Form 1-A Issuer Information UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 1-A
REGULATION A OFFERING STATEMENT
UNDER THE SECURITIES ACT OF 1933
OMB APPROVAL

FORM 1-A

OMB Number: 3235-0286


Estimated average burden hours per response: 608.0

1-A: Filer Information

Issuer CIK
0001661779
Issuer CCC
XXXXXXXX
DOS File Number
Offering File Number
Is this a LIVE or TEST Filing? LIVE TEST
Would you like a Return Copy?
Notify via Filing Website only?
Since Last Filing?

Submission Contact Information

Name
Phone
E-Mail Address

1-A: Item 1. Issuer Information

Issuer Infomation

Exact name of issuer as specified in the issuer's charter
STARTENGINE CROWDFUNDING, INC.
Jurisdiction of Incorporation / Organization
DELAWARE
Year of Incorporation
2014
CIK
0001661779
Primary Standard Industrial Classification Code
SERVICES-COMPUTER PROCESSING & DATA PREPARATION
I.R.S. Employer Identification Number
46-5371570
Total number of full-time employees
28
Total number of part-time employees
1

Contact Infomation

Address of Principal Executive Offices

Address 1
8687 MELROSE AVE
Address 2
7TH FLOOR (GREEN BUILDING)
City
WEST HOLLYWOOD
State/Country
CALIFORNIA
Mailing Zip/ Postal Code
90069
Phone
800-317-2200

Provide the following information for the person the Securities and Exchange Commission's staff should call in connection with any pre-qualification review of the offering statement.

Name
Jamie Ostrow
Address 1
Address 2
City
State/Country
Mailing Zip/ Postal Code
Phone

Provide up to two e-mail addresses to which the Securities and Exchange Commission's staff may send any comment letters relating to the offering statement. After qualification of the offering statement, such e-mail addresses are not required to remain active.

Financial Statements

Industry Group (select one) Banking Insurance Other

Use the financial statements for the most recent period contained in this offering statement to provide the following information about the issuer. The following table does not include all of the line items from the financial statements. Long Term Debt would include notes payable, bonds, mortgages, and similar obligations. To determine "Total Revenues" for all companies selecting "Other" for their industry group, refer to Article 5-03(b)(1) of Regulation S-X. For companies selecting "Insurance", refer to Article 7-04 of Regulation S-X for calculation of "Total Revenues" and paragraphs 5 and 7 of Article 7-04 for "Costs and Expenses Applicable to Revenues".

Balance Sheet Information

Cash and Cash Equivalents
$ 1040327.00
Investment Securities
$ 307990.00
Total Investments
$
Accounts and Notes Receivable
$ 442186.00
Loans
$
Property, Plant and Equipment (PP&E):
$ 3154.00
Property and Equipment
$
Total Assets
$ 2644487.00
Accounts Payable and Accrued Liabilities
$ 323653.00
Policy Liabilities and Accruals
$
Deposits
$
Long Term Debt
$ 0.00
Total Liabilities
$ 685526.00
Total Stockholders' Equity
$ 1958961.00
Total Liabilities and Equity
$ 2644487.00

Statement of Comprehensive Income Information

Total Revenues
$ 1881310.00
Total Interest Income
$
Costs and Expenses Applicable to Revenues
$ 912327.00
Total Interest Expenses
$
Depreciation and Amortization
$ 1280.00
Net Income
$ -1933791.00
Earnings Per Share - Basic
$ -0.26
Earnings Per Share - Diluted
$ -0.26
Name of Auditor (if any)
dbbmckennon

Outstanding Securities

Common Equity

Name of Class (if any) Common Equity
Common Stock
Common Equity Units Outstanding
8337932
Common Equity CUSIP (if any):
000000N/A
Common Equity Units Name of Trading Center or Quotation Medium (if any)
N/A

Preferred Equity

Preferred Equity Name of Class (if any)
Preferred Stock
Preferred Equity Units Outstanding
6947574
Preferred Equity CUSIP (if any)
000000N/A
Preferred Equity Name of Trading Center or Quotation Medium (if any)
N/A

Debt Securities

Debt Securities Name of Class (if any)
N/A
Debt Securities Units Outstanding
0
Debt Securities CUSIP (if any):
000000N/A
Debt Securities Name of Trading Center or Quotation Medium (if any)
N/A

1-A: Item 2. Issuer Eligibility

Issuer Eligibility

Check this box to certify that all of the following statements are true for the issuer(s)

1-A: Item 3. Application of Rule 262

Application Rule 262

Check this box to certify that, as of the time of this filing, each person described in Rule 262 of Regulation A is either not disqualified under that rule or is disqualified but has received a waiver of such disqualification.

Check this box if "bad actor" disclosure under Rule 262(d) is provided in Part II of the offering statement.

1-A: Item 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings

Summary Infomation

Check the appropriate box to indicate whether you are conducting a Tier 1 or Tier 2 offering Tier1 Tier2
Check the appropriate box to indicate whether the financial statements have been audited Unaudited Audited
Types of Securities Offered in this Offering Statement (select all that apply)
Equity (common or preferred stock)
Does the issuer intend to offer the securities on a delayed or continuous basis pursuant to Rule 251(d)(3)? Yes No
Does the issuer intend this offering to last more than one year? Yes No
Does the issuer intend to price this offering after qualification pursuant to Rule 253(b)? Yes No
Will the issuer be conducting a best efforts offering? Yes No
Has the issuer used solicitation of interest communications in connection with the proposed offering? Yes No
Does the proposed offering involve the resale of securities by affiliates of the issuer? Yes No
Number of securities offered
4444444
Number of securities of that class outstanding
8337932

The information called for by this item below may be omitted if undetermined at the time of filing or submission, except that if a price range has been included in the offering statement, the midpoint of that range must be used to respond. Please refer to Rule 251(a) for the definition of "aggregate offering price" or "aggregate sales" as used in this item. Please leave the field blank if undetermined at this time and include a zero if a particular item is not applicable to the offering.

Price per security
$ 11.2500
The portion of the aggregate offering price attributable to securities being offered on behalf of the issuer
$ 41000000.00
The portion of the aggregate offering price attributable to securities being offered on behalf of selling securityholders
$ 0.00
The portion of the aggregate offering price attributable to all the securities of the issuer sold pursuant to a qualified offering statement within the 12 months before the qualification of this offering statement
$ 0.00
The estimated portion of aggregate sales attributable to securities that may be sold pursuant to any other qualified offering statement concurrently with securities being sold under this offering statement
$ 0.00
Total (the sum of the aggregate offering price and aggregate sales in the four preceding paragraphs)
$ 41000000.00

Anticipated fees in connection with this offering and names of service providers

Underwriters - Name of Service Provider
Underwriters - Fees
$
Sales Commissions - Name of Service Provider
Sales Commissions - Fee
$
Finders' Fees - Name of Service Provider
Finders' Fees - Fees
$
Audit - Name of Service Provider
dbbMcKennon
Audit - Fees
$ 5000.00
Legal - Name of Service Provider
CrowdCheck Law LLP
Legal - Fees
$ 25000.00
Promoters - Name of Service Provider
Promoters - Fees
$
Blue Sky Compliance - Name of Service Provider
Blue Sky Compliance - Fees
$
CRD Number of any broker or dealer listed:
Estimated net proceeds to the issuer
$ 38935000.00
Clarification of responses (if necessary)
The issuer is offering both shares of Common and Preferred Stock. Certain investors are entitled to a discount.

1-A: Item 5. Jurisdictions in Which Securities are to be Offered

Jurisdictions in Which Securities are to be Offered

Using the list below, select the jurisdictions in which the issuer intends to offer the securities

Selected States and Jurisdictions
ALABAMA
ALASKA
ARIZONA
ARKANSAS
CALIFORNIA
COLORADO
CONNECTICUT
DELAWARE
GEORGIA
HAWAII
IDAHO
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
MAINE
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NEVADA
NEW HAMPSHIRE
NEW JERSEY
NEW MEXICO
NEW YORK
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
OREGON
PENNSYLVANIA
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TENNESSEE
TEXAS
UTAH
VERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
DISTRICT OF COLUMBIA
PUERTO RICO

Using the list below, select the jurisdictions in which the securities are to be offered by underwriters, dealers or sales persons or check the appropriate box

None
Same as the jurisdictions in which the issuer intends to offer the securities
Selected States and Jurisdictions

1-A: Item 6. Unregistered Securities Issued or Sold Within One Year

Unregistered Securities Issued or Sold Within One Year

None

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
StartEngine Crowdfunding, Inc.
(b)(1) Title of securities issued
Common Stock
(2) Total Amount of such securities issued
678904
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
$5,091,780 at $7.50 per shares
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
StartEngine Crowdfunding, Inc.
(b)(1) Title of securities issued
Common Stock
(2) Total Amount of such securities issued
10399
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
$77,993 at $7.50 per shares
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Act

(e) Indicate the section of the Securities Act or Commission rule or regulation relied upon for exemption from the registration requirements of such Act and state briefly the facts relied upon for such exemption
Regulation CF

 

AN OFFERING STATEMENT PURSUANT TO REGULATION A RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING CIRCULAR IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THE OFFERING STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS QUALIFIED. THIS PRELIMINARY OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR MAY THERE BE ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL BEFORE REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH STATE. THE COMPANY MAY ELECT TO SATISFY ITS OBLIGATION TO DELIVER A FINAL OFFERING CIRCULAR BY SENDING YOU A NOTICE WITHIN TWO BUSINESS DAYS AFTER THE COMPLETION OF THE COMPANY’S SALE TO YOU THAT CONTAINS THE URL WHERE THE FINAL OFFERING CIRCULAR OR THE OFFERING STATEMENT IN WHICH SUCH FINAL OFFERING CIRCULAR WAS FILED MAY BE OBTAINED.

 

PRELIMINARY OFFERING CIRCULAR DATED MARCH 12, 2020

 

STARTENGINE CROWDFUNDING, INC.

 

 

 

8687 MELROSE AVE

7TH FLOOR (GREEN BUILDING)

WEST HOLLYWOOD, CALIFORNIA 90069

800-317-2200

 

UP TO 4,444,444 SHARES OF COMMON STOCK (1)

 

AND

 

UP TO 111,111 SHARES OF SERIES T PREFERRED STOCK

 

SEE “SECURITIES BEING OFFERED” AT PAGE 38

 

COMMON SHARES

 

    Price to Public     Underwriting
discount and
commissions (2)
    Proceeds to issuer (3)  
Per share   $           11.25     $  0     $ 11.25  
Total Maximum   $ 40,000,000     $ 0     $ 40,000,000  

 

(1)           This assumes that all shares are purchased at the Owner’s Discount (defined below) price; see “Plan of Distribution and Selling Shareholders.” This maximum represents the shares available to be offered as of the date hereof out of the rolling 12-month maximum offering amount of $50,000,000, and reflecting that the company is also offering $1,000,000 in shares of Series T Preferred Stock.

 

(2)           The company has not engaged commissioned sales agents or underwriters; see “Plan of Distribution and Selling Shareholders.” In the event a commissioned sales agent or underwriter is engaged, the company will file a Supplement to this Offering Circular.

 

(3)           Does not include expenses of the offering or reflect the Owner’s Discount; see “Plan of Distribution and Selling Shareholders.”

 

The minimum investment amount for Common Shares is $500.

 

 

 

 

PREFERRED SHARES

 

    Price to Public     Underwriting
discount and
commissions (5)
    Proceeds to issuer (6)  
Per share   $           11.25     $  0     $ 11.25  
Total Maximum   $ 1,000,000     $ 0     $ 1,000,000  

 

(4)           This assumes that all shares are purchased at the Owner’s Discount price; see “Plan of Distribution and Selling Shareholders.”

 

(5)           The company has not engaged commissioned sales agents or underwriters; see “Plan of Distribution and Selling Shareholders.” In the event a commissioned sales agent or underwriter is engaged, the company will file a Supplement to this Offering Circular.

 

(6)           Does not include expenses of the offering or reflect the Owner’s Discount; see “Plan of Distribution and Selling Shareholders.”

 

The minimum investment amount for Preferred Shares is $200,000.

 

The company is seeking to raise up to $40,000,000 from the sale of Common Stock and $1,000,000 from the sale of Preferred Stock for a total of $41,000,000 (the “maximum offering dollar amount”), which represents the shares available to be offered as of the date hereof out of the rolling 12-month maximum offering amount of $50 million,. All investors will be required to purchase securities pursuant to subscription agreements which appear as Exhibits to the Offering Statement of which this Offering Circular forms a part, and which are irrevocable. These contain exclusive forum and jury waiver provisions which are similarly irrevocable; see “Risk Factors,” “Securities Being Offered – Common Stock – Forum Selection Provision,” “Securities Being Offered – Preferred Stock – Forum Selection Provision,” and “Plan of Distribution and Selling Shareholders – Jury Trial Waiver.” Investors in Common Shares in this offering will be required to grant a proxy to vote their shares to the company’s Chief Executive Officer; see “Risk Factors” and “Securities Being Offered – Common Stock – The Proxy.” This means voting control of the company will remain in the hands of the company’s Chief Executive Officer and its Chairman. See “Security Ownership of Management.”

