Private Placement Investment Considerations

/ 15 May 2018

Private Placement Investment Considerations

The following provides general background on, and underscores certain risks to Investors associated with, Private Placements. Private Offerings can be purchased directly from the Issuer of the Security during the Offering period or through an agented, “best efforts” process managed by a FINRA-registered Broker-Dealer acting as a Placement Agent.  Under U.S. law, other than the Issuer, only registered Broker-Dealers can conduct Private Placements as third-parties and receive compensation for such services. Any type of company can raise capital in the amounts they need through a Private Placement of Securities. Virtually any type of Security can be offered to Investors through a Private Placement, including debt (such as Promissory Notes) or equity interests (e.g. common stock, preferred stock or membership interest in a Limited Liability Company). Investment in privately placed Securities offers Investors a significantly expanded universe of investment alternatives, but Investors must also be aware of the greatly increased risks associated with these Securities.   Additional risks include: Illiquidity – Private Placements are “buy and hold” investments.  “Secondary” trading (i.e. selling the Security before its maturity) is not allowed, and, so, Broker-Dealers do not make Secondary markets in Private Placements. Unaudited financial statements – There is no requirement that Issuers of private Securities have their financial statements audited by an accounting firm, though some do. Inconsistent pricing of similar Securities – Since there are no trading markets, the pricing of Private Placements carrying similar risk can vary significantly. Difficult to determine the ongoing value of the investment – The lack of Secondary markets makes it more difficult to determine independently the ongoing value of the investment, which is necessary for valuing personal financial statements and for estate-related transfers. Private Placements are subject to all federal and state Securities regulations, including those related to misrepresentation or fraud. For information regarding eligibility to invest in Rule 506(b) Private Placements, please read “Accredited Investor Verification Guidelines” and “Accredited Investor Questionnaire.”

Perspectives on Private Investments & Crowdfunding

/ 15 May 2018

Perspectives on Private Investments & Crowdfunding

The following briefly reviews the history of securities exchanges, the establishment of the first U.S. federal securities law, touches on the regulatory burden that is currently imposed on Broker-Dealers, and references the exciting outgrowth of recent legislation authorizing Crowdfunding. While privately placed Securities represent, arguably, the oldest and least efficient form of investment banking, this very large portion ($2 trillion+) of the capital markets is now rapidly evolving because of developments in information technology.  Internet-based Crowdfunding represents a major advance in private Capital formation, though it is a long way from reaching its potential for both Issuers and Investors. Modern banking can be traced to 14th century banking houses in Italy, most famously the Medici.  “Bank” derives from “banco” which, in Italian, translates as “bench.”   This is where early financiers transacted money lending and investment activities.  It was during this time that the first government and corporate Securities were created and began to trade.  As all transactions at that time were private, Investors relied heavily upon the integrity of the banking houses to provide credible disclosures.  While accounting standards and extensive government regulations now underpin Securities transactions, reputational integrity is still fundamental to investment banking. The first stock exchange activity involving public Securities occurred in Holland in the 17th century.  In the U.S., the Buttonwood Agreement of 1792 led to what became the New York Stock Exchange (NYSE), which grew rapidly with the expansion of railroads and the broader U.S. economy in the 19th century.  Until the crash of 1929, the sale of Securities was self-regulated by the Securities industry. Soon after the crash, the Securities Act of 1933 (the “Act”) was enacted, mandating public registration for corporate Securities, followed by the Securities Exchange Act of 1934 which created the Securities Exchange Commission (the “SEC”) to oversee all Securities activity.  In 1938, the Maloney Act amendments to this Act mandated the creation of what is now the Financial Industry Regulatory Authority (“FINRA”), the Self-Regulatory Organization (“SRO”) that directly oversees all Securities Broker-Dealers and their Registered Representatives. Other Federal regulation has expanded significantly over the years, in particular, the Dodd-Frank Act in 2010 following the 2008-2010 “melt down” of the financial markets. Though Securities can be placed privately and be exempt from SEC registration under Section 4(a)(2) of the Act, the SEC provides “safe harbor” guidelines for such Offerings within Regulation D (“Reg D”), which are heavily relied upon.  Reg D was adopted in 1982 and then revised in 2013 to address equity Crowdfunding activities. The administrative burden resulting from the above regulations has largely contributed to a significant decline in the number of Securities Broker-Dealers in the U.S. There are about 30% fewer firms than in 2007.  Given that regulatory oversight and control of commercial banks have also increased dramatically over this period, smaller companies in the U.S. now have less access to Capital than during any period since the late 1940’s. Notwithstanding the above, the future is bright for investment banks able to adapt to the opportunities created by Crowdfunding provisions within the JOBS Act of 2012 and through continual advances and the intelligent uses of information technology (internet, social media, etc.). For information about the risks of investing in private companies, please see “Private Placement Investment Considerations.”

