– “concept companies” at very early stage of development looking to
validate market and technology
– “small businesses” in retail/service sector with large followings on social
media
– “wowie/zowie companies” with marketing allure, sex appeal and pizzazz

• As of December 31, 2020*:
– Number of issuers/offerings
• 713 in 2019, 1148 in 2020
– Amount raised
• $194MM in 2016-2018, $104.7MM in 2019, $214.9MM in 2020
• 892 offerings in 2020 achieved minimum raise, 256 were not funded or
removed
– Average amount raised: $225,000 in 2020
– Issuers from 46 states (50% from CA, NY)
– 48 companies launched in 2020 raised the maximum $1.07MM
– 358,000 unique individual investors (up 75% from 2019)
– Avg. cost of offering $5,000 to $7,500
– Avg. portal fee 5% of offering
– StartEngine Secondary: market for crowdfunded shares**

• 64 portals registered with FINRA
• The Top Title III Crowdfunding Portals [by capital raised]:
1. WeFunder – $70.9M
2. StartEngine – $68.6M
3. Republic – $37.7M
4. Netcapital – $8.2M
5. MicroVentures – $5.7M
6. SeedInvest – $5.1M
7. Mainvest – $4.0M
8. Nextseed (acquired by Republic in 2020) – $3.7M
9. Equifund CFP – $3.0M
10.Trucrowd – $2.1M

“Title IV” Crowdfunding
• SEC Regulation A-Plus*
• Very popular for large-scale real estate offerings
• Creates two tiers of offerings:
– Tier 1, consisting of securities offerings of up to $20
million in a 12-month period; and
– Tier 2, consisting of securities offerings of up to $75
million in a 12-month period.
• For offerings of up to $20 million, a company can elect
whether to proceed under Tier 1 or Tier 2.
• Tier 2 offerings are exempt from state “blue sky”
regulation, but Tier 1 offerings are not.

Cryptocurrency in 2021
• Bitcoin, Ethereum, Dogecoin
• “Not a new currency, more like the new gold, or maybe a
collectible.” – Cliff Ennico
– Does not generate income; merely a storehouse of
value (and speculation)
– Cannot be used to buy stuff (except maybe a Tesla )
– Increasing concern about environmental/energy
impact of “mining”
• PRC banned the use of cryptocurrency for purchasing
goods and services

Cryptocurrency in 2021
• BUT:
– Digital (government-backed) currency is on the rise!
– China is digitizing the Yuan
– The EU is looking into digitizing the Euro

Coin Offerings (ICOs)
• Similar to project crowdfunding except involves
cryptocurrencies (Bitcoin, Ethereum)
• Investors pay in Bitcoin and receive cryptocoins called
“tokens”
– May represent a share in a firm, a prepayment
voucher for future services or in some cases no
discernible value at all
– Investor hopes for increase in value of tokens, not
necessarily an increase in value of the startup
• Transactions are reported on distributed ledger or
“blockchain” and may be freely tradeable

• Most issuers are extremely early stage or “concept”
companies.
• Startup creates a plan or whitepaper which states what
the project is about, what need(s) the project will fulfill
upon completion, how much money is needed to
undertake the venture, how much of the virtual tokens
the pioneers of the project will keep for themselves, what
type of money is accepted, and how long the ICO
campaign will run for.

• Four types of tokens*
– Payment tokens are synonymous with cryptocurrencies and have no further
functions or lines to other development projects. Tokens may in some cases only
develop the necessary functionality and become accepted as a means of
payment over a period of time.
– Coupon tokens give someone the right to purchase goods or services from the
issuer
– Utility tokens are intended to provide digital access to an application or service.
– Asset tokens represent assets such as participations in real physical companies
or earnings streams, or an entitlement to dividends or interest payment. As
such, they are analogous to equities, bonds or derivatives.
• Can be “hybrid” tokens, and any token can be considered a “security” if it meets that
country’s definition of a “security”
• Issuer needs to be “crystal clear” as to what the token represents and what rights
holders of tokens have.

• The four steps in an ICO:
– Preparation of the White Paper
• Essentially a business plan with a technical description of the underlying technology for which
funding is sought, the potential use and benefits of the technology, and how proceeds of the
token offering are to be used.
• The structure and content of a white paper are not regulated, but many issuers follow the
required disclosures for a Title III crowdfunded offering of securities
– Pre-Sale of Tokens
• Essentially a “private offering” to a select investor group at a significant discount from the
proposed ICO price, with (sometimes) additional bonuses such as free access or a bonus
card
• Consider limiting these to “accredited investors,” such as hedge funds
• Consider a Simple Agreement for Future Tokens (SAFT) giving investors the right to
participate in the public ICO sale
– Use of Proceeds and Execution of the Project
• Hopefully can accomplish this with just proceeds from the pre-sale of tokens
– Crowdfunded Sale of Tokens to the Public
• Payment made in cryptocurrencies, usually Bitcoin or Ether
• Most ICOs have a minimum threshold for funding – if the threshold is not met within a
specified time period, funds are returned to investors automatically.