 

The company has engaged Prime Trust, LLC of Nevada as an escrow agent (the “Escrow Agent” or “Prime Trust”) to hold funds tendered by investors. We may hold a series of closings at which we receive the funds from the escrow agent and issue the shares to investors. This offering will terminate at the earlier of the date at which the maximum offering amount has been sold or the date at which the offering is earlier terminated by the company at its sole discretion. At least every 12 months after this offering has been qualified by the United States Securities and Exchange Commission (the “SEC”), the company will file a post-qualification amendment to include the company’s recent financial statements. The offering is being conducted on a best-efforts basis without any minimum target. We may undertake one or more closings on a rolling basis. After each closing, funds tendered by investors will be available to us, and since there is no minimum offering amount, we will have access to these funds even if they do not cover the expenses of this offering. After the initial closing of this offering, we expect to hold closings on at least a monthly basis.

 

2

 

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL OF ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE SEC; HOWEVER THE SEC HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION

 

GENERALLY NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO www.investor.gov.

 

This offering is inherently risky. See “Risk Factors” on page 10.

 

Sales of these securities will commence approximately on                  , 2020.

 

The company is following the “Offering Circular” format of disclosure under Regulation A.

 

In the event that we become a reporting company under the Securities Exchange Act of 1934, we intend to take advantage of the provisions that relate to “Emerging Growth Companies” under the JOBS Act of 2012. See “Summary – Implications of Being an Emerging Growth Company.”

 

3

 

 

TABLE OF CONTENTS

 

Summary 5
Risk Factors 10
Dilution 15
Plan of Distribution and Selling Shareholders 17
Use of Proceeds to Issuer 20
The Company’s Business 20
The Company’s Property 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Directors, Executive Officers and Significant Employees 35
Compensation of Directors and Officers 36
Security Ownership of Management and Certain Shareholders 37
Interest of Management and Others in Certain Transactions 38
Securities Being Offered 38
Financial Statements F-1

 

In this Offering Circular, the term “StartEngine”, “we”, “us”, “our”, or “the company” refers to StartEngine Crowdfunding, Inc. and our subsidiaries on a consolidated basis. The terms “our “StartEngine Capital” or “funding portal” refers to StartEngine Capital LLC, the terms “StartEngine Secure” or “our transfer agent” refer to StartEngine Secure LLC, and the terms “StartEngine Primary” or “our broker-dealer” refer to StartEngine Primary LLC.

 

THIS OFFERING CIRCULAR MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

 

4

 

 

SUMMARY

 

Summary

 

StartEngine Crowdfunding, Inc. aims to revolutionize how startups and small businesses raise capital. We provide an online electronic platform that connects small and medium-sized businesses seeking capital with investors. Online investment by large numbers of investors in comparatively small amounts is often called crowdfunding.

 

Nearly six million small businesses are organized in the United States according to the U.S. Census Bureau. Most of these companies are in need of capital, and they are having difficulty finding it. Banks are reluctant to lend to small and risky companies. Venture capital funds flow to high growth-potential companies whose founders fit a particular profile in terms of education, age, gender and ethnicity. Founders who do not fit this profile risk their life savings to fund their companies and help them grow.

 

The JOBS Act, signed by President Obama in 2012, is intended to help solve the funding problems that early-stage and small companies encounter, by giving them access to a completely new source of funds: their friends and families, customers, fans and believers. In turn, those potential investors get the chance to invest in a company, team or idea they believe in, however uncertain eventual success might be.

 

StartEngine helps companies conduct crowdfunding offerings under the JOBS Act. StartEngine Primary operates under Titles II and IV of the JOBS Act. Title II of the JOBS Act permitted companies to advertise offerings of securities on the internet while selling only to accredited investors. Title IV amended Regulation A under the Securities Act, allowing private companies to advertise the sale of securities to both accredited and non-accredited investors. Our wholly-owned subsidiary, StartEngine Capital, operates under Title III of the JOBS Act, which added Regulation Crowdfunding to the funding options for small companies.

 

We currently facilitate capital-raising under three different exemptions from registration under the Securities Act, all made possible by the JOBS Act:

 

  · Title II of the JOBS Act led to Rule 506(c) of Regulation D under the Securities Act. Since September 23, 2013, start-ups have been able to broadly solicit potential investors for their offerings, including presenting their offerings on online platforms, such as ours, to sell securities in their company. Investors under this rule are required to be accredited investors, meaning they meet certain income and net worth thresholds.
     
  · Title III of the JOBS Act allowed for the adoption of Regulation Crowdfunding. Under Regulation Crowdfunding, companies can raise slightly over $1 million a year from accredited and non-accredited investors. Since the regulation went into effect on May 16, 2016, we have been facilitating these transactions through our wholly owned subsidiary, StartEngine Capital, which is a funding portal registered with the SEC and a member of the Financial Industry Regulatory Authority (“FINRA”).

 

  · Title IV of the JOBS Act required changes to improve Regulation A, the exemption that we are using for this offering. Under the amendments to Regulation A, which went into effect on June 19, 2015, companies can raise up to $50 million a year from accredited and non-accredited investors. Since our wholly-owned subsidiary, StartEngine Primary became a registered broker-dealer in June 2019, we have been facilitating Regulation A offerings for other companies through StartEngine Primary.

 

In addition, companies may also utilize our technology platform to sell securities in offerings made outside the United States in reliance on Regulation S under the Securities Act.

 

We launched our crowdfunding operations in June 2015, as Regulation A went into effect. Elio Motors’ equity crowdfunding offering, hosted on our site, eventually raised $16,917,576 from 6,345 investors. As of December 31, 2019, we have hosted the Regulation A offerings of 24 companies, including two for StartEngine itself. Regulation Crowdfunding went into effect on May 16, 2016 and as of December 31, 2019 we have acted as intermediary for offerings by 561 companies. As of December 31, 2019, companies on our platform have raised a total of $115.6 million from all offering types. Our subsidiary StartEngine Secure began offering transfer agent services in May 2017 and became a registered transfer agent in November 2017. As of December 31, 2019, we provide services for 248 companies, and we anticipate that StartEngine Secure will be an important part of our operations in the future.

 

StartEngine was founded by Howard Marks and Ron Miller. Howard Marks is Chief Executive Officer (“CEO”). Howard founded StartEngine with the mission of helping entrepreneurs achieve their dreams. Howard was the founder and CEO of Acclaim Games, a publisher of online games that is now part of The Walt Disney Company. Before Acclaim, Howard was Chairman of Activision Studios from 1991 until 1997. As a former Board Member, and Executive Vice-President of video game giant Activision, he and a partner took control in 1991 and turned the ailing company into the video game industry leader. As a games industry expert, Howard built one of the largest and most successful games studios in the industry, selling millions of games. He started StartEngine, an unrelated entity, in 2011 as the first startup accelerator in Los Angeles with the goal of helping to make Los Angeles a technology city. After investing in over 60 companies, Howard realized the difficulties entrepreneurs had with raising capital from angel investors and venture capitalists. With the advent of the JOBS Act, Howard realized he could help thousands of entrepreneurs by creating a new company focused on implementing the equity crowdfunding rules. Thus, StartEngine Crowdfunding, Inc. was born in March 2014. Howard is the 2015 "Treasure of Los Angeles" award recipient for his work to transform Los Angeles into a leading technology city, and is a member of Mayor Eric Garcetti's technology council.

 

5

 

 

Ron Miller is the chairman and cofounder of StartEngine. When Howard and Ron initially met in the fall of 2013, they recognized that the JOBS Act represented the greatest advancement for entrepreneurship in a generation. From direct experience as entrepreneurs, they recognized that the key to bringing new technologies and innovations to market required capital that is not readily available. As a serial start-up entrepreneur, Ron immediately went into action to advocate for SEC rulemaking to give life to the JOBS Act, raise the initial capital and built a leadership team to drive the sales and marketing plan to help StartEngine establish a leading position in the market.

 

Prior to StartEngine, Ron founded, built and sold five companies through management buyouts, private equity, private investors, and public markets. He was also nominated as a four-time Inc. 500/5000 award recipient and was an Ernst & Young entrepreneur of the year award finalist. As Chairman, Ron brings his deep experience as a leader and strategist to the company.

 

The Offering

 

The offering is for Common Stock and Series T Preferred Stock of StartEngine Crowdfunding, Inc. The rights of the Common Stock and the Series T Preferred Stock are described more fully in “Securities Being Offered.”

 

Securities offered  

Maximum of 4,444,444 shares of Common Stock (1)

Maximum of 111,111 shares of Series T Preferred Stock (1)

     
Shares of Common Stock outstanding before the offering (2)   8,337,932 shares
     
Shares of Preferred Stock outstanding before the offering (2)   6,947,574 shares
     
Shares of Common Stock outstanding after the offering (1)   12,782,376 shares
     
Shares of Preferred Stock outstanding after the offering (1)   7,058,685 shares
     
Delivery of the Shares   Shares will be delivered by book entry.
     
Use of proceeds   The net proceeds of this offering will be used primarily to cover marketing costs and operating expenses, including salaries to our executive officers. The details of our plans are set forth in our “Use of Proceeds” section.
     
   

(1) Investors in this offering who currently own shares of the company are entitled to an owner’s discount (the “Owner’s Discount”) of 20%; see “Plan of Distribution and Selling Shareholders.” The number of shares covered by the Offering Statement of which this Offering Circular forms a part assumes that all the shares were purchased with the Owner’s Discount. This represents the shares available to be offered as of the date of this Offering Circular out of the rolling 12-month maximum offering amount of $50 million.

 

(2) As of March 11, 2020. Does not include shares issuable upon the exercise of options issued under the 2015 Equity Incentive Plan, the issuance of securities in the company’s previous Regulation A and Regulation CF after March 11, 2020 or the issuance of shares in the company’s current offering of the company’s Common Stock under Regulation CF.

 

6

 

 

Implications of Being an Emerging Growth Company

 

We are not subject to the ongoing reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) because we are not registering our securities under the Exchange Act.  Rather, we will be subject to the more limited reporting requirements under Regulation A, including the obligation to electronically file:

 

· annual reports (including disclosure relating to our business operations for the preceding three fiscal years, or, if in existence for less than three years, since inception, related party transactions, beneficial ownership of the issuer’s securities, executive officers and directors and certain executive compensation information, management’s discussion and analysis (“MD&A”) of the issuer’s liquidity, capital resources, and results of operations, and two years of audited financial statements),

 

· semiannual reports (including disclosure primarily relating to the issuer’s interim financial statements and MD&A) and

 

· current reports for certain material events.

 

In addition, at any time after completing reporting for the fiscal year in which our offering statement was qualified, if the securities of each class to which this offering statement relates are held of record by fewer than 300 persons and offers or sales are not ongoing, we may immediately suspend our ongoing reporting obligations under Regulation A.

 

If and when we become subject to the ongoing reporting requirements of the Exchange Act, as an issuer with less than $1.07 billion in total annual gross revenues during our last fiscal year, we will qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and this status will be significant. An emerging growth company may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:

 

· will not be required to obtain an auditor attestation on our internal controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

· will not be required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”);

 

· will not be required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes);

 

· will be exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;

 

· may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A; and

 

· will be eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under Section 107 of the JOBS Act.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, or such earlier time that we no longer meet the definition of an emerging growth company. Note that this offering, while a public offering, is not a sale of common equity pursuant to a registration statement, since the offering is conducted pursuant to an exemption from the registration requirements. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.07 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1 billion in principal amount of non-convertible debt over a three-year period.

 

Certain of these reduced reporting requirements and exemptions are also available to us due to the fact that we may also qualify, once listed, as a “smaller reporting company” under the SEC’s rules. For instance, smaller reporting companies are not required to obtain an auditor attestation on their assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.

 

7

 

 

Selected Risks Associated with Our Business

 

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. These risks include, but are not limited to, the following:

 

Risk Factors Related to the Company and its Business

 

  · We are an early stage company and have not yet generated any profits;

 

  · Our financials were prepared on a “going concern” basis;

 

  · Any valuation of the Company at this stage is difficult to assess;

 

  · We operate in a regulatory environment that is evolving and uncertain;

 

  · We operate in a highly regulated industry;

 

  · We were recently approved as a broker-dealer, and are still in the process of adapting our business model and pricing structure;

 

  · We may be liable for misstatements made by issuers;

 

  · Our compliance is focused on U.S. laws and we have not analyzed foreign laws regarding the participation of non-U.S. residents;

 

  · StartEngine’s service offerings are relatively new in an industry that is still quickly evolving;

 

  · We have an evolving business model;

 

  · We are reliant on one main type of service;

 

  · Our future plans include the use of blockchain technology, including the Ethereum protocol;

 

  · We depend on key personnel and face challenges recruiting needed personnel;

 

  · StartEngine and its providers are vulnerable to hackers and cyber attacks;

 

  · The SEC may suspend trading in a stock when the SEC is of the opinion that a suspension is required to protect investors and the public interest;

 

  · StartEngine currently relies on one escrow agent and technology service provider;

 

  · We are dependent on general economic conditions;

 

  · We face significant market competition;

 

  · We may not be able to protect all of our intellectual property;

 

  · Our revenues and profits are subject to fluctuations;

 

  · If the company cannot raise sufficient funds it will not succeed; and

 

  · There is no minimum amount set as a condition to closing this offering.

