All right. So we owe crowdfunding to the Jobs Act. Now, the jobs Act was a bipartisan legislation that developed in 2011 and was finally signed into law by President Obama in 2012, it's rather remarkable fact, is by itself by the way is bipartisan legislation in an election year but this was a topic that was much on the minds of people in Congress, here we were coming out of the Great Recession right. The darkest moments I suppose were 2009 into 2010 and the rate of IPOs was very low, it was almost nonexistent for awhile there and you may remember, you remember those days, remember Ben Bernanke talking about looking for "green shoots" right, like new plants growing up after there's been a forest fire or something like that, signs of new life, the next generation of entrepreneurship rising out of the ashes. So that was the context in which Congress was thinking, what can we do? What can we do to bring capital into startups? Get entrepreneurship going to jumpstart right, so jobs were the stand for jump-start our business startups act, that's how you get jobs right, okay. Jump Start Our Business Startups Act. So that was 2012 and if you look at the jobs Act, there were four titles, it's really title three that we really care about here, when people talk about crowdfunding, they're talking about title three which people often just called Regulation crowdfunding, okay, but there's three other titles too, so let me just sketch what's going on with all the titles and then from then onwards in this module we'll focus largely on title three, okay. So these different titles as you'll see are focusing on somewhat different points on the startup growth curve and they are trying to bring different benefits to different companies, address the concerns that would be most on your mind at those different points, okay, and also these titles also took effect at different times. I said title three took effect in mid-2016, the other titles actually kicked in a little earlier than that. Okay so, title one. Title one, the phrase people associate with title one is emerging growth company, emerging growth company and the idea of title one was you've got companies that might want to go public but maybe something's holding them back. Something's holding them back from going public and can we identify what's holding them back and maybe relax a little bit on the costs or the restrictions that are keeping them from tapping the capital markets. Okay. So the idea was emerging growth companies, so the idea that a company that is making less than a billion dollars in revenue, not profit, revenue, a billion dollars. That such a company would be called an emerging growth company and if they wanted to go public, they could do it in a less onerous way, a way that might be a little less costly or intimidating to them than and that's maybe that's why they're not doing it, okay. So one of the big pieces of it and this has really caught on, is confidential review process. Okay. So the idea is, so I mentioned that in the previous section that if I'm going to go public, I submit this draft, statement and then the SEC reads it very carefully and then they give me all these bullets and I have to respond to that, and go back and forth back and forth. Well, if I'm an emerging growth company, I might still have to do all that but it's all confidential, right, so the public doesn't see any of that, it doesn't see any of that, unless and until I decide that let's do it, let's go public right. So as long as I could go through that whole process which takes months, all right, it takes months and then at the end of that process, I can decide well, okay, do I want to do this or not? Do I want to go public or not? I might think well, given the feedback I'm getting from the SEC or maybe just given what's happened elsewhere in the markets for several months because several months is a long time right, I'm thinking back to last year, I'm like thinking back to 2018. Well, mid 2018 was gangbusters in the stock market, lots of IPOs, everyone's going to market. Late 2018, you may remember the market just fell off a cliff, everything stopped, it was high volatility. So you could have started the process mid-2018 thinking okay, this is great, let's get going and then you get to November, so, wait a second, you just stomp on the brakes and not do it, and if you did, the public would never even know that you started the process. It's all confidential right, and so you don't have these embarrassment essentially of starting something that you then stop, and also you don't have to disclose all that confidential information, think about Lyft right, well, when Lyft, when people could see the Lyft's financials, they learned quite a lot of things they didn't already know, right. Uber hasn't done that right, we know about Lyft, we don't know about Uber now, right because Lyft is going public. So you can decide not to go public, you can in some sense fail privately in this process, and of course you can always just pick it up and do it some other time, okay. So that has really caught on as a way to go public and by the way, so originally this business of confidential filing was only for the emerging growth companies. That piece of title one has now been expanded by the Trump administration to essentially all companies right. So anybody can now do this, anyone can do this confidential first step. There are also other pieces to title one, other cost and frictions that people complain about the IPO process, so yeah, well, it's very cumbersome to have audited financials going way back, well for title