Crowdfunding Overview

/ 15 May 2018

Crowdfunding Overview

Recognizing that access to capital is critical to the health of smaller companies which generate about 50% of U.S. job growth, the Congress passed the Jumpstart Our Business Startups (JOBS) Act in 2012, which set the stage for the development of equity Crowdfunding in the U.S. The JOBS Act The JOBS Act includes several provisions specifically designed to enhance Capital formation: Title II – Enables “General Solicitation” for Private Placements sold only to Accredited Investors.  Specific regulatory guidance is found in S.E.C. Regulation D (Reg D), Rule 506(c). Title III – Authorized smaller Crowdfunding (less than $1 million), public sales of Securities to a broader range of Investors than had been authorized under Reg D previously.  Crowdfunding is conducted through the internet via FINRA-regulated Crowdfunding Portals. Title IV – Establishes a form of Initial Public Offering (IPO) up to $50 million where any level of Investor can participate and where Issuer disclosures are reduced from S-1 requirements in larger IPOs.  Regulation A+ of the S.E.C. provides regulatory guidance for raising capital in this manner. With these new financing options (and some that preceded the JOBS Act), Crowdfunding has become a somewhat confusing term, some involving the sale of a Security (a highly regulated activity) and some, currently the bulk of Crowdfunding activity, involving a pre-sale of a product or service (which is not regulated). Crowdfunding Categories Rewards-based Crowdfunding This is a fund-raising approach wherein Capital is advanced to a very small enterprise based upon the promise to deliver a product or service in the future.  The most successful internet sites Offering this service include Kickstarter ($2bn raised since 2010) and Indiegogo ($1bn raised since 2010).  Rewards-based Crowdfunding does not involve the selling of a Security and, therefore, is not subject to U.S. Securities regulations. Equity Crowdfunding Equity Crowdfunding pertains to the sale of Securities through “general solicitation” for an Offering (i.e. advertising) via the internet. Title II, Accredited Equity Crowdfunding This type of Crowdfunding enables, for the first time, general solicitation to Accredited Investors.  This significantly expands the ability of Broker-Dealers to communicate the availability of a Reg D Private Placement.  Historically, great care was made to avoid publicity about Reg D Offerings because it could cancel the Offerings exemption from SEC registration.  Under Title II, a new Rule 506(c) of Reg D was created by the S.E.C., though it requires third-party verification of Accredited Investor status, versus self-verification, which is authorized under the traditional Rule 506(b) Reg D Offerings. Title III Crowdfunding (via Crowdfunding Portals) – This type of Crowdfunding has received the most publicity since passage of the JOBS Act.  These Offerings are limited in Offering amount (max. $1,070,000, but more typically much less) and, importantly, they enable sales to Investors whose financial profile (income in this case) is well below the Accredited Investor definition in Rule 501 of Reg D.   All Crowdfunding Portals  must be registered with FINRA. Title IV, Regulation A+ (“Mini IPO”) This type of Crowdfunding allows companies to raise up to $20 million per year (Tier 1) or up to $50 million per year (Tier 2) from the general public in a “mini-IPO” style Offering.   Reg A+ can provide an attractive liquidity option for successful, but smaller, companies, since Reg A+ Securities are free to trade publicly, and the reporting requirements are significantly lower than for traditional S-1 IPOs. 