 

8

 

 

Risk Factors Related to the Common Stock, Preferred Stock and the Offering

 

  · There is uncertainty as to the amount of time it will take for us to deliver securities to investors under this offering;

 

  · Investors in our Common Stock will have to assign their voting rights;

 

  · Investors in our Series T Preferred Stock will have to be subject to drag along rights;

 

  · Voting control is in the hands of a few large stockholders;

 

  · We are offering a discount on our stock price to current owners of our securities;    
     
  · The exclusive forum provision in the subscription agreements may have the effect of limiting an investor’s ability to bring legal action against us and could limit an investor’s ability to obtain a favorable judicial forum for disputes;
     
  · Investors in this offering may not be entitled to a jury trial with respect to claims arising under the subscription agreements, which could result in less favorable outcomes to the plaintiff(s) in any action under the agreements;

 

  · Future fundraising may affect the rights of investors;

 

  · Holders of our Preferred Stock are entitled to potentially significant liquidation preferences over holders of our Common Stock if we are liquidated, including upon a sale of our company;

 

  · There is no current market for our Common Stock or Preferred Stock;

 

  ·

You will need to keep records of your investment for tax purposes; and

 

  · Our price of Common Stock or Preferred Stock may be volatile.

 

9

 

 

RISK FACTORS

 

The SEC requires the company to identify risks that are specific to its business and its financial condition. The company is still subject to all the same risks that all companies in its business, and all companies in the economy, are exposed to. These include risks relating to economic downturns, political and economic events and technological developments (such as hacking and the ability to prevent hacking). Additionally, early-stage companies are inherently more risky than more developed companies. You should consider general risks as well as specific risks when deciding whether to invest.

 

Risk Factors Related to the Company and its Business

 

We are an early stage company and have not yet generated any profits.

 

StartEngine was formed in 2014. Accordingly, the company has a limited history upon which an evaluation of its performance and future prospects can be made. Our current and proposed operations are subject to all the business risks associated with new enterprises. These include likely fluctuations in operating results as the company reacts to developments in its market, managing its growth and the entry of competitors into the market. We will only be able to pay dividends on any shares once our directors determine that we are financially able to do so. StartEngine has incurred a net loss and has had insufficient revenues generated since inception to cover operational expenses. There is no assurance that we will be profitable in the next three years or generate sufficient revenues to pay dividends to the holders of the shares.

 

Our financials were prepared on a “going concern” basis.

 

Our financial statements were prepared on a “going concern” basis. Certain matters, as described below and in Note 1 to the accompanying financial statements indicate there may be substantial doubt about the company's ability to continue as a going concern. However, based on management's assessment of operations and financing, they determined that the substantial doubt was alleviated. We have not generated profits since inception, and we have had a history of losses. We have sustained losses of $1,933,791, $4,600,089 and $2,280,174 for the six months ended June 30, 2019 and for the years ended December 31, 2018 and 2017, respectively, and have an accumulated deficit of $13,199,480 as of June 30, 2019. Our ability to continue operations is dependent upon our ability to generate sufficient cash flows from operations to meet our obligations, which the company has not been able to accomplish to date, and/or to obtain additional capital financing.

 

Any valuation of the Company at this stage is difficult to assess.

 

The valuation for the offering was established by the company. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult to assess and you may risk overpaying for your investment.

 

We operate in a regulatory environment that is evolving and uncertain.

 

The regulatory framework for online capital formation or crowdfunding is very new. The regulations that govern our operations have been in existence for a very few years. Further, there are constant discussions among legislators and regulators with respect to changing the regulatory environment. New laws and regulations could be adopted in the United States and abroad. Further, existing laws and regulations may be interpreted in ways that would impact our operations, including how we communicate and work with investors and the companies that use our platforms’ services and the types of securities that our clients can offer and sell on our platform. For instance, over the past year, there have been several attempts to modify the current regulatory regime. Some of those suggested reforms could make it easier for anyone to sell securities (without using our services). Any such changes would have a negative impact on our business. Moreover, certain types of securities offered utilizing our platforms (e.g., cryptocurrencies and other digital assets) have been subjected to increased regulatory scrutiny.

 

We operate in a highly regulated industry.

 

We are subject to extensive regulation and failure to comply with such regulation could have an adverse effect on our business. Further, our subsidiary StartEngine Capital LLC is registered as a funding portal; our subsidiary StartEngine Secure LLC is registered as a transfer agent; and our subsidiary StartEngine Primary LLC is registered as a broker-dealer and in the process of establishing the ability to operate an alternative trading system. As a funding portal and broker-dealer, we have to comply with stringent regulations, and the operation of our funding portal, broker-dealer and alternative trading system services exposes us to a significant amount of liability. Regulated entities are frequently subject to examination, constraints on their business, and in some cases fines. See "Regulations." In addition, some of the restrictions and rules applicable to our subsidiaries could adversely affect and limit some of our business plans

 

10

 

 

We were recently approved as a broker-dealer, and are still in the process of adapting our business model and pricing structure.

 

Until recently, we were not a broker-dealer and had structured our business model in a way that we believe allowed us to act in this arena without registration. Since June 2019, when StartEngine Primary LLC’s application was approved and it began operating as a broker-dealer, we not only have been subjected to federal and state requirements but also have needed to comply with the requirements of FINRA, the self-regulatory organization, that apply to broker-dealers. Moreover, we have not formally launched our alternative trading system and when we do, we will be subjected to additional laws. We are still in the process of adapting to this new change, but there have been and will be increased costs, including the need for personnel with specific qualifications and pay them in accordance with their experience. We are subjected to periodic examinations and we will be required to change aspects of our business processes and communications in response to the findings of those examinations. Becoming a broker-dealer has and will continue to lead to increases in our compliance costs as well as increases in our exposure to liabilities, including subjecting us to liability for misstatements made by issuers utilizing our services; see “Business – Regulations.” To date, we have limited data as to how becoming a broker-dealer has increased our revenues and It is unclear that the additional fees and business that we anticipate by expanding our offerings will indeed develop, and even if we do receive additional revenues, whether those revenues will be able to offset the additional compliance costs.

 

We may be liable for misstatements made by issuers.

 

Under the Securities Act and the Exchange Act, issuers making offerings through our funding portal may be liable for including untrue statements of material facts or for omitting information that could make the statements misleading. This liability may also extend in Regulation Crowdfunding offerings to funding portals, such as our subsidiary. Further, as a broker-dealer, we may be liable for statements by issuers utilizing our services in connection with Regulation A and Regulation D offerings. See “Regulation – Regulation Crowdfunding – Liability” and “Regulation – Regulation A and Regulation D – Liability”. Even though due diligence defenses may be available; there can be no assurance that if we were sued we would prevail. Further, even if we do succeed, lawsuits are time consuming and expensive, and being a party to such actions may cause us reputational harm that would negatively impact our business. Moreover, even if we are not liable or a party to a lawsuit or enforcement action, some of our clients have been and will be subject to such proceedings. Any involvement we may have, including responding to document production requests, may be time-consuming and expensive as well.

 

Our compliance is focused on U.S. laws and we have not analyzed foreign laws regarding the participation of non-U.S. residents.

 

Some of the investment opportunities posted on our platform are open to non-U.S. residents. We have not researched all the applicable foreign laws and regulations, and we have not set up our structure to be compliant with foreign laws. It is possible that we may be deemed in violation of those laws, which could result in fines or penalties as well as reputational harm. This may limit our ability in the future to assist companies in accessing money from those investors, and compliance with those laws and regulation may limit our business operations and plans for future expansion.

 

StartEngine’s product offerings are relatively new in an industry that is still quickly evolving.

 

The principal securities regulations that we work with, Rule 506(c), Regulation A and Regulation Crowdfunding, have only been in effect in their current form since 2013, 2015 and 2016, respectively. StartEngine’s ability to continue to penetrate the market remains uncertain as potential issuer companies may choose to use different platforms or providers (including, in the case of Rule 506(c) and Regulation A, using their own online platform), or determine alternative methods of financing. Investors may decide to invest their money elsewhere. Further, our potential market may not be as large, or our industry may not grow as rapidly, as anticipated. With a smaller market than expected, we may have fewer customers. Success will likely be a factor of investing in the development and implementation of marketing campaigns, subsequent adoption by issuer companies as well as investors, and favorable changes in the regulatory environment.

 

We have an evolving business model.

 

Our business model is one of innovation, including continuously working to expand our product lines and services to our clients, such as our expansion into the digital assets arena and the transfer agent space as well as our planned foray into becoming a broker-dealer and an alternative trading system; see the “The Company’s Business – Principal Products and Services – Services under Development”. It is unclear whether these services will be successful. Further, we continuously try to offer additional types of services, and we cannot offer any assurance that any of them will be successful. From time to time we may also modify aspects of our business model relating to our service offerings. We cannot offer any assurance that these or any other modifications will be successful or will not result in harm to the business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth, and negatively affect our operating results.

 

We are reliant on one main type of service.

 

All of current services are variants on one type of service — providing a platform for online capital formation. Our revenues are therefore dependent upon the market for online capital formation.

 

We depend on key personnel and face challenges recruiting needed personnel.

 

Our future success depends on the efforts of a small number of key personnel, including our founder and Chief Executive Officer, Howard Marks, and our compliance, engineering and marketing teams. Our software engineer team, as well as our compliance team and our marketing team led by Johanna Cronin, are critical to continually innovate and improve our products while operating in a highly regulated industry. In addition, due to our limited financial resources and the specialized expertise required, we may not be able to recruit the individuals needed for our business needs. There can be no assurance that we will be successful in attracting and retaining the personnel we require to operate and be innovative.

 

11

 

 

StartEngine and its providers are vulnerable to hackers and cyber attacks.

 

As an internet-based business, we may be vulnerable to hackers who may access the data of our investors and the issuer companies that utilize our platform. Further, any significant disruption in service on the StartEngine platform or in its computer systems could reduce the attractiveness of the StartEngine platform and result in a loss of investors and companies interested in using our platform. Further, we rely on a third-party technology provider to provide some of our back-up technology as well as act as our escrow agent. Any disruptions of services or cyber attacks either on our technology provider or on StartEngine could harm our reputation and materially negatively impact our financial condition and business. Further, platforms that use blockchain technology can be subject to cybersecurity threats. Hackers or other malicious groups or organizations may attempt to interfere with the blockchain through different means, including but not limited to malware attacks, denial of service attacks, or consensus based attacks. Transactions can also be subject to fraud and theft.

 

In the event we are approved as an ATS, we may be affected by SEC actions.

 

The SEC may suspend trading in a stock when the SEC is of the opinion that a suspension is required to protect investors and the public interest. A suspension of any our clients’ securities could adversely affect our business.

 

The SEC may impose a suspension of trading for various reasons, which include:

 

  · A lack of current, accurate, or adequate information about the company – for example, when a company has not filed any periodic reports for an extended period.

 

  · Questions about the accuracy of publicly available information, including in company press releases and reports, about the company’s current operational status and financial condition.

 

  · Questions about trading in the stock, including trading by insiders, potential market manipulation, and the ability to clear and settle transactions in the stock.

 

If that were to happen, the trading activities in the ATS which we intend to operate could be adversely affected.

 

StartEngine currently relies on one vendor for escrow and technology services.

 

We currently rely on Prime Trust to provide technology services for processing investment transactions (e.g., processing credit card and payments, electronic execution of the subscription agreements, etc.) and all escrow services related to offerings on our platform. Any change in this relationship will require us to find another technology service provider, escrow agent and escrow bank. This may cause us delays as well as additional costs in transitioning our technology.

 

We are dependent on general economic conditions.

 

Our business model is dependent on investors investing in the companies presented on our platforms. Investment dollars are disposable income. Our business model is thus dependent on national and international economic conditions. Adverse national and international economic conditions may reduce the future availability of investment dollars, which would negatively impact our revenues and possibly our ability to continue operations. It is not possible to accurately predict the potential adverse impacts on the company, if any, of current economic conditions on its financial condition, operating results and cash flow.

 

We face significant market competition.

 

We facilitate online capital formation. Though this is a new market, we compete against a variety of entrants in the market as well likely new entrants into the market. Some of these follow a regulatory model that is different from ours and might provide them competitive advantages. New entrants could include those that may already have a foothold in the securities industry, including some established broker-dealers. Further, online capital formation is not the only way to address helping start-ups raise capital, and the company has to compete with a number of other approaches, including traditional venture capital investments, loans and other traditional methods of raising funds and companies conducting crowdfunding raises on their own websites. Additionally, some competitors and future competitors may be better capitalized than us, which would give them a significant advantage in marketing and operations.

 

We may not be able to protect all of our intellectual property.