one, you only need two years and not three. You don't have to disclose as much about your compensation. You don't have to do what's called "say on pay" for a few years, "say on pay" you may know came out of the Dodd-Frank bill, "say on pay" is where a company has to disclose, here's what we're paying, here's what we're paying our top people. They put it out there and then the investors can vote, yes or no, I should say they vote yes or no, that's just, if you vote no, if the investors ultimately vote no they can still pay that it's embarrassing but they can still pay it. So "say on pay" is more of a poll of their investors, it's embarrassing to lose the poll but it doesn't directly mean you can't pay them but that's still a big deal to some companies. Some companies like to do "say on pay", they're perfectly happy with their compensation and they know that the public will like it, others of course not so. Anyhow, so you're exempt from "say on pay" for a few years and there's some other things like that. One of the big things people talk about, this is going to sound tiny but it ends up being huge, coming out of WorldCom and Enron, thinking back to the Sarbanes-Oxley Bill that came out of that, that set of disasters right, in the early 2001-2002, coming out of that. From that point onwards, companies had to have an auditor attest to the strength of your internal controls over financial reporting, right. Now, that might sound very inside baseball right, I mean having an auditor attest to the quality of your internal controls over financial reporting, well, when you think about Enron, WorldCom, I mean just look back, read those, you can see well that was the problem right. So it's very difficult to be confident that a company has good controls. It's very expensive to do that and there are companies that will say that right there, the expense of that auditing of our internal controls are so high, that right there is enough not to go public. So companies are exempt for a bit from that but eventually, yes you do have to do that. You eventually you do have to show the world that you have controls over your financial reporting, okay. So that's title one, title one is all about making it easier to go IPO, identifying some of the frictions that keep people back from doing that and trying to ease them at least for a bit, so they'll go public. Title two of the Jobs Act is not about making it easier to go public but it's more about making it easier to stay private, okay. So for title two, what it's saying is that, okay so there's a regulation called Regulation D and regulation D is one of the go-to regulation for companies that want to stay private and want to raise money privately without going public, okay. So historically they've enjoyed this exemption from having to go public under regulation D, which allows them to raise money. So they can do that. They can raise money from friends, they can raise money from friends of friends, they can raise money from people that they'd been referred to. But what they can't do, is bring in money by advertising, or what the SCC calls general solicitation. You couldn't do that. You couldn't just put an ad in the paper say call this number if you're interested in investing in our company. You couldn't advertise. So that is the big developed with title II is that I can bring in money from outside investors that I bring in simply by advertising. Now these days you do that on the Internet. So you can do that, but there's a catch. So basically, this is crowdfunding. Titled II is a flavor of crowdfunding. I'm putting myself out there on the Internet, I'm describing a company, I'm telling you how you can invest and you can invest, sounds like crowdfunding, but there's a twist here which is that it's only for rich people. When I say rich people, what I mean is, to be an investor in a Title II crowdfunding, you have to have either number one, $1 million not counting your house, you have to have $1 million, or if you don't have a $1 million, you have to have made at least $200,000 for the last two years. So if you've satisfy those rules, those about wealth income requirements, then the SCC would call you an accredited investor and now you can invest in that startup. By the way, the burden of proof essentially that you are accredited investor is on the company, so I can't just say, "By the way, are you rich?" "Yeah, I'm rich." So, "Okay, great. Well then you can buy my securities." No. I have to have a process in place to verify that you really have that kind of money. So what you see now is there're some internet portals that facilitate crowdfunding, but if you look closely, you'll see they're only doing Title II crowdfunding where in order to invest through that portal, you have to go through a process that they oversee where you verify tax returns, you verify that you have the income or wealth to be an accredited investor. Once they've taken care of that piece, then the startups can go to that website and they know that well the website has done that vetting for them and now they can raise money from those investors legally while staying private. So Title II is a flavor of crowdfunding, but just remember, Title II is crowdfunding for rich people. That brings this Title III, which is just crowdfunding for everybody. So Title III says that I can raise money from anybody. But now, relative to title II, there are some restrictions that we're going to have to live under. So yes, I could raise money from anybody, but people are going to be limited in how much they can invest and that limit's going to be a function