This is a comprehensive presentation scheduled for delivery at an Illinois State Bar Association seminar April 3, 2014. It covers Regulation D rules for private (though publicly announced) securities offerings as modified by the JOBS Act, Illinois securities law, accredited investor status verification, public announcements of securities offerings, securities fraud, the disclosures required, and the detailed parts of the private placement memo and file

1. Private Offerings After The JOBS Act
By: William A. Price, Attorney at
Law, www.growthlaw.com, 1-800-630-
4780, email wprice@growthlaw.com

2. Part I: Rules, New and Old
• Private Offerings Rules, Both Federal And State, Since The
Jobs Act
• Accredited Investor Definitions And Verification Methods
• Small Public Offerings Rules
What’s In This Presentation? (I)

3. Part II: The Private Offerings Process
• Start and End Dates
• Investor Suitability
• Intermediaries: Finders, Broker-Dealers, M&A
Brokers, Public Platforms
• Restrictions On Resale
• Disclosure Documents and Backup Files
• Alternatives to A Reg D Offering
What’s In This Presentation (II)

4. PRIVATE OFFERINGS RULES
As Amended By The JOBS Act

5. • SEC and State ―Blue Sky‖ Laws Limit Offerings Without
Public Registration
• ―Accredited Investors‖ ($1 million in assets beyond
house, or high income, or some institutions that represent
investors) only allowed targets
• Some limits on amount raised, depending on exception
used
• JOBS Act allowed public announcement of private offerings
• Sales of securities must be through ―broker-dealers‖ or
company officers with compensation not based on sale
Private Offerings Rules

6. Regulation D contains Rules 504, 505, and 506, provides
exceptions to public registration requirements
• Rule 504 (up to $1 million raised/12 mos., no general
solicitation, restricted resales)
• Rule 505 (up to $5 million/12 mos., accredited investors plus
up to 35 nonaccredited, disclosure requirements for
nonaccredited, restricted resales)
• Rule 506 (any amount, accredited only if general
solicitation, otherwise up to 35 nonaccredited with
disclosures, state rules preempted)
Private Offerings Rules, SEC

7. • Accredited Investors Only (less than $5 million), and
• Intrastate Offering (Most of firm’s business in state where
offered securities, offering only to residents of that
state, state law determines offering limits and disclosures)
Additional Exceptions

8. • Section 4.G of the Illinois Securities Law and Sections
130.440, 130.441 and 130.442 of the IL SOS Rules and
Regulations may be used for a Regulation D Rule 504
limited offering.
• $1 million max. offering
• No general solicitation of investors
• File SEC Form D or Illinois Forms 4G Report of Sale within
12 months of first sale to IL resident, filing fee $100
Illinois ―Blue Sky‖ Offerings: Rule 504

9. • Section 4.D of the Illinois Securities Law and Section
130.420 of the Rules and Regulations set forth the
requirements of the Uniform Limited Offering
Exemption(ULOE).
• Maximum raise $5 million
• Unlimited accredited, up to 35 non-accredited investors
• Federal Form D to be filed with IL SOS and Fed SEC within
15 days after receipt of consideration or delivery of a
subscription agreement, filing fee to IL $200
Illinois ―Blue Sky‖ Offerings, Rule 505

10. • Section 2a. of the Illinois Securities Law and Section
130.293 of the IL SOS Rules and Regulations set forth the
Notification Filing requirements of a Regulation D Rule 506
offering.
• No maximum amount in offering
• Maximum of 35 unaccredited investors, unlimited accredited
• Federal Reg D form to be filed with Illinois ($100 filing fee)
and SEC, at least 15 days before first solicitation and
another at closing of offering, if using Rule 506 (b) or ( c )
Illinois ―Blue Sky‖ Offerings, Rule 506

11. • Rule 506 ( c ) is new, implements JOBS Act
• SEC estimates there will be 3,637 Rule 506(c) offerings per
year.
• Unlimited sales to accredited investors only, verification of
accredited status required
• Public solicitation of such investors allowed
• Anti-fraud laws still apply
• Some ―private offerings‖ limited broker-dealer license
categories added
JOBS Act Additions to Private Offerings

12. • Form D to be filed with SEC at least 15 days before any
public solicitation
• Amendments allowed to same, with filing up to 15 days after
solicitation
• Final Form D to be filed, with amount raised, etc…, within 30
calendar days after conclusion of solicitation
Remember: Any future change in Form D information requires
filing of amendment to the filing, per Rule 503
JOBS Act PPM Rules: Multiple Form D
Submissions To SEC For Rule 506 ( c ) raise