 

Our profitability may depend in part on our ability to effectively protect our proprietary rights, including obtaining trademarks for our brand names, protecting our products and websites, maintaining the secrecy of our internal workings and preserving our trade secrets, as well as our ability to operate without inadvertently infringing on the proprietary rights of others. There can be no assurance that we will be able to obtain future protections for our intellectual property or defend our current trademarks and future trademarks and patents. Further, policing and protecting our intellectual property against unauthorized use by third parties is time-consuming and expensive, and certain countries may not even recognize our intellectual property rights. There can also be no assurance that a third party will not assert infringement claims with respect to our products or technologies. Any litigation for both protecting our intellectual property or defending our use of certain technologies could have material adverse effect on our business, operating results and financial condition, regardless of the outcome of such litigation.

 

12

 

 

Our revenues and profits are subject to fluctuations.

 

It is difficult to accurately forecast our revenues and operating results, and these could fluctuate in the future due to a number of factors. These factors may include adverse changes in: number of investors and amount of investors’ dollars, the success of world securities markets, general economic conditions, our ability to market our platform to companies and investors, headcount and other operating costs, and general industry and regulatory conditions and requirements. The company's operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant and could impact our ability to operate our business.

 

If the company cannot raise sufficient funds it will not succeed.

 

To date, we have experienced a continuing need for capital to execute our business model. We are offering securities in the amount of up to $41 million in this offering, and may close on any investments that are made. The amount we can raise in any 12-month period is limited to $50 million. Even if the maximum amount is raised (in this 12-month period or in subsequent periods), we are likely to need additional funds in the future in order to grow, and if we cannot raise those funds for whatever reason, including reasons relating to the company itself or to the broader economy, we may not survive. If we manage to raise only a portion of funds sought, we will have to find other sources of funding for some of the plans outlined in “Use of Proceeds.” We do not have any alternative sources of funds committed.

 

There is no minimum amount set as a condition to closing this offering.

 

Because this is a “best efforts” offering with no minimum, we will have access to any funds tendered. This might mean that any investment made could be the only investment in this offering, leaving the company without adequate capital to pursue its business plan or even to cover the expenses of this offering.

 

Risk Factors Related to the Common Stock, Preferred Stock and the Offering

 

There is uncertainty as to the amount of time it will take for us to deliver securities to investors under this offering.

 

The process for issuance of Common or Preferred Stock is set out in “Plan of Distribution and Selling Shareholders.” There may be a delay between the time you execute your subscription agreement and tender funds and the time securities are delivered to you, while we and the Escrow Agent complete our subscription and due diligence process and we submit a disbursement request to the Escrow Agent. Although, based on our experience in our prior offering, investors who provide the information required by the subscription agreement and give accurate instructions for the payment of the subscription price should receive their securities in no more than six months, we cannot guarantee that you will receive your securities by a specific date or within a specific timeframe.

 

Investors in our Common Stock will have to assign their voting rights.

 

As part of this investment, each investor in our Common Stock will be required to agree to the terms of the Subscription Agreement included as Exhibit 4.1 to the Offering Statement of which this Offering Circular is a part. By each such investor’s execution of the Subscription Agreement and under the terms thereof, that investor will grant an irrevocable proxy, giving the right to vote its shares of Common Stock to the company’s CEO. That will limit investors’ ability to vote their shares of Common Stock until the events specified in the proxy, which include the company’s IPO or acquisition by another entity, which may never happen.

 

Investors in our Series T Preferred Stock will be subject to drag-along rights.

 

As part of this investment, each investor in our Series T Preferred Stock will be required to agree to drag along rights contained in our subscription agreement included as Exhibit 4.2 to the Offering Statement of which this Offering Circular is a part. In the event the company’s Board and the holders of a majority of the company’s voting stock vote in favor of a sale of the company, and holders of our Series T Preferred Stock do not approve the sale, a Series T Preferred Stock holder will be required to sell his/her shares; see “Securities Being Offered –Preferred Stock – Drag Along Rights” below. Specifically, holders of such securities will be forced to sell their stock in that transaction regardless of whether they believe the transaction is the best or highest value for their shares, and regardless of whether they believe the transaction is in their best interests.

 

Voting control is in the hands of a few large stockholders.

 

Voting Control is concentrated in the hands of a small number of shareholders. Whether or not your shares are subject to the proxy discussed above, you will not be able to influence our policies or any other corporate matter, including the election of directors, changes to our company’s governance documents, expanding the employee option pool, and any merger, consolidation, sale of all or substantially all of our assets, or other major action requiring stockholder approval. Some of the larger stockholders include, or have the right to designate, executive officers and directors of our Board. These few people and entities make all major decisions regarding the company. As a minority shareholder and a signatory to the proxy agreement, you will not have a say in these decisions.

 

13

 

 

We are offering a discount on our stock price to current owners of our securities.

 

Certain investors, specifically current owners of our securities, are entitled to a discount to the share price in this offering; see “Plan of Distribution and Selling Shareholders”. Therefore, the value of shares of investors who pay the full price in this offering will be immediately diluted by investments made by investors entitled to the discount, who will pay less for the same stake in the company.

 

The exclusive forum provision in the subscription agreements may have the effect of limiting an investor’s ability to bring legal action against us and could limit an investor’s ability to obtain a favorable judicial forum for disputes.

 

Section 7 in each of the subscription agreements for this offering includes a forum selection provision that requires any claims against the company based on the subscription agreement be brought in a court of competent jurisdiction in the State of California; see “Securities Being Offered – Common Stock – Forum Selection Provision” and “Securities Being Offered – Preferred Stock – Forum Selection Provision.” The forum selection provision will not be applicable to lawsuits arising from the federal securities laws. The provision may have the effect of limiting the ability of investors to bring a legal claim against us due to geographic limitations. There is also the possibility that the exclusive forum provision may discourage stockholder lawsuits with respect to matters arising under laws other than the federal securities laws, or limit stockholders’ ability to bring such claims in a judicial forum that they find favorable for disputes with us and our officers and directors. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

Investors in this offering may not be entitled to a jury trial with respect to claims arising under the subscription agreements, which could result in less favorable outcomes to the plaintiff(s) in any action under the agreements.

 

Investors in this offering will be bound by the subscription agreements, each of which includes a provision under which investors waive the right to a jury trial of any claim they may have against the company arising out of or relating to the subscription agreement, including any claims made under the federal securities laws.

 

If we opposed a jury trial demand based on the waiver, a court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which governs the subscription agreement, in a court of competent jurisdiction in the State of California. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the subscription agreement. You should consult legal counsel regarding the jury waiver provision before entering into the subscription agreement.

 

If you bring a claim against the company in connection with matters arising under the subscription agreement, including claims under federal securities laws, you may not be entitled to a jury trial with respect to those claims, which may have the effect of limiting and discouraging lawsuits against the company. If a lawsuit is brought against the company under the subscription agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in such an action.

 

Nevertheless, if the jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the subscription agreement with a jury trial. No condition, stipulation or provision of the subscription agreement serves as a waiver by any holder of common shares or by us of compliance with any provision of the federal securities laws and the rules and regulations promulgated under those laws.

 

In addition, when our Common Stock or Preferred Stock are transferred, the transferee is required to agree to all the same conditions, obligations and restrictions applicable to those securities or to the transferor with regard to ownership of those securities, that were in effect immediately prior to the transfer of the Common Stock or Preferred Stock, including but not limited to the subscription agreement. Therefore, purchasers in secondary transactions will be subject to this provision.

 

Future fundraising may affect the rights of investors.

 

In order to expand, the company is likely to raise funds again in the future, either by offerings of securities (including post-qualification amendments to this offering) or through borrowing from banks or other sources. The terms of future capital raising, such as loan agreements, may include covenants that give creditors greater rights over the financial resources of the company.

 

Holders of our Preferred Stock are entitled to potentially significant liquidation preferences over holders of our Common Stock if we are liquidated, including upon a sale of our company.

 

Holders of our outstanding Preferred Stock, including the Series T Preferred Stock offered in this offering, have liquidation preferences over holders of Common Stock being offered in this offering. This liquidation preference is paid if the amount a holder of Preferred Stock would receive under the liquidation preference is greater than the amount such holder would have received if such holder’s shares of Preferred Stock had been converted to Common Stock immediately prior to the liquidation event. Holders of Series A Preferred Stock and Series T Preferred Stock are entitled to liquidation preferences superior to Series Seed Preferred Stock. See “Securities Being Offered – Preferred Stock – Right to Receive Liquidation Distributions”. If a liquidation event, including a sale of our company, were to occur that resulted in a distribution of less than approximately $7 million plus the amount of Series T Preferred Stock sold in this offering to our stockholders, the holders of our Preferred Stock (including Series T Preferred Stock) could be entitled to all proceeds of cash distributions.

 

14

 

 

There is no current market for our Common Stock or Preferred Stock.

 

There is no formal marketplace for the resale of our Common Stock or Preferred Stock. These securities may be traded over-the-counter to the extent any demand exists. These securities are illiquid and there will not be an official current price for them, as there would be if we were a publicly-traded company with a listing on a stock exchange. Investors should assume that they may not be able to liquidate their investment for some time, or be able to pledge their shares as collateral. Further, certain investors are required to assign their voting rights as a condition to investing; see “Risk Factors — Investors in our Common Stock will have to assign their voting rights.” This assignment of their voting rights may further limit an investor’s ability to liquidate their investment. Since we have not yet established a trading forum for the Common Stock or Preferred Stock, there will be no easy way to know what these securities are “worth” at any time. Even if we seek a listing on the “OTCQX” or the “OTCQB” markets or another alternative trading system or “ATS,” there may not be frequent trading and therefore no market price for the Common Stock and/or Preferred Stock.

 

You will need to keep records of your investment for tax purposes.

 

As with all investments in securities, if you sell the Common Stock or Preferred Stock, you will probably need to pay tax on the long- or short-term capital gains that you realize if sold at a profit or set any loss against other income. If you do not have a regular brokerage account, or your regular broker will not hold the Common Stock or Preferred Stock for you (and many brokers refuse to hold Regulation A securities for their customers) there will be nobody keeping records for you for tax purposes and you will have to keep your own records, and calculate the gain on any sales of any securities you sell.

 

The price for our Common Stock and Preferred Stock may be volatile.

 

The market price of our Common Stock and Preferred Stock, if and when any trading begins in the future, is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

  · We may not be able to compete successfully against current and future competitors.

 

  · Our ability to obtain working capital financing.

 

  · Additions or departures of key personnel.

 

  · Sales of our shares.

 

  · Our ability to execute the business plan.

 

  · Operating results that fall below expectations.

 

  · Regulatory developments.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our securities. As a result, you may be unable to resell your securities at a desired price.

 

DILUTION

 

Dilution means a reduction in value, control or earnings of the shares the investor owns.

 

Immediate dilution

 

An early-stage company typically sells its shares (or grants options exercisable for its shares) to its founders and early employees at a very low cash cost because they are, in effect, putting their “sweat equity” into the company. When the company seeks cash investments from outside investors, like you, the new investors typically pay a much larger sum for their shares than the founders or earlier investors, which means that the cash value of your stake is diluted because all the shares are worth the same amount, and you paid more than earlier investors for your shares.

 

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The following table demonstrates the price that new investors are paying for their shares and the immediate dilution under various total investment scenarios. This table assumes that all the shares were purchased at the full price in this offering and does not reflect new investments in shares by previous investors, who will pay less for the same stake in the company. The dilution is based on the company’s net asset value at June 30, 2019, effected for capital raised between July 1, 2019 and March 11, 2020. We believe this method gives investors a better picture of what they will pay for their investment compared to previous investors and Company insiders than simply listing such transactions for the last 12 months, which is what the SEC requires.

 

      $5,000,000       $20,000,000       Maximum  
      Raise       Raise       Raise  
Price per share   $ 11.25     $ 11.25     $ 11.25  
Shares issued     444,444       1,777,777       3,644,444  
Capital raised (1)   $ 4,999,995     $ 19,999,991     $ 40,999,995  
Less: Offering costs   $ (315,000 )   $ (1,565,000 )   $ (2,065,000 )
Net offering proceeds to company   $ 4,684,995     $ 18,434,991     $ 38,934,995  
Proceeds from option exercises (2)   $ 5,437,400     $ 5,437,400     $ 5,437,400  
Net tangible book value pre-financing   $ 5,169,773     $ 5,169,773     $ 5,169,773  
Share issued and outstanding pre-financing (3)     16,800,506       16,800,506       16,800,506  
Shares issued in financing from company     444,444       1,777,777       3,644,444  
Post financing shares issued and outstanding     17,244,950       18,578,283       20,444,950  
Net tangible book value per share prior to offering   $ 0.31     $ 0.31     $ 0.31  
Increase/(decrease) per share attributable to new investors   $ 0.58     $ 1.26     $ 2.12  
Net tangible book value after offering   $ 0.89     $ 1.56     $ 2.42  
Dilution per share to new investors   $ 10.36     $ 9.69     $ 8.83  

 

(1) Existing investors receive a 20% discount on purchase of these shares. If half of the investors in this offering are existing investors, and the company issues all 3,644,444 shares, the dilution to new investors paying $11.25 per share will be $9.03 per share .
(2) Assumes all options are exercised at exercise price.
(3) Includes impact of 1,515,000 stock options. 644,225 are vested as of the date of this Offering Circular.