Regulation of ICOs
• People’s Bank of China banned ICOs in September 2017
• US and UK regulators say the tokens may be “securities”*
• In the US, will apply the Howey test**. Under the Howey test,
a transaction is an investment contract if:
– It is an investment of money
– There is an expectation of profits from the investment
– The investment of money is in a common enterprise
– Any profit comes from the efforts of a promoter or third
party
• If a security, ICO offerings must be registered with SEC or
qualify for one of the Regulation D exemptions

Non-Fungible Tokens (NFTs)
• NFTs transform digital works of art and other collectibles into one-of-
a-kind, verifiable assets that are easy to trade on the blockchain. A
content creator can digitize or “mine” his or her works and upload them
to one of several NFT marketplaces (such as https://knownorigin.io,
https://rarible.com, https://opensea.io, https://superrare.co, and
https://niftygateway.com), which charge a network fee called “gas” for
the privilege.
• Because NFTs currently can be sold only for cryptocurrency, the
creator will also need to open an account on Coinbase.com to accept
payments in the cryptocurrency Ethereum® (https://ethereum.org).
• Then, at least in theory, the creator can sit back and wait for the
digital payments to flow in the door as people buy their NFTs.

• What’s good about NFTs?
– each NFT is a unique creation. When you buy the NFT of an artwork, you own an “original” of
that artwork, just the same as if you bought an oil painting at a “brick and mortar” art gallery.
– each purchase and sale of an NFT is recorded on a blockchain, making it almost impossible for
someone to sell knockoffs of the artwork without getting caught. If your name does not appear in
the chain of title for an NFT, you have no legal right to that artwork. What you have instead is a
copy, which may be an authorized reproduction or an illegal knockoff.
– the artist can include a “smart contract” in each NFT specifying that he or she gets a percentage
of the purchase price each time an NFT changes hands, something that never happens in the
“brick and mortar” art world.
– digitizing an artwork in an NFT is a terrific way for artists to prove its “date of first publication”
without having to go through the tedious and often inefficient process of registering a copyright
(my one-hour video on copyright law can be found at www.youtube.com by searching for “Cliff
Ennico Copyright Basics”)

• What’s bad about NFTs?
– just like buying a painting in a “brick and mortar” art gallery, when you buy an NFT you buy
only the artwork itself, not the artist’s copyright – the legal monopoly giving the artist the
exclusive right to exploit the artwork commercially for a period of years.
– Since digital reproductions of the same artwork are virtually identical (unlike serigraphs or
lithographs of a painting, or reproductions of a sculpture), which is the “original” and which
are the “copies?” Can you have multiple NFTs for the same work?
– it isn’t clear at the present time how NFTs will apply to copyrightable works other than
digital art – for example, to works of literature, architectural designs, and musical works.
• If I write a novel and post the text to a NFT, is the NFT merely the “original author’s manuscript”
that can be resold only as a collectible? Or, if I add a “smart contract” claiming a percentage of each
sale of the NFT, have I just “self-published” the book?
• if I write a song and upload the music and lyrics to a NFT, is the NFT the “sheet music” of the song,
a recording, a live performance, or all three? How will the music industry’s traditional distinction
between publishing rights, reproduction rights and performance rights apply to an NFT?

Some Other “Cutting Edge” Tools for
Startups
• Royalty Financing (see materials)
• Simple Agreement for Future Equity (SAFE)*
– Issuer agrees to give investor a future equity stake if certain
triggering events occur
• The “equity linked note”**
– No interest, holder gets % of increase in underlying
equity x “participation rate”
• The Rollover as Business Startup (ROBS)***
– Form a C corporation, then roll over 401(k) into
corporation’s profit sharing plan

Thank You!

Questions and Answers
Cliff Ennico
Attorney, Author and Columnist
2490 Black Rock Turnpike, # 354
Fairfield, Connecticut 06825-2400, U.S.A.
Tel.: (203) 254 1727
Fax: (203) 254 8195
e-Mail: crennico@gmail.com
www.succeedinginyourbusiness.com

Living in the Wild Wild West of Fintech

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