13. • All ―Written General Solicitation Materials‖ to be used in
general solicitation to be submitted to SEC
• Submission is to be through a new SEC online page
• Submissions are due no later than the date of first use of
such materials in the offering
JOBS Act PPM Rules: Rule 510T

14. • Limitation to accredited investors must be disclosed in
offering documents
• If used by private funds, must disclose Investment
Companies Act protections not available
• Any private fund that includes performance data in its
written general solicitation materials would need to disclose
certain information about the performance data
JOBS Act PPM Rules: Rule 510T Legends and
Disclosures

15. ACCREDITED INVESTORS
New Verification Process, Same Investor
Types

16. 1. a bank, insurance company, registered investment
company, business development company, or small business
investment company;
2. an employee benefit plan, within the meaning of the
Employee Retirement Income Security Act, if a bank, insurance
company, or registered investment adviser makes the investment
decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with
assets exceeding $5 million;
4. a director, executive officer, or general partner of the company
selling the securities;
―Accredited Investors‖ Per Rule
501, Regulation D (Part 1)

17. 5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth
with the person’s spouse, that exceeds $1 million at the time of the
purchase, excluding the value of the primary residence of such person;
7. a natural person with income exceeding $200,000 in each of the
two most recent years or joint income with a spouse exceeding $300,000
for those years and a reasonable expectation of the same income level in
the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the
securities offered, whose purchases a sophisticated person makes.
Source: http://www.sec.gov/answers/accred.htm
―Accredited Investors‖ Per Rule 501, Reg D
(Part 2)

18. Income test: Review of IRS forms that report income for the
most recent two years, and written representation from the
purchaser that he/she has a reasonable expectation of
reaching an income level necessary to qualify as an accredited
investor for the current year.
Net worth test: Review of documentation dated within the
prior three months detailing assets, report from a national
credit reporting agency, and written representation from the
purchaser that all liabilities necessary to make a net worth
determination are disclosed.
Verification of Accredited Investor Status, Per
New Rule 506 (c) (ii) (2): ―Safe Harbors‖ I

19. Third-party verification: Written confirmation from a qualified
third party that has taken reasonable steps to verify within the
prior three months that the purchaser is an accredited investor.
Allowed third parties include: registered broker-
dealer, registered investment advisor, licensed attorney, or
certified public accountant.
Previous purchaser: In regard to a purchaser who has
previously purchased an issuer’s securities in a Rule 506(b)
offering prior to the effective date of Rule 506(c), the issuer
must obtain a certification from the purchaser of the same
issuer’s 506(c) offering that he or she qualifies as an
accredited investor. (See SEC Release No. 33-9415 at 36-39.)
Verification of Accredited Investor Status, Per
New Rule 506 (c) (ii) (2): ―Safe Harbors‖ II

20. New Rule 506 ( c ) verification is to be based on ―principles-
based methods‖ (PBM) not limited to the four ―safe harbors.‖
(Per Angel Capital Association White Paper, download
www.naca.com)
NACA suggests established members of angel groups with
personal introductions and a history of having made angel
investments who have self-certified meet the ―preexisting
business relationship‖ test, so no ―general solicitation‖
violated, and angel self-certification with transction history
enough for PBM.
Verification of Accredited Investor Status, Per
New Rule 506 (c) (ii) (2): Group History

21. SMALL PUBLIC OFFERINGS RULES
Sales To The General Public

22. • Regulation A has simplified disclosures, offering up to $5
million
• JOBS Act provides for similar offering up to $50 million:
regulations still pending
• Multistate offerings and some state offerings laws allow
public solicitation in-state with more limited disclosures (e.g.
Wisconsin, limits amount investable, noncertified accounts
allowed up to $1 million)
Small Public Offerings

23. THE PRIVATE OFFERINGS PROCESS
Rules and Terminology

24. 1. Introduction of parties: SEC says broker-dealer registration
required for any contingent compensation, some courts
disagree
2. Financial/Business Disclosures: All information ―material‖ to
investor’s decision must be disclosed before investment $$
taken, or all offerors and assisting professionals can be
sued under criminal and civil anti-fraud laws (SEC ruled
10b-5, state equivalents). ―Private Offering Memorandum‖
the usual document
3. Information Filing with state or SEC within 15 days after
investment
The Private Offerings Process