 

Future dilution

 

Another important way of looking at dilution is the dilution that happens due to future actions by the company. The investor’s stake in a company could be diluted due to the company issuing additional shares. In other words, when the company issues more shares, the percentage of the company that you own will go down, even though the value of the company may go up. You will own a smaller piece of that company. This increase in number of shares outstanding could result from a stock offering (such as an initial public offering, another crowdfunding round, a venture capital round, or angel investment), employees exercising stock options, or by conversion of certain instruments (e.g., convertible bonds, preferred shares or warrants) into stock.

 

If the company decides to issue more shares, an investor could experience value dilution, with each share being worth less than before, and control dilution, with the total percentage an investor owns being less than before. There may also be earnings dilution, with a reduction in the amount earned per share (though this typically occurs only if the company offers dividends, and most early stage companies are unlikely to offer dividends, preferring to invest any earnings into the company).

 

The type of dilution that hurts early-stage investors most occurs when the company sells more shares in a “down round,” meaning at a lower valuation than in earlier offerings. An example of how this might occur is as follows (numbers are for illustrative purposes only):

 

  · In June 2019 Jane invests $20,000 for shares that represent 2% of a company valued at $1 million.

 

  · In December the company is doing very well and sells $5 million in shares to venture capitalists on a valuation (before the new investment) of $10 million. Jane now owns only 1.3% of the company but her stake is worth $200,000.

 

  · In June 2020 the company has run into serious problems and in order to stay afloat it raises $1 million at a valuation of only $2 million (the “down round”). Jane now owns only 0.89% of the company and her stake is worth only $26,660.

 

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This type of dilution might also happen upon conversion of convertible notes into shares. Typically, the terms of convertible notes issued by early-stage companies provide that in the event of another round of financing, the holders of the convertible notes get to convert their notes into equity at a “discount” to the price paid by the new investors (i.e., they get more shares than the new investors would for the same price). Additionally, convertible notes may have a “price cap” on the conversion price, which effectively acts as a share price ceiling. Either way, the holders of the convertible notes get more shares for their money than new investors. In the event that the financing is a “down round”, the holders of the convertible notes will dilute existing equity holders, even more than the new investors do, because they get more shares for their money. Investors should pay careful attention to the amount of convertible notes that the company has issued (and may issue in the future), and the terms of those notes.

 

If you are making an investment expecting to own a certain percentage of the company or expecting each share to hold a certain amount of value, it’s important to realize how the value of those shares can decrease by actions taken by the company. Dilution can make drastic changes to the value of each share, ownership percentage, voting control, and earnings per share.

 

PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS

 

Plan of Distribution

 

StartEngine is seeking to raise up to $41,000,000 in total. The company will raise the money through the sale of $40,000,000 of shares of Common Stock and $1,000,000 of shares of Preferred Stock. The maximum offering amount is $41,000,000, which represents the value of securities available to be offered as of the date of this Offering Circular.  Under Regulation A, the company may only offer $50 million in securities during a rolling 12-month period. In calculating the amount to be sold under this offering, we have assumed that all the shares of Common Stock offered under our previous Regulation A offering, which terminated March 11, 2020, were sold. From time to time, we may seek to qualify additional shares.

 

The company is offering a maximum of 4,444,444 shares of Common Stock and 111,111 shares of Preferred Stock on a “best efforts” basis, which reflects the Owner’s Discount.

 

The minimum investment is $500 for the Common Stock and $200,000 for the Preferred Stock.

 

StartEngine is not selling the shares through commissioned sales agents or underwriters. The company will use its existing website, www.startengine.com, to provide information with respect to the offering.

 

The company is initially offering its securities in all states other than Florida. Investors in those states can invest in the company through a Regulation CF offering. The company may choose to make the appropriate filings to become an “issuer-dealer” in these states, or to record company officers as agents, in which case it will start to sell in those states. In the event the company makes arrangements with a broker-dealer (including an affiliated broker-dealer) to sell into these or other states, it will file a Supplement to this Offering Circular.

 

The company’s Offering Circular will be furnished to prospective investors in this offering via download 24 hours a day, 7 days a week on its startengine.com website.

 

Owner’s Discount

 

StartEngine will be offering a discount to current owners of its securities. Current StartEngine shareholders will receive a 20% discount on the share price to purchase shares of Common Stock and Series T Preferred Stock. These investors will still be required to meet the minimum investment criteria for the respective class of security.

 

The Owner’s Discount will be available to investors who are listed as the shareholders of record for any of our equity securities with our transfer agent on the day that this offering is qualified by the SEC (“Current Owners”). Subsequent purchasers of shares or transferees will not be entitled to the discount.

 

Perks

 

Investors in this offering who invest at least $1,000 or who are Current Owners will be entitled to a 10% bonus on investments in certain other companies’ Regulation CF and Regulation A offerings on StartEngine.

 

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TAX CONSEQUENCES FOR RECIPIENT (INCLUDING FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES) WITH RESPECT TO THE INVESTMENT PURCHASE PACKAGES ARE THE SOLE RESPONSIBILITY OF THE INVESTOR. INVESTORS MUST CONSULT WITH THEIR OWN PERSONAL ACCOUNTANT(S) AND/OR TAX ADVISOR(S) REGARDING THESE MATTERS.

 

This perk applies to offerings by participating third party Regulation CF and Regulation A issuers only. This perk will be valid for one year from when an investor signs the subscription agreement. If an investment is subsequently voided, the investor making it will no longer be entitled to the perk. StartEngine is under no obligation to accept any subscription agreement, and the perk will not apply if the subscription agreement is not accepted. So long as the investor meets the above conditions, the benefits of this perk will be applied when the investor signs the subscription agreement for a Regulation CF offering or a Regulation A offering. The company reserves the right to discontinue this perk if required for regulatory purposes.

 

Investors entitled to this perk may also be entitled to additional incentives, including priority to receive shares in participating offerings that have been oversubscribed.

 

If an investor signs subscription agreements for two participating offerings within 15 days of eligibility for this perk, the perk will be extended another year from the initial expiration date. For example, if an investor signs a subscription agreement to invest in this offering on April 1, 2020 and by April 16 signs subscription agreements for two participating offerings, that investor will be entitled to participate in this perk until March 31, 2022.

 

Further, if a Current Owner, who is entitled the perk, signs subscription agreement for this offering in the last three months of their perk eligibility period, their eligibility for the perk will be extended for an additional year from the initial expiration date. For example, an investor earlier invested $1,000 in our previous Regulation A offering and was entitled to the perk until June 2, 2020, and signs a subscription agreement in this offering on May 2, 2020 for $500. This investor has one month left of their current perk eligibility period (that is, within the last three months of their perk eligibility period). Therefore by making this investment this investor, would be entitled to extend their perk for an additional year from their original perk expiration date, or June 2, 2021.

 

Other than described above, Current Owners will not receive any other extensions on their perk. For example, if an investor signs a subscription agreement in this offering on April 2, 2020 and then subsequently signs another subscription agreement in July 2, 2020, the perk eligibility end date for such investor will be April 1, 2020.

 

Process of Subscribing

 

Prospective investors who submitted non-binding indications of interest during the “test the waters” period, will receive an automated message from us indicating that the offering is open for investment. You will be required to complete a subscription agreement in order to invest. Investors in Common Stock can only complete the subscription agreement on our website. Investors in Preferred Stock should contact the company at contact@startengine.com to receive a subscription agreement.

 

The subscription agreement must be delivered to us and funds for the subscribed amount must be delivered in accordance with the instructions stated in the subscription agreement. Investors will specify whether they will purchase shares via credit card, wire transfer, or ACH transfer.

 

The subscription agreement includes a representation by the investor to the effect that, if you are not an “accredited investor” as defined under securities law, you are investing an amount that does not exceed the greater of 10% of your annual income or 10% of your net worth (excluding your principal residence).

 

Prime Trust is a Nevada registered trust company that offers escrow services as well as an integrated technology platform for processing investment transactions. The company has agreed to pay Prime Trust: (i) technology transaction fee of $2.50 per for each subscription processed regardless if the company accepts the investment, (ii) $250 for escrow account set up fee, (iii) $25 per month for so long as the offering is being conducted, (iv) for investments over $2,000, $2 per domestic investor (individual) and $5 per domestic investor (entity) for anti-money laundering check (up to $60 for international investors (individuals) and $75 for international investors (entities)), (v) $3.00 per investor (one-time accounting fee upon receipt of funds), and (vi) any applicable fees for fund transfers (ACH $1, check $10, wire $15 or $35 for international). Our registered transfer agent, StartEngine Secure, will maintain stockholder information on a book-entry basis.

 

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Investors’ Tender of Funds

 

The company will accept tenders of funds to purchase the shares. The company may close on investments on a “rolling” basis (so not all investors will receive their shares on the same date). The funds tendered by potential investors will be held by Prime Trust, the Escrow Agent, and will be transferred to the company upon each closing. The escrow agreement can be found in Exhibit 8 to the Offering Statement of which this Offering Circular is a part.  The Escrow Agent will not investigate the desirability or advisability of investment in the shares in this offering nor will it approve, endorse or pass upon the merits of purchasing those shares. The Escrow Agent is performing OFAC due diligence on all investors and AML due diligence on investors investing more than $2,000. The Escrow Agent will use a third-party identity verification service to verify customer identification and run AML checks. The process is automated for domestic US, Canadian, and UK investors who are natural persons. If information provided by the investor matches the information on file with the identity verification service, the investor will be cleared for AML. If the information does not match or is not found, the Escrow Agent will request official documentation (e.g., a driver’s license) from the investor to verify that the information provided is accurate. For international investors (excluding Canada and the UK) and non-natural persons, the due diligence will effected using the LexisNexis system. The investor will need to provide additional information, which may include a copy of a valid passport, copy of a valid government issued ID, proof of residency, trust agreements and operating agreements. The Escrow Agent performs funds origination verification on all investments. If the name on the bank account, wire or check used to invest matches the name of the investor, the funds origination is cleared. If the source of funds does not match the name of the investor, authorization or verification documentation is required. Information and verification that may be required includes: names, tax ID, SSNs, government issued ID numbers, addresses, dates of birth, copies of valid government issued ID (passport/visa/driver’s license), address verifications (mail item within the last 90 days that lists the individual and the address provided) if address is not listed on ID, and copies of business entity documentation showing formation, ownership and control structure (such as Articles of Incorporation/By-laws/Operating Agreement). Documents must show that the contact / associated person listed is an authorized signor for the business entity. In addition to identity verification and source-of-funds validation, the Escrow Agent performs watch list checks on all investors, including various lists created and maintained by the OFAC. If there is a watch list hit, the Escrow Agent employs a conservative, best efforts approach to determine if the hit is a false positive. In the case that a false positive cannot be reasonably ascertained, the Escrow Agent notifies the proper authorities, which can include but are not limited to government agencies such as the Federal Bureau of Investigation.

 

There are no conditions that the company must meet in order to hold a closing. A closing will occur each time the company determines to accept funds. All funds are held in escrow pending satisfactory due diligence. The company will accept a subscription (i.e., hold a closing) within 30 calendar days after due diligence is successfully completed. Given the timing of completion of diligence, it is possible that the company could conduct a closing every weekday, which would be administratively burdensome. In order to reduce the number of closings, the company may wait until it has completed due diligence on several investments before submitting a disbursement request to the Escrow Agent. Based on our experience in our prior offering under Regulation A, investors who provide the information required by the subscription agreement and give accurate instructions for the payment of the subscription price should receive their securities in no more than six months; however we cannot guarantee that you will receive your securities by a specific date or within a specific timeframe. The average period from subscription to closing in our previous offering was approximately 30 days, with the fastest time to closing being five days and the slowest, which involved an issue with an international wire, being over six months. If an investor pays by ACH, the period between subscription and closing will be at least 15 days. Subscriptions are irrevocable, and during the period between an investor’s subscription and a closing, the investor will not have the rights of a shareholder. If the closing does not happen, for whatever reason, including, the dissolution or liquidation of the company, the funds in escrow will be returned to the investor.

 

Tendered funds will only be returned to investors in the event we decide to terminate the offering, in which case any money tendered by potential investors that is still held in escrow will be promptly returned by the Escrow Agent upon our instruction. Upon each closing, funds tendered by investors will be made available to the company for our immediate use. Each investor will receive notice from the company upon the receipt of funds and upon closing.

 

Issuance of Shares

 

The information regarding the ownership of the Common Stock or Preferred Stock will be recorded with the stock transfer agent.

 

Jury Trial Waiver

 

The subscription agreement provides that subscribers waive the right to a jury trial of any claim they may have against us arising out of or relating to the subscription agreement, including any claim under federal securities laws. If we opposed a jury trial demand based on the waiver, a court would determine whether the waiver was enforceable given the facts and circumstances of that case in accordance with applicable case law.