of their wealth or income. Also, I'm going to be limited in how much money I can raise. So to think about Title III, bear in mind that the regulators care about, all investors, but they particularly care about investors of limited means. That's what this whole accredited investor thing is all about. Well, if you're wealthy enough, you make enough money, there's two things. Number one, maybe you're more astute investor, for us maybe not. But also, you've got money to lose and we're not as concerned there as we are for the investors of more limited means, they're the ones that we want to be careful about not getting ripped off or at least not investing to an extent, not losing a very damaging amount of money in this market. So the restrictions from the entrepreneur side, I can raise over any 12-month period up to $1 million. That's it, $1 million. I can raise $1 million and when I go to this market, I don't have anything like the stringent auditing expenses and regulated review that we saw with the traditional IPO process. So if I got this market, if I'm raising only up to a $100,000, then all I need is a company official to sign off on the documents. A company official like I could just sign off that just my disclosures being accurate. If I want to go up to a half million, now I need to have my information reviewed by a public accountant. Now, review is a term of art here. Review and audit are two different things. A review is less costly far fewer professional hours than an audit. So I'd have to have it reviewed by a public accountant, but I don't have to have an audit. Once I'm over half million bucks, then if this is my first time, then I still just have it reviewed, but if it's my second time going to the crowdfunding market, now I'm going to have to pay for an audit. So as you can see, we're trying to because we're not raising much money here, we're only raising up to a million bucks and so you have to be careful about how expensive you're going to make it to go to this market, and so that's the idea here that we're not making the entrepreneur spend a tremendous amount of professional hours if they're not raising that much money. So that is the entrepreneur side. On the investor side, they said they are going to be limited in how much they can invest depending on their wealth and income. So basically, what it boils down to is that if you make up to a 100,000 bucks, then you are limited to the greater of 2,000 bucks a year that you can invest or five percent of your income. So that's the idea. So if I'm making just almost a 100,000 bucks and I can invest almost 5,000 bucks. All put together, all Title III crowdfunding investment all put together, once I'm over 100,000, now it is 10 percent of my income, up to 100,000 bucks. So even there, I'm limited. The idea as you can see, yes I might lose all my money that I invest in crowdfunding but I'm not going to lose more than 10 percent of my income. Also I should add that when you invest in this market as an investor, you are actually limited in your ability to sell. So over the next year, I can't sell my whenever I bought in crowdfunding to anybody else. So this could be no liquidity for a year. So there's one more title that I mentioned of the jobs act which is Title IV. Title IV is what people often refer to as Reg A+. Reg A+ because there has been a Reg A for many years. Reg A+ is just a bit of a twist on it. Reg A+ really isn't what anyone would call crowdfunding. Reg A+ is a way that a company can do essentially an IPO but just on a smaller scale. If you are doing an IPO, but there's somewhat lighter disclosure requirements, some other lighter requirements and you're doing at a smaller size. So it's a way to allow a company to do an IPO maybe in a slightly earlier moment than they otherwise would and at a smaller size. So this really hasn't taken off so much the way that the regulators hoped it would as well. There's only been a few of these and the performance hasn't really been that great. As I say it's not really, I wouldn't call it crowdfunding, it really got more of the flavor of a typical IPO. Maybe the one piece that's like crowdfunding is that these are done on what we call a best efforts basis which is not the usual way an IPO is done. Usually, if I take my company IPO, I hire an underwriter and ultimately what happens is the underwriter buys the shares from the issuer and then places those shares with the public. A best efforts IPO is where the underwriter doesn't do any of that. They just provide a conduit for the retail public or anyone or institutional investors whoever it is to buy shares of the IPO and then at the end of that process, the issuer has sold whatever shares people showed up to buy. So that's a best efforts IPO. You tend not to see those for the major companies, you see this for the relatively smaller, sketchy, maybe you call them companies, would do a best efforts IPO. So in this Title IV Reg+ base, that's also what you're going to see. So the retail investor does have better access to these IPOs than the typical IPO. They show up and buy shares, they can probably do it. So maybe that's got some of the little flavor of crowdfunding but for the most part now this is just a regular IPO. It hasn't really taken off either. But I just thought I'd mention it because it's the last piece of the jobs Act. Going forward, my focus here is going to be on the Title III crowdfunding. So that's it. That's the job Act 1, 2, 3, and 4 and that's what's given us this new world of companies you going directly to the retail markets to fund their defender startups.