25. • “Best Efforts” Offering can be open indefinitely
• “All Or None” Offering: a minimum time set to raise capital
stated in offering documents, none into deal unless full
amount of capital raised
• “Part Or None” Offering: a minimum of time to raise capital
stated in offering documents, none into deal unless
minimum target amount of capital raised
Start And End Dates

26. • You may want this from a properly licensed investment
advisory organization not involved with the sale, to be sure
no claims made by accredited but not always capable
individual investors after sale done, if deal goes bad
Investor Suitability Verification

27. LICENSED AND UNLICENSED
INTERMEDIARIES
Broker-Dealers, Finders, M&A Brokers

28. • SEC: No compensation contingent on raise unless
registered as broker-dealer
• Caselaw: SEC v. Kremer, 778 F. Supp. 2d 1320 (US D. Ct.
M.D. Fl. 2011) , held SEC not correct: multiple factors
determine if BD registration required
• Most ―Finders‖ either serve as officers of issuer, with
compensation not specifically linked to raise, or as financial
consultants, with payable functions other than capital raise
• FINRA has recently proposed limited B-D registration for
capital raisers: most BD rules still apply
―Finders‖ Fees To Source Capital

29. • Section 29 of the 1934 Act, 15 U.S.C. § 78c
• Regional Properties Inc. v. Financial & Real Estate
Consulting Co., 678 F.2d 552 (5th Cir. 1982)(dicta)(Investor
could invalidate whole offering, not just finders agreement.)
Nonregistered Finders = Invalid Offering

30. FINRA proposed regulations for Limited Corporate Financing
Brokers, Proposal 14-09, Source:
http://www.finra.org/Industry/Regulation/Notices/2014/P44958
7
This may have very limited attractiveness to any but
companies already large enough to be FINRA broker-dealers:
almost all other FINRA requirements, exams still apply
New FINRA Limited Registration

31. • SEC No-Action Letter in County Business, Inc., 2006 SEC
No-Act. LEXIS 669 (11/8/06) allowed contingent
compensation for persons in the business of helping sell
companies.
• Note that broker participation in negotiation of terms of sale
must be strictly limited if asset sale turns into stock sale or
other sale of a security
• This could include terms of a seller’s earn-out
M&A Broker Compensation Allowed

32. January 31, 2014 similar holding, for change of control broker
compensation, assuming:
• The M&A Broker will not have the ability to bind a party to
an M&A Transaction.
• M&A Broker will not provide any financing for the deal
• M&A Broker will not handle client funds
• No public offering
• Clear disclosures and agreement if joint representaton by
broker
• M&A broker does not form group of buyers
SEC ―No Action Letter‖ M&A Brokers

33. • If financing is arranged, broker-dealer or other regulations
could apply, a written client agreement would be
required, and disclosure to the client would be required
• Source: https://www.sec.gov/divisions/marketreg/mr-
noaction/2014/ma-brokers-
013114.pdf?utm_source=SEC+Issues+M%26A+Broker+No
+Action+Letter+1-31-14&utm_campaign=SEC+MAB+NAL+-
+2%2F3%2F14&utm_medium=email
M&A Brokers, Continued

34. • Another JOBS Act addition, for a ―platform or mechanism
that permits the offer, sale, purchase, or negotiation of or
with respect to securities, or permits general
solicitation, general advertisements, or similar or related
activities by issuers of such securities, whether online, in
person, or through other means‖
• Must comply with JOBS Act requirements and new SEC
rules for same, see generally
http://www.sec.gov/divisions/marketreg/exemption-broker-
dealer-registration-jobs-act-faq.htm
―Public Platforms‖ For Accredited Investor
Announcements Exception To Broker-Dealer
Registration

35. BUYERS OF SECURITIES: FOR
INVESTMENT, NOT RESALE
Resale Of Securities

36. • Rule 144 or other valid exception from public registration
needed, or public offering is required
• Basic element: hold for more than a year
• Different rules if sale to persons ―affiliated‖ with offeror
• Amounts allowed to be sold may be limited
Restricted Resale

37. • Section 144 compliance is also important
• Offering Participation Agreement should say investor is
purchasing for investment, not for resale
• Verification by witness or investor signature is advisable
Prove Purpose Of Investment