 

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Selling Shareholders

 

No securities are being sold for the account of shareholders; all net proceeds of this offering will go to the company.

 

USE OF PROCEEDS TO ISSUER

 

The company estimates that if it sells the maximum amount of $41,000,000 from the sale of Common Stock and/or Series T Preferred Stock, which represents the value of shares available to be offered as of the date of this offering circular out of the rolling 12-month maximum offering amount of $50 million, the net proceeds to the issuer in this offering will be approximately $38,935,000, after deducting the estimated offering expenses of approximately $2,065,000 (including payment to Prime Trust, marketing, legal and accounting professional fees and other expenses).

 

The table below shows the net proceeds the company would receive from this offering assuming an offering size of $5 million, $10 million and $41 million, and the intended use of those proceeds. There is no guarantee that we will be successful in selling any of the shares we are offering.

 

Amount raised   $ 5,000,000     $ 20,000,000     $ 41,000,000  
Offering expenses   $ 315,0000     $ 1,565,000     $ 2,065,000  
Net proceeds to Issuer   $ 4,685,000     $ 18,435,000     $ 38,935,000  
Marketing   $ 1,685,000     $ 6,500,000     $ 12,000,000  
Operations   $ 1,000,000     $ 2,000,000     $ 2,000,000  
Product development   $ 1,000,000     $ 3,000,000     $ 5,000,000  
Cash reserves   $ 1,000,000     $ 6,935,000     $ 19,935,000  

 

Marketing is our largest expected expenditure. Our marketing will use a lead-generation program designed to reach companies who are likely to want to raise capital and to offer them the ability to register on StartEngine to build crowdfunding offerings. Our marketing costs consist mainly of internal salaries for brand managers, lead generation associates, inside sales people and third party companies specialized in incoming lead conversion through telephone and emails. Also included are advertising costs on several types of media, including television, radio, podcasts and internet services such as Facebook and Google. These costs include engaging vendors such as advertising agencies and consultants.

 

Product development is our second largest expected expenditure. This mostly includes salaries for the internal software development team. We expect to hire additional software engineers, user experience specialists, user interface specialists and quality assurance engineers. These engineers will assist with improving our existing services as well as developing our planned new services.

 

The company reserves the right to change the above use of proceeds if management believes it is in the best interest of the company.

 

The allocation of the net proceeds of the offering set forth above represents the company’s estimates based upon its current plans, assumptions it has made regarding the industry and general economic conditions and its future revenues (if any) and expenditures.

 

Investors are cautioned that expenditures may vary substantially from the estimates above. Investors will be relying on the judgment of the company’s management, who will have broad discretion regarding the application of the proceeds from this offering. The amounts and timing of the company’s actual expenditures will depend upon numerous factors, including market conditions, cash generated by the company’s operations (if any), business developments and the rate of the company’s growth. The company may find it necessary or advisable to use portions of the proceeds from this offering for other purposes.

 

In the event that the company does not raise the entire amount it is seeking, then the company may attempt to raise additional funds through private offerings of its securities or by borrowing funds. The company does not have any committed sources of financing.

 

THE COMPANY’S BUSINESS

 

StartEngine Crowdsourcing Inc. was incorporated in the State of Delaware on March 19, 2014. On May 8, 2014, the company changed its name to StartEngine Crowdfunding, Inc.

 

StartEngine aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding operates under Title IV of the JOBS Act, allowing private companies to advertise the sale of their stock to both accredited and non-accredited investors under Regulation A, and under Title II of the JOBS Act, which permits offerings to accredited investors to be advertised under Rule 506(c) of Regulation D. StartEngine is in the process of expanding the breadth of its offerings in order to better serve its mission. Beginning in December 2017, StartEngine began offering transfer agent services through one of its subsidiaries. In June 2019, StartEngine Primary LLC was approved for membership as a broker-dealer with FINRA. The company is now in the process of implementing the services described in “The Company’s Business – Services under Development”. Specifically, StartEngine Primary now offers broker-dealer services to companies selling securities in Regulation A, Regulation Crowdfunding and Regulation D offerings and is working toward adding an alternative trading system to the scope of its offerings.

 

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StartEngine Crowdfunding has three wholly owned subsidiaries:

 

  · StartEngine Capital LLC (“StartEngine Capital”), a funding portal registered with the SEC and a member of the Financial Industry Regulatory Authority (“FINRA”), operates under Title III of the JOBS Act, which introduced Regulation Crowdfunding,

 

  · StartEngine Secure LLC (“StartEngine Secure”), a transfer agent registered with the SEC that was formed on December 12, 2017, and

 

  · StartEngine Primary LLC (“StartEngine Primary”), a company formed on October 12, 2017, a registered broker-dealer, with the ability to offer an alternative trading system.

 

Principal Products and Services

 

Depending on the type of offering being made, we currently operate as a technology platform connecting issuers and investors and as a Regulation Crowdfunding funding portal. We facilitate the following types of offerings that are exempt from registration under the Securities Act:

 

  · Regulation A Offerings: Through StartEngine Crowdfunding we host Regulation A Offerings or Large Online Public Offerings (“Large OPOs”) on our platform. These companies are seeking to raise anywhere from $100,000 to $50,000,000 and we provide an array of services, including assisting with due diligence, custodial accounts and coordinating vendors.

 

  · Regulation Crowdfunding Offerings: Through StartEngine Capital, our funding portal registered with the SEC and FINRA, we host Regulation Crowdfunding or Small Online Public Offerings (“Small OPOs”). These companies are seeking to raise anywhere from $10,000 to $1,070,000, and we also provide an array of services permitted by Regulation Crowdfunding, including campaign page design services, marketing consulting services, assisting with due diligence, custodial accounts, and coordinating vendors.

 

  · Rule 506(c) Offerings: Through StartEngine Crowdfunding, we host offerings under Rule 506(c) of Regulation D or “Select Public Offerings.” Accredited investors are allowed to invest in these offerings and we host these offerings either on a stand-alone basis or concurrently with a Regulation Crowdfunding offering. Under Rule 506(c), companies can use general solicitation to attract investors and there is no limit to the amount of money that can be raised. Therefore, companies engaged in a concurrent Regulation Crowdfunding offering can also raise additional funds from accredited investors providing they comply with the requirements of each exemption.

 

In the past year, we have broadened the types of securities that are offered on our platforms. Currently, issuers are able to sell traditional securities (e.g., common shares and preferred shares) as well as digital assets (tokens). Sales of digital assets have been called initial coin offerings (“ICOs”), and all ICOs on our platforms will rely on the exemptions from registration available through Regulation A, Regulation Crowdfunding, Rule 506(c) of Regulation D and Regulation S.

 

Through our wholly owned subsidiary, StartEngine Secure, we offer transfer agent services. These services include tracking each investor’s account information and the amount of securities purchased and date purchased.  We began offering transfer agent services in May 2017 to all of our clients and became a registered transfer agent in November 2017. Revenues from this service were first recognized in January 2018. Our goal is to provide a seamless service to our client companies. Our intent is for our transfer agent to have agreements with our various entities to allow it to collect information on investors and their investments through an API (application programming interface). Therefore, when a company raises money on StartEngine, our transfer agent will be notified and sent the investor information and the investment details.  The transfer agent will then capture this information into its redundant and secure database hosted in the cloud and encrypt for security purposes.

 

We offer marketing services branded under the name “StartEngine Premium”. For an additional fee, our team will support companies with the design of their campaign pages, provide a designated account consultant to guide a company throughout the campaign creation process, and assist a company in developing a marketing strategy based on best practices and analytics from previous successful campaigns. This service first generated revenues in May 2017. Our funding portal now also offers digital advertising services branded under the name “StartEngine Promote”. These services are aimed at improving the success of Regulation Crowdfunding campaigns through paid advertising. For a percentage of the net investments attributable to advertisements placed by StartEngine, our team will support companies with the creative design, purchase, and optimization of advertising across, but not limited to, Facebook, Instagram, Linkedin, Twitter, and Google Adwords. This service first generated revenues in May 2018. In addition, we also offer a full-service product for our clients using Regulation Crowdfunding where, for an increase in the commission charged, we will hire consultants to assist with all areas of a campaign, including due diligence, compliance and internal accounting services.

 

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We strive to ever increase the services offered to our clients. We recently expanded the scope of our offerings to include broker-dealer services and are in the process of creating an alternative trading system. Both of these services are executed through our subsidiary, StartEngine Primary. We intend that the alternative trading system will be branded StartEngine Secondary.

 

StartEngine Primary: By adding broker-dealer services to the mix of our offerings, we are able to take a more active role in the promotion and sale of securities in Regulation A, Regulation CF and Regulation D offerings hosted on our platforms. Further, we will be able to facilitate the trades that will occur on StartEngine Secondary, once it is operational. To further this goal, StartEngine Primary received approval for a range of business lines to allow for us to act as the broker-dealer for the private placements of securities (which includes securities sold under Regulation D), to effect transfers and sales on StartEngine Secondary, and to be able to receive referral fees and commissions for sales of securities. Our broker-dealer registration became effective in June 2019. We estimate that our annual costs related to the operations of the broker-dealer will be approximately $500,000, which also cover the services of our Chief Compliance Officer and additional legal costs.

 

Service under Development

 

StartEngine Secondary: The goal of the StartEngine Secondary platform will be to increase liquidity for shares sold in Regulation A, Regulation Crowdfunding and Regulation D offerings. We intend to facilitate the transfer and sale of these shares by creating an alternative trading system to allow for secondary trades. Sales of shares sold under Regulation A on the StartEngine platform will be permitted immediately, while holders of shares sold under Regulation Crowdfunding and Regulation D will need to wait one year in order to comply with the transfer restrictions to participate on the platform. We are currently working towards obtaining the necessary regulatory approvals. The date of registration for our Alternative Trading System is still uncertain; however, we have made significant progress with the appropriate regulators. We anticipate no additional costs for building the trading system as we are using existing technology resources within the company. Once the trading platform is registered, we anticipate that the additional legal, compliance and surveillance costs will be an additional estimated $250,000 during the first year of operations. These costs are in addition to those spent for StartEngine Primary.

 

StartEngine LDGR: StartEngine is developing a service called StartEngine LDGR. StartEngine LDGR is a method that uses blockchain technology to provide investors with digital stock certificates (such as tokens). StartEngine LDGR will work with registered transfer agents such as StartEngine Secure. We recently released the first version of LDGR and it is currently in testing; there is no date for completion at this time. We do not anticipate additional costs for building LDGR as we intend to continue to use our existing technology resources within the company. We are awaiting guidance from the SEC in order to deploy LDGR for issuers of digital securities.

 

Ancillary Services: We are in the process of developing an array of ancillary services to assist the companies listing on our platforms. As these are in the development phase, there is no assurance that these services will be developed. These services may include an expansion of marketing services, StartEngine Premium, see “Principal Products and Services” above. Further, we are developing services to assist our clients after the completion of their campaigns. Some of the services that we intend to develop include tools for the companies to communicate with their investors, assistance with annual reports and on-going compliance, and a variety of marketing tools so that companies can continue to increase their brand awareness and monitor their progress with their investors. We do not anticipate additional costs for building these ancillary services as we intend to continue to use the existing resources within the company.

 

Support Services

 

Our company is focused on our core competencies and therefore we surround ourselves with third party companies who help us accomplish our non-core tasks.

 

We rely on the following companies for outsourced services:

 

  · Fund America: Transaction management

 

  · Amazon AWS: Cloud hosting

 

  · Google Business: Cloud email and applications

 

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Market

 

Regulation A

 

Amended Regulation A, popularly known as “Regulation A+,” became effective June 19, 2015. The SEC published an analysis after its first 16 months in November 2016, and reported that it qualified approximately 81 offerings seeking up to $1.5 billion. During this period, $190 million had been reported as raised. The SEC’s report came to the conclusion that this is a “potentially viable public offering on-ramp for smaller issuers.” According to the SEC, the size of the Regulation A market was approximately $800 million for the period from July 1, 2018 to June 30, 2019.

 

As of December 31, 2019, we have hosted the Regulation A offerings of 24 companies, who have raised a total of $49.7 million on our platforms. We believe the market for Regulation A will continue to grow as more companies become aware of the ability to raise capital through crowdfunding platforms. Because it permits a maximum raise of $50 million each 12 months, we believe this rule is well suited for small and midsize businesses. We have seen the demand increase significantly between 2018 and 2019. The recent legislative change to permit SEC-reporting companies to make offerings in reliance on Regulation A should expand the potential market for our services to small public companies. We expect to continue to increase the number of companies who list their offerings on our platform, although we are likely to encounter competition from other platforms and from companies who seek to raise funds online without using a platform. Further, gaining broker-dealer capabilities will enable us to increase the scope of services offered to our clients.

 

Regulation Crowdfunding

 

Since its launch on May 16, 2016, we estimate that as of December 31, 2019, 304 companies have raised over $57.5 million on StartEngine. According to the SEC, the size of the Regulation CF market was approximately $54 million for the period from July 1, 2018 to June 30, 2019.