Accredited Investor Questionnaire

/ 15 May 2018

Accredited Investor Questionnaire

The following form is one of the Private Placement Closing Documents to be executed by an Investor.  It certifies that the Investor is Accredited. To download a PDF of our Accredited Investor Questionnaire click HERE. REGULATION D “ACCREDITED INVESTOR” INVESTOR QUESTIONNAIRE REGULATION D QUALIFICATION STATEMENT An investor represents to an issuer of securities that they undersigned qualify as an “accredited investor” pursuant to Regulation D under the Act, as a result of having the following status:   An investor represents to an issuer of securities that they undersigned qualify as an “accredited investor” pursuant to Regulation D under the Act, as a result of having the following status: (1) a natural person with an individual net worth, or joint net worth with his or her own spouse, excluding the value of his, her, or their primary residence, exceeding $1,000,000; (2) a natural person who had an individual income in excess of $200,000 in each of the two most recent calendar years or joint income with his or her spouse in excess of $300,000 in each of the two most recent calendar years and who reasonably expects reaching the same income level in the current calendar year; SIGNATURE OF INVESTOR: (3) a trust, with total assets of $5,000,000 not formed for the specific purpose of acquiring the Note, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the prospective investment; (4) a bank as defined in Section 3(a)(2) of the Act, or a savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Act, whether acting in its individual or fiduciary capacity; (5) a broker dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended; (6) an insurance company as defined in Section 2(13) of the Act; (7) an investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”) or a business development company as defined in Section 2(a) (48) of the 1940 Act; (8) a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; (9) a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for the benefit of its employees, if such plan has total assets in excess of $5,000,000; (10) an employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), if (a) The investment decision is made by a plan fiduciary, as defined in Section 3(21) of ERISA, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or (b) the employee benefit plan has total assets in excess of $5,000,000, or (c) the employee benefit plan is a self-directed plan with investment decisions made solely by persons that are “accredited investors”; (11) a private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940, as amended; (12) an organization described in Section 501(c)(3) of the Internal Revenue Code, a corporation, Massachusetts or similar business trust, limited liability company, or partnership (which may include endowments or foundations), not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000; or (13) an entity in which all of the equity owners are “accredited investors” under any one or more of the categories specified in paragraphs 1 through 12 above. ADDITIONAL INFORMATION WHICH AN ISSUER MAY REQUIRE BEFORE ACCEPTING INVESTMENT FROM AN INVESTOR: Education Completed: Investment Experience: Tax Bracket: Certification that: (a) The Investor has not filed or been involved in bankruptcy proceedings, and there are no suits pending or judgments outstanding against the Investor, that would impair the Investor’s ability to make payments on this investment; (b) The investment is solely for the Investor’s own account and not for the account of any other person; and (c) The Investor’s assets do not constitute plan assets within the meaning of ERISA. The Investor further certifies: In signing this Investor Questionnaire, they acknowledge they have received and carefully reviewed all of the following documentation: a) The Issuer’s Company Operating Agreement. b) The offering’s Subscription Agreement. c) The Offering’s Private Placement Memorandum Additionally, in making this investment, the Investor is able to bear the economic risk of this investment, and the Investor acknowledges that this investment involves a high degree of risk and that the Investor should not be making this investment unless the Investor can afford to lose the amount invested in its entirety. The foregoing statements and documents attached hereto are true and accurate to my knowledge and belief, and the Investor is authorized to rely on the information in entering into the Investment as of the date completed below. If an Individual -  Date:_____________ (Signature of Investor):_____________ (Printed or Typed Name):____________ If Co-owners - Date: ______________ (Signature of Co-Investor):___________ (Printed or Typed Name):____________ Type of ownership: ___co-tenants ___joint tenancy (married couples only)   If an Entity:  Date:__________________ (Name of Entity):___________________ (Type of Entity & State of formation):_______ By:___________________________ (Signature of official of Investor)      Name:________________________      Title:_________________________

What is a Private Placement?

/ 14 May 2018

What is a Private Placement?

The following outlines the principal regulations that governs a Rule 506(b) Private Placement and discusses the participants in a Private Placement. Private Placements are Offerings of Securities which do not involve registration of the underlying Security with the Securities Exchange Commission (“SEC”).  They are traditionally offered discreetly and sold to Investors, historically, in a non-public manner (i.e. without public advertising).  See “Regulation D, Rule 506(b)” for more information. However, a recent SEC Rule authorizes general solicitations for some privately placed Securities which are purchased only by Accredited Investors (see “Accredited Investors Questionnaire” and “Regulation D, Rule 506(c)”). Regulation D is a regulation of the SEC, and it contains specific rules for the proper conduct of a Private Placement in the United States (“safe harbor” guidelines).  Following the Rules within Regulation D is strongly recommended.  All CFG private Offerings follow Regulation D guidelines. A registered Securities Broker-Dealer may act as a Placement Agent to conduct an Offering on behalf of the Issuer, or the Issuer can offer Securities directly to Investors.  If a Placement Agent is used, the firm must be a registered Broker-Dealer with the Financial Industry Regulatory Authority (“FINRA”). Private Offerings can include any form of Security, such as Promissory Notes or equity interests (e.g. common stock, preferred stock or membership interest in a Limited Liability Company). Investors in Private Placements include individuals, wealth managers, managed funds, insurance companies, etc. Private Placements are subject to all federal and state regulations regarding Securities issuance, including those relating to misrepresentation and fraud. For a discussion of certain risks associated with Private Placements, please read “Private Placement Investment Considerations.”