38. DISCLOSURE DOCUMENTS AND
BACKUP FILES
―How To‖ For Your PPM Process

39. • Review and verify all offering
documents, presentations, explanations
• Take minutes of investor meetings to show only approved
explanations and representations made
• Be sure all facts material to investment risks are disclosed
before investment, and disclosure acknowledged by
investors or their representatives
All Representations Can Be Basis For Suit

40. • THIS SUMMARY OF OFFERING IS PROVIDED TO (insert specific
investor name) AS A SUMMARY OF THE PRIVATE INVESTMENT
PRESENTATION MADE ON (insert date).
• THE MATERIALS IN THIS OFFERING SUMMARY ARE NOT THE
COMPLETE OFFERING AND MAY NOT BE USED TO MAKE AN
IMMEDIATE OFFER TO PURCHASE ANY UNITS OF INVESTMENT.
THEY ARE AN EXTRACT FROM A PRIVATE PLACEMENT
MEMORANDUM WHICH DETAILS THE PRIVATE OFFERING FOR
(investment name). OFFERS TO PURCHASE INVESTMENTS MAY BE
MADE ONLY AFTER REVIEW BY A QUALIFIED INVESTOR AND/OR
APPROPRIATE INVESTMENT COUNSEL FOR SUCH INVESTOR, OF
THE COMPLETE PRIVATE PLACEMENT MEMORANDUM, AND BY
SUBMISSION OF THE SUBSCRIPTION AGREEMENT WHICH WILL
BE AVAILABLE WITH THE PRIVATE PLACEMENT MEMORANDUM.
• Requests for the complete offering packet can be made by signup at this
briefing, or by written request to: (Investment Contact Address)
Cautionary Language Example For Slides

41. • Offering documents should require approval by issuer of
accredited status and of offer to purchase by investor
Issuer Approvals

42. • File copy, marked as such, of all documents distributed in
the offering packet and other information distributions.
• Distribution control sheet, with information on the
individual or individuals responsible for its maintenance; the
numbered offering document sets distributed, identified by
investor, and/or by registered investor representative to
whom they are provided; and the date of distribution.
• Sales control sheet listing current sales.
Distribution Control and File Maintenance

43. • Daily record of checks, investment
agreements, verification of investor accreditation and
executed suitability questionnaires and other documents
received.
• Check copies and forwarding information: Record who
handled/processed all financial documents or
communications, what funds held by escrow agent, what
information sent or funds sent to and through broker, issuer
• Suitability and accreditation verifications: keep copies
• Investment Confirmations: Send immediately to investors
and representatives, keep copies
Distribution Control And Files II

44. • Federal and state investment notification forms (federal
Form D, state forms as required in advance of or after
investment) should be timely filed, and copies maintained in
the file.
• Conditions Met Record: Running total of sales and ―all or
nothing, minimum investment amount, or best efforts
investment targets set and met, with transmission of funds
by escrow holder (required for all but ―best efforts‖ offering)
to issuer or back to investor, as appropriate
Distribution and File Maintenance III

45. First page:
• Identify investment agent/broker/issuer and offering
• State that securities regulator/SEC have not reviewed issue
for suitability
• State exemption from public registration applicable
• Direct readers to risk disclosures
• Provide name, contact information for agents to receive
offers to purchase
The Private Placement Memorandum

46. • Disclosures and Disclaimers should clearly identify high risk
of loss and other industry and offering warnings
• Also include investment suitability and other investment and
tax warnings
• Risk Factors usually get prominent display in the warnings
PPM II: Disclosures and Disclaimers

47. All risks material to the investor making the investment must
be disclosed, to avoid 10b5 and state blue sky law liability for
securities fraud. Examples of risk factors to list (if applicable)
include:
• lack of business operating history;
• adverse economic conditions in a particular industry;
• lack of a market for the securities offered; and
• dependence upon key personnel.
PPM III Risk Factors

48.  Executive Summary—Giving an overview of the
company, the offering and use of the proceeds, and a summary of
financial data.
 The Company—Dealing with the business, the markets, the
strategy, the products and services, product
technology, facilities, employees, competition, and management.
 Financial Statements.
 Risk Factors. Be comprehensive, and show how plan
addresses same
 Shareholders Capitalization Table.
 Subscription Procedures.
 Appendix—Tax considerations.
PPM IV: Sections

49. 1. Control: Management willing to share with investors? What
terms/conditions will they require (see ―term sheet
negotiations‖ discussions later in this presentation)
2. Cash flow: sufficient to support proposed dividends and
debt service?
3. Tax factors: any benefits to pass through to
investors/investor structure needs to avoid UBIT/other tax
issues?
4. Investor exits: When allowed? What effect on deal?
Issues For Counsel To Review With Client
Before Preparing PPM