 

We believe Regulation Crowdfunding will continue to grow year over year as more startup companies become aware of this funding method and view Regulation Crowdfunding as a viable fundraising option. Regulation Crowdfunding makes it relatively inexpensive to make an offering of securities: legal, compliance and accounting costs can be less than $10,000, and offering costs can be even cheaper for companies who prepare the documentation internally. With a maximum raise of $1,070,000 per year, we believe that this funding method is perfect for early-stage companies.

 

We are working to increase awareness of the benefits of Regulation Crowdfunding through a lead generation program that includes advertising on social media, email marketing and other marketing support. We mainly focus on start-ups; however, our outreach will also include some companies further along in their development. We have and plan to continue to educate the market through the content we write and publish on our blog as well as being guest authors on other popular blogs.

 

Rule 506(c)

 

According to the SEC, the private placement market, and specifically the Regulation D market (mainly comprising Rule 506(b), Rule  504, and Rule 506(c) offerings), was approximately $1.87 trillion market for the period from July 1, 2018 to June 30, 2019. Of the Rule 506(b) and Rule 506(c) market, approximately 11% of those offerings ($210 billion) were under Rule 506(c) of Regulation D and approximately 14% of those offerings ($270 billion) were under Rule 504. The vast majority of the sales were through Rule 506(b), which does not allow for general solicitation and allows for some non-accredited investors as well as less stringent requirements for verifying accredited status. Based on this information, we believe there is large potential market for online sales under Rule 506(c).

 

We believe Rule 506(c) offerings will to continue to grow year over year because it is an inexpensive way to raise capital from accredited investors with a low cost of entry. Further, recent discussions by regulators regarding expanding the definition of an “accredited investors” may widen the pool of potential investors. We estimate it can cost under $10,000 to prepare an offering under Rule 506(c). There is no limitation on the amount raised, which makes this rule attractive to companies who just completed a Regulation Crowdfunding offering or are planning a Regulation A campaign in the near future. This exemption can be used together with Regulation A and Regulation Crowdfunding. For Regulation Crowdfunding offerings, this exemption provides companies an opportunity to extend an offering beyond Regulation Crowdfunding once the maximum $1,070,000 has been reached. For Regulation A offerings, this exemption can be used as a fundraising option prior to the launch of the offering, because of the time it takes to get a Regulation A offering qualified.

 

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Transfer Agent

 

The exemptions provided by Regulation A and Regulation CF include conditional exemptions from the registration requirements of the Securities Exchange Act of 1934. One of the conditions is that should the number of a company’s securityholders and/or the value of a company’s assets exceed a certain threshold, a company needs to use a registered transfer agent to avoid the requirement that the company become a fully-registered company with the SEC - an expensive proposition for many of these small companies. Therefore, the market for our transfer agent services includes all companies that have previously raised funds through Regulation A and Regulation CF offerings. Currently, we mainly market our services to our current clients.

 

StartEngine Secondary

 

We believe that a portion of the owners of securities purchased under Regulation A, Regulation D and Regulation Crowdfunding will be interested in selling their securities to prospective buyers. There is no viable marketplace today for these securityholders to sell their securities unless the company seeks a quotation on an over-the-counter marketplace. Companies who use Tier 1 of Regulation A or Regulation Crowdfunding do not qualify for quotation on the leading over-the-counter marketplace. Further even if a company qualifies for that market, which would include issuers using Tier 2 of Regulation A, the listing requirements are expensive. We believe StartEngine Secondary has the potential for success because there is currently no marketplace for these securities.

 

Registered User Base

 

As of December 31, 2019, we have 225,474 registered users. Of these, 68,120 have made investments on our platform. We are seeing week-over-week growth in registered users and expect to register more users as we add more companies to our platform.

 

Competition

 

With respect to offerings made under Regulation Crowdfunding, we compete with other intermediaries, including brokers and funding portals such as WeFunder, NextSeed, SeedInvest, Republic and MicroVentures.

 

With respect to offerings under Regulation A, we compete with other platforms, hosting services and broker-dealers. Some of our competitors include: SeedInvest, CrowdEngine and Wefunder.

 

With respect to offerings under Rule 506(c), or online offerings made under Regulation D (which includes non-solicited offerings), we compete with platforms such as Crowdfunder, AngelList, EquityNet, SeedInvest, FundersClub and Fundable.

 

With respect to our transfer agent, we compete with transfer agents such as Computershare and VStock Transfer.

 

Strategy

 

Our Mission: help entrepreneurs achieve their dreams.

 

Our Strategy: We provide technology to allow the general public to invest in entrepreneurs.

 

Our Advantages

 

We believe that StartEngine is one of the leaders in the global crowdfunding nation. We aim to facilitate financial ignition of innovative companies led by determined, intelligent entrepreneurs who have the energy and talent to start and grow successful companies.

 

We harness the power and wisdom of “The Crowd” through the internet to release entrepreneurial creativity, thereby creating jobs, economic efficiency and ultimately economic growth. We believe we not only help entrepreneurs raise capital to start and grow their businesses, but we also help them build armies of committed, long-term brand ambassadors who, as investors, promote their companies to their friends, families and colleagues.

 

As one of the first movers in the equity crowdfunding industry, we are active in crowdfunding legal and regulatory affairs. Our position allows us to collaborate to establish industry-wide best practices and to improve the quality of listings. We believe our backend operating systems are highly efficient. Each function operates through documented procedures to ensure consistent, quality results. Knowing what it takes to successfully grow a company, we try to keep operating expenses to a minimum.

 

We believe that StartEngine’s key asset is its team members. We are a group of talented people who have come together to democratize finance and investment in startup and growth companies. The hallmark of the company is talented, respectful, enthusiastic and entrepreneurial people who understand and operate on the principles of dignity and respect.

 

Our mission is to help entrepreneurs achieve their dreams. Our objective is that by 2029, we will facilitate funding of $10 billion for companies.

 

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Research and Development

 

StartEngine invested approximately $602,013 in 2019 and $751,233 in 2018 in research and development, product development, and maintenance.

 

Employees

 

As of March 9, 2020, we had 29 employees working out of West Hollywood, California.    We also work with a large number of contractors for user-experience design, security controls, and testing, services and marketing.

 

Regulation

 

Having platforms that host Regulation A, Regulation Crowdfunding and Regulation D offerings, we are required to comply with a variety of state and federal securities laws as well as the requirements of FINRA, a national securities association of which our funding portal subsidiary is a member. Further, as a registered transfer agent, we are required to comply with a variety of state and federal securities laws and laws that govern transfer agents, as well as laws aimed at preventing fraud, tax evasion and money laundering

 

Regulation Crowdfunding

 

In order to act as an intermediary under Regulation Crowdfunding, our subsidiary is registered as a funding portal with the SEC and became a member of FINRA. In the future, we may be subject to additional rules issued by other regulators, such as the money-laundering rules proposed by FinCEN.

 

SEC Requirements

 

As a funding portal, our subsidiary is prohibited from engaging in certain activities in order not to be regulated as a full-service broker-dealer. These activities are set out in Section 4(a)(6) of the Securities Act and in Regulation Crowdfunding. We have accordingly established internal processes to ensure that our subsidiary as well as its agents and affiliates do not engage in activities that funding portals are not permitted to undertake, including:

 

  · Providing investment advice or recommendations to investors for securities displayed on our platform;

 

  · Soliciting purchases, sales or offers to buy securities displayed on our platform;

 

  · Compensating employees, agents or other persons for solicitation or for the sale of securities displayed or listed on our platform; or

 

  · Holding, managing, processing or otherwise handling investors’ funds or securities.

 

In addition, our funding portal has certain affirmative requirements that it is required to comply with to maintain its status. These affirmative obligations include:

 

  · Providing a communications channel to allow issuers to communicate with investors;

 

  · Having due diligence and compliance protocols and requirements in place so that the company has a “reasonable basis” to believe that

 

  its issuers are in compliance with securities laws, have established means to keep accurate records of the securities offered and sold, and that none of their covered persons (e.g., officers, directors and certain beneficial owners) are “bad actors” and therefore disqualified from participating in the offering;

 

  its issuers and offerings do not present the potential for fraud or otherwise raise concerns about investor protection; and

 

  its investors do not invest more than they are allowed to invest under the limitations set out in Regulation Crowdfunding; and

 

· Creating procedures for its investors to notify them of risks regarding investing in securities hosted on its platform and providing them with required investor education and disclosure materials.

 

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We are also required to set up protocols regarding payment procedures and recordkeeping.

 

FINRA Rules

 

As a member of FINRA, our funding portal is subject to their supervisory authority and is required to comply with FINRA’s portal requirements. Some of those rules are also applicable to the company as an entity associated with the portal. These requirements include rules regarding conduct, compliance and codes of procedure. For instance, FINRA’s compliance rules require timely reporting of specified events, such as complaints and certain litigation against the portal or its associated persons as well as the provision of the portal’s annual financials prepared on a U.S. GAAP basis. In addition, under the conduct rules, the portal is required to conduct its business in accordance with high standards of commercial honor and just and equitable principles of trade, is limited to certain types of communications with investors and issuers, and is prohibited from using manipulative, deceptive and other fraudulent devices.

 

Liability

 

Under Section 4A(c) of the Securities Act, an issuer, including its officers and directors, may be liable to the purchaser of its securities in a transaction made under Section 4(a)(6) if the issuer makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which there were made, not misleading; provided, however, that the purchaser does not know of the untruth or omission, and the issuer is unable to prove that it did not know, and in the exercise of reasonable care could not have known, of the untruth or omission.

 

Though not explicitly stated in the statute, this section may extend liability to funding portals, and the SEC has stated that, depending on the facts and circumstances, portals may be liable for misleading statements made by issuers. However, funding portals would likely have a “reasonable care” due diligence defense. “Reasonable care” would include establishing policies and procedures that are reasonably designed to achieve compliance with the requirements of Regulation Crowdfunding, including conducting a review of the issuer’s offering documents before posting them to the platform to evaluate whether they contain materially false or misleading information. We have designed our internal processes and procedures with a view to establishing this defense, should the need arise.

 

Further, we may also face liability from existing anti-fraud rules and statutes under the securities laws. For instance, under Section 9(a)(4) of the Exchange Act anyone who "willfully participates" in an offering could be liable for false or misleading statements made to induce a securities transaction.

 

In addition, FINRA imposes liability for certain conduct, including violations of commercial honor and just and equitable principles of trade and acts using manipulative, deceptive and other fraudulent devices.

 

Regulation A and Regulation D

 

Broker-Dealer Regulations

 

Our subsidiary, StartEngine Primary, recently completed the process of registering as a broker-dealer with the SEC and became a member of FINRA. The registration process not only includes registering with the SEC, which we have completed, but also requires membership in a self-regulatory organization (in our case, we are a member of FINRA) and in the Securities Investor Protection Corporation (“SIPC”), compliance with state requirements and making sure that our associate persons satisfy all applicable qualification requirements.

 

SEC Requirements

 

Since StartEngine Primary became a broker-dealer, it is required to comply with extensive SEC regulations with respect to its conduct and the processing of transactions. These include requirements related to conduct, financial responsibility, and other requirements such as those that relate to communications, anti-money laundering (AML) and ongoing internal controls and governance. In addition, StartEngine Primary has submitted for review by the SEC Form ATS in order to operate its proposed alternative trading system for secondary trading of securities, including tokenized securities.

 

Conduct Requirements

 

In general, many of the rules that govern broker-dealers stem from antifraud provisions; these requirements are broad in scope and prohibit misstatements or misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities. Specifically, the following rules apply:

 

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  · Section 9(a) prohibits particular manipulative practices regarding securities registered on a national securities exchange.

 

  · Section 10(b) prohibits the use of "any manipulative or deceptive device or contrivance" in connection with the purchase or sale of any security.

 

  · Section 15(c)(1) prohibits broker-dealers from effecting transactions in, or inducing the purchase or sale of, any security by means of "any manipulative, deceptive or other fraudulent device" in over-the-counter markets

 

  · Section 15(c)(2) prohibits a broker-dealer from making fictitious quotes in over-the-counter markets

 

In order to comply with the antifraud specific requirements include those related to:

 

  · fair dealing (e.g., a duty of fair dealing includes charging reasonable fees, promptness of executive orders, and disclosing specified material information as well as any conflict of interest);

 

  · best interests (e.g., a duty to act in the “best interests” of the retail customer, which includes certain disclosure and care obligation and compliance obligations as well as maintaining policies and procedures to minimize the effects, if any, of conflicts of interest);

 

  · execution (e.g., a duty of execution requires that based on the circumstances requirement to find the most favorable terms for a customer;

 

  · customer confirmation (e.g., at or before the completion of transaction certain information must be provided to customers, including specifics on the sale, the payment that the broker-dealer receives, etc.);

 

  · disclosure of credit terms;

 

  · restrictions on short sales;

 

  · trading during an offering; and

 

  · restrictions on insider trading.

