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 Whats 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 Whats 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 firms 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 persons 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 issuers 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 issuers 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 investors 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 sellers 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 SummaryGiving an overview of the company, the offering and use of the proceeds, and a summary of financial data. The CompanyDealing 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. AppendixTax 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. Issuers Business Issuers Properties Issuers 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?