50. • Issuer’s Business
• Issuer’s Properties
• Issuer’s Competition
• Issuer Offiers, Directors, and their compensation
• Material transactions between Issuer and officers/directors
• Material legal proceedings involving
issuer, officers, directors
• The plan for distributing the securities and the intended use
of the proceeds of the offering
SEC Suggested Information For PPM

51. 5. Amount to Be Raised: Sufficient for What Business/Profit
Goals? What Are Best Sources of Capital For Same?
6. Accounting Effects: If convertible debt, would debt service
covenants in existing loans be violated?
Issues For Counsel/Client Discussion Before
PPM

52. • Organizations Documents (Articles of Incorporation or
Organizations, Bylaws, or Operating Agreement), including
any attorney opinions on these items
• Market Feasibility Studies For Deal
• Pro Forma Financial Analysis, Issuer and Deal
• Business Plan
• Business Plan of Operations (Program of Work, by company
department or other work team, with milestones)
Due Diligence File Items, To Verify PPM If
Later Challenged/Sued

53. • Employment Agreements of Key Managers
• Key Life Insurance Binders (where appropriate)
• Corporate Tax Returns (for all years of operation within
statute of limitations)
• Audited Corporate Statements for last three to five years
(unaudited may be used, but they carry less credibility)
• Use of Funds Statement
• Distribution Plan (What Distributions To Investors/Owners)
Due Diligence File Items II

54. • Turnkey Purchase Contract
• Use Agreement
• Project Specific Due Diligence Items for any significant
elements of the business plan (e.g., in a real estate
development project, this file would include site control
agreement, soils report, zoning letter, utility will-serve
letters, development plan, etc.)
Due Diligence File Items III

55. • Note limited role, if any, for M&A Advisers/Business Brokers
in structuring any deal unless exemption applies or HR
2274/S1923 create exemption
• Negotiations on terms can cover valuation, special rights for
investor class like nondilution, right to participate in further
rounds, Board seats for investment group, information
rights, preference to other obligations on liquidation by loan
status (convertible of investment), etc…
• Insiders may lose control with first or later rounds, could
have to earn back their own shares
―Term Sheet‖ Negotiations With Investors

56. • Investor participation as issuer officer/partner (no ―security‖
sold, instead investor buys a job and does own due
diligence
• Angel group negotiation of investment participation, group or
individual angels do due diligence/term sheets
• SEC Small Corporate Offerings (SCOR) filings
• Multistate offerings using NASAA forms
• For larger deals, nonprofit, economic development, and
other bond or sale-leaseback financing
• For small to mid-size deals, negotiation with private equity
groups: similar information to PPM, but direct to term sheet
and investor does extensive due diligence
Alternatives To Reg D

57. • Earliest round: friends, family, and fools
• Second round: business
associates, customers, competitors, local ―angel‖
groups, technology competitions, MBA plan
competitions, lawyer, accountant, bank referrals
• Mezzanine and other pre-public rounds: p/e groups, larger
angel networks, ―private offering‖ broker-dealers, investment
portals, international sources, loan brokers, strategic buyers
or investors, ―cause‖ investors
Sources of Outside Investors

58. • Full disclosure of possible business risks, and plans for
each
• Management Team, other ―Special Sauce‖ (IP, etc…)
• Business model (how investment $$ turn into profits)
• Corporate governance/inside team rights after investment
• When investments are due/capital calls allowed, how much
• Hoped-for exit events, assistance with same (or with next
rounds of $$) available from investors
Things To Think About In The Offering

59. • SEC No Action Letter In County Business Inc:
– Letter: http://sec.gov/divisions/marketreg/mr-noaction/cbi110806-
incoming.pdf
Reply: http://sec.gov/divisions/marketreg/mr-
noaction/cbi110806.htm
• SEC Information For Small Business:
http://www.sec.gov/info/smallbus.shtml
• North American Securities Administrators Association:
http://www.nasaa.org/
• Financial Industry Regulatory Authority (FINRA):
http://www.finra.org/
Resources For Offerers And Brokers

60. William A. Price, Attorney at Law
www.growthlaw.com
wprice@growthlaw.com
1-800-630-4780
P.O. Box 1425
Warrenville, IL 60555
Questions?