 

Further, when StartEngine has an ATS that is operational, StartEngine Primary will be governed by the rules regulating broker-dealer trading systems. Regulation ATS includes provisions that govern the operations an ATS such as those that relate to fees charged, fair access to the trading system, system requirements (capacity, integrity and security), display of orders and capacity to execute those orders, recordkeeping and reporting, and establishing procedures including related to confidentiality of trading information, among other things.

 

Finally, broker-dealers are governed by requirements regulating employees and individuals associated with the broker-dealer.

 

Financial Responsibility Requirements

 

Financial responsibility and operations requirements include: net capital requirements, margin requirements, customer protection requirements (e.g., reserve account and segregation of customer assets), risk assessment requirements, financial reporting (including an independent audit), and recordkeeping requirements.

 

Other Requirements

 

Broker-dealers are subject to a host of other rules and requirements including: mandatory arbitration, submitting for SEC and FINRA examinations, maintain and reporting information on the broker-dealers affiliates (in our case, this includes the parent organization as well as the other subsidiaries), following electronic media and communication guidelines as well as maintaining an AML program.

 

FINRA Requirements

 

Since our subsidiary became a broker-dealer member of FINRA, our subsidiary has been subject to its supervisory authority and is required to comply with FINRA’s broker-dealer requirements. Some of those rules are also applicable to the company itself, as an entity associated with the broker-dealer. These requirements include many similar requirements to those of the SEC, and in many cases are broader in scope and provide more specificity. FINRA also has rules regarding conduct, compliance and codes of procedure. For instance, FINRA members must comply with NASD's Rules of Fair Practice, which broadly speaking requires broker-dealers to observe high standards of commercial honor and just and equitable principles of trade in conducting their business. There are also rules that relate to use of manipulative, deceptive or other fraudulent devices, suitability, payments to unregistered persons, know your customer, supervision of our employees and responsibilities related to associated persons, financial soundness, recordkeeping, maintaining procedures, arbitration for customer disputes, AML and submitting to ongoing supervision. We are also required to undertake due diligence investigations with respect to Regulation A and Regulation D offerings.

 

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Liability

 

Under our arrangements that do not use the services of our broker-dealer subsidiary, Section 12(a)(2) of the Securities Act, which applies to Regulation A, imposes liability for misleading statements not only on the issuers of securities but also on “sellers,” which includes brokers involved in soliciting an offering. Rule 10b-5 under the Exchange Act generally imposes liability on persons who “make” statements. Currently, the information presented on our platform is drafted by the issuers themselves. Additional liability may arise from as-yet untested provisions such as Section 9(a)(4) of the Exchange Act, discussed above.

 

Broker-dealers are subject to heightened standards of liability. Not only do we have potential liability under Section 12(a)(2) but we also are subject to liability under Rule 10b-5. Broker-dealers may also be subject to liability for failure to comply with SEC and FINRA requirements, including claims that we can be held liable for the behavior of our agents (control person liability), claims regarding unsuitable recommendations, violations of margin rules, breach of contract, common law claims of fraud and various claims under state laws.

 

Regulation S

 

Regulation S provides that the registration requirements of the Securities Act do not apply to offers and sales of securities that occur outside the United States. Regulation S provides safe harbors that provide specific conditions for transactions so that the transactions will be deemed to occur outside the United States, including the imposition of “distribution compliance periods” during which securities may not be resold or transferred to “US persons”. The distribution compliance periods vary accordingly to whether the issuer of securities is a domestic or foreign company and whether or not the issuer’s securities are registered under the Exchange Act and subject to ongoing reporting obligations thereunder. The securities that we are most likely to host on our platform in Regulation S offerings are those of non-reporting US issuers, whose equity securities are subject to a one-year distribution compliance period, and whose non-equity securities are subject to a 40-day distribution compliance period. During the distribution compliance period, purchasers of the securities are required to certify that they are not US persons, and agree to resell only to non-US persons. Securities professionals are required to deliver confirmations to buyers of securities stating that these resale restrictions apply to the buyers. Disclosure of these restrictions are also required to be made in selling materials and on the securities themselves. “US persons” as defined in Regulation S, which includes natural persons resident in the United States, partnerships and companies organized under US law, estates and trusts of which administrators, executors or trustees are US persons, discretionary accounts held by a US fiduciary for US persons, non-discretionary accounts held for the benefit of US persons, and certain foreign partnerships and companies created by US persons. These conditions may require limiting access to campaign pages to non-U.S. based internet addresses.

 

Issuers that rely on Regulation S are still required to comply with the requirements of the jurisdiction in which their securities are sold.

 

Operation of ATSs

 

ATSs must be operated by registered broker-dealers and must submit for satisfactory review by the SEC the information required on Form ATS FINRA will also review the company’s Form ATS submission. Information contained in the Form ATS submission covers the operations of the ATS and a description of how the ATS will comply with the requirements of Regulation ATS, which includes details on the following:

 

  · how the system operates (e.g., details on how orders are entered and transactions are executed, reported, cleared and settled);

 

  · securities traded on the ATS; and

 

  · subscribers and authorized users as well as access to the ATS.

 

Other information required to be provided includes descriptions of the processes for verification of ownership and stock transfer; getting an issuer symbol; ATS system capacity, security and contingency planning and access to the ATS/cyber security. Further, the personnel involved in performing brokerage functions related to the ATS must be properly licensed with FINRA and appropriate state securities regulators.

 

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Transfer Agent Regulations

 

As a registered transfer agent, we are required to comply with all applicable SEC rules, which predominantly includes the rules under Section 17A(c) of the Exchange Act. The requirements for transfer agents include:

 

  · minimum performance standards regarding tracking, recording and maintaining the official record of ownership of securities of a company and related recordkeeping and reporting rules;

 

  · timely and accurate creation of records for security holders; and

 

  · related safeguards and data security requirements for fraud prevention.

 

In addition, we must comply with various state corporate and securities laws as well as provisions of the Anti-Money Laundering (AML) regulations, Office of Foreign Assets Regulations (OFAC) and the Foreign Account Tax Compliance Act (FATCA).

 

Intellectual Property

 

We have a trademark for “StartEngine” in the United States. We do not own any patents; however, we have our own proprietary source code that we use in operating our platform. We also have a patent pending on the topic of peer to peer trading.

 

Litigation

 

The company is not involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise.

 

THE COMPANY’S PROPERTY

 

We do not own any significant property. We lease our office space at 8687 Melrose Ave, 7th Floor (Green Building), West Hollywood, CA 90069. Our current lease expires on October 30, 2020.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Operating Results

 

StartEngine Crowdfunding, Inc. was incorporated on March 19, 2014 in the State of Delaware. The company was originally incorporated as StartEngine Crowdsourcing, Inc., but changed to the current name on May 8, 2014. The company’s revenue- producing activities commenced in 2015 with the effectiveness of the amendments to Regulation A under the Securities Act adopted in response to Title IV of the JOBS Act. Operations expanded in 2016, as Regulation Crowdfunding, adopted in response to Title III of the JOBS Act, went into effect. On June 10, 2019, our subsidiary, StartEngine Primary LLC was approved for membership as a broker-dealer with FINRA.

 

For the period covered by this report, our revenues for offerings made under Regulation A and Rule 506(c) of Regulation D were in the form of posting fees, as we were not permitted to collect transaction-based compensation. We generally allowed companies to use one of two fee schemes for posting Regulation A and Regulation D offerings — either a per investor payment or a flat monthly fee. When using the per investor structure, the fee per investor is $50 under Regulation A and $250 under Regulation D. When using the flat monthly fee, under both Regulation A and Regulation D, companies can pay a $20,000 to $30,000 monthly posting fee. For some transactions, flat fees can be negotiated on the basis of the expected investor volume. Since StartEngine Primary has been approved as a broker-dealer, as of June 2019, in lieu of the other fee arrangement, Regulation A and Regulation D offerings can be subject to a commission ranging between 5% and 7% based on the risks and other factors associated with the offering.

 

In Regulation Crowdfunding offerings, our funding portal subsidiary is permitted to charge commissions to the companies that raise funds on our platform. We typically charge 6% to 10% under Regulation Crowdfunding offerings for our platform fees. In addition, we charge additional fees to allow investors to use credit cards. To date, these credit card fees mainly cover our credit card processing costs. We also generate revenue from services, which include a consulting package called StartEngine Premium priced from $5,000 to $25,000 to help companies who raise capital with Regulation Crowdfunding, digital advertising services branded under the name StartEngine Promote for an additional fee, .as well as transfer agent services marketed as StartEngine Secure. We additionally charge a $1,000 fee for certain amendments we file on behalf of companies raising capital with Regulation Crowdfunding as well as fees to run the required bad actor checks for companies utilizing our services.

 

Six Months ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

Our revenues decreased to $1,881,310 for the six months ended June 30, 2019 (“Interim 2019”) from $2,421,061 for the six months ended June 30, 2018 (“Interim 2018”), a decrease of 22%. The primary components of this decrease were:

 

  Decrease in events and sponsorship revenue to $23,500 in Interim 2019 from $300,700 in Interim 2018 due primarily to the company holding the StartEngine ICO 2.0 Summit in Interim 2018. In Interim 2019, the company held a Founders Summit, which was a smaller, free workshop-style event that had significantly fewer sponsorships.

 

  Decrease in fees related to the Regulation A and Regulation D offerings to $83,536 in Interim 2019 from $363,189 in Interim 2018, due to the company focusing on transitioning to becoming a broker-dealer in Interim 2019 and the Interim 2018 fees including fees related to a specific engagement, the tZERO initial coin offering.

 

  Decrease in StartEngine Premium revenue to $495,456 in Interim 2019 from $690,832 in Interim 2018 due primarily to refunds that were issued as the company adopted more selective criteria to narrow the scope of potential issuers on its platform.

 

  Increase in Regulation Crowdfunding platform fees to $903,412 in Interim 2019 from $695,593 in Interim 2018 due primarily to a higher aggregate amount raised by issuers in Regulation Crowdfunding offerings.  
     
  Increase in other service revenue, which primarily includes StartEngine Secure transfer agent services, StartEngine Promote campaign advertising services, licensing, and compliance fees for bad actor checks and amendments, to $375,406 in Interim 2019 from $370,747 in Interim 2018 related to higher StartEngine Secure and StartEngine Promote fees, partially offset by a lower volume of services resulting from the discontinuance of certain full-service posting agreements.

 

Cost of revenues decreased to $912,328 for Interim 2019 from $1,150,009 for Interim 2018, a decrease of 21%. The primary components of this decrease were:

 

  Decrease in event costs to $111,630 in Interim 2019 from $233,162 in Interim 2018 due primarily to the change in the company’s semi-annual event as outlined in the revenue discussion above.

 

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  Decrease in professional services costs to $8,740 in Interim 2019 from $131,264 in Interim 2018 as we have discontinued offering certain full service packages.

 

  Decrease in payroll costs to $308,465 in Interim 2019 from $357,576 in Interim 2018 attributable mainly to a temporary decrease in the due diligence headcount.  
     
  Increase in transaction costs to $391,950 in Interim 2019 from $310,636 in Interim 2018 related to higher offering activity and an increase in the amount of investments made via credit cards, which incur additional fees.  
     
  Decrease in other costs, which primarily includes campaign copywriting, consulting, customer service, web hosting, and other IT costs, to $91,543 in Interim 2019 from $117,371 in Interim 2018 related primarily to lower campaign copywriting and consulting costs.

 

Accordingly, our gross margins decreased to 51.5% for Interim 2019 from 52.5% for Interim 2018.

 

Our operating expenses consist of general and administrative expenses (consisting primarily of salaries, stock-based compensation, office rent, legal services and accounting services), sales and marketing expenses, and research and development expenses. Operating expenses totaled $2,893,525 for Interim 2019 from $3,085,707 for Interim 2018, a decrease of 6%. The primary components of this decrease were:

 

  A decrease in sales and marketing expenses to $952,327 for Interim 2019 from $1,328,609 for Interim 2018, a 28% decrease, primarily as a result of lower advertising and lead generation costs, as well as lower payroll costs related to reduced headcount on the sales team.

 

  An increase in general and administrative expenses to $1,580,138 for Interim 2019 from $1,470,716 for Interim 2018, a 7% increase, primarily as a result of a higher bad debt reserve as the company sold more StartEngine Premium packages with deferred payment terms and higher payroll costs driven by a higher bonus accrual.  The increase was partially offset by lower legal expenses as Interim 2018 included legal costs related to our broker-dealer application and responding to FINRA and SEC comments.

 

  An increase in research and development expenses to $361,059 for Interim 2019 from $286,382 for Interim 2018, a 26% increase, due to higher payroll costs related to increased headcount on the research and development team.

 

The net value of other expenses versus Other income for Interim 2019 was a loss $4,497, compared to gain of $12,555 for Interim 2018. The change was due to the change in value of warrant investments during Interim 2019. During the same periods in 2019 and 2018, we had a provision for taxes of $4,753 and $4,532, respectively.

  

As a result of the foregoing, net loss increased to $1,933,791 from $1,806,632 for Interim 2019 and Interim 2018, respectively.

 

The company recorded other comprehensive income of $56 and $2,791 for Interim 2019 and Interim 2018, respectively, related to unrealized gains on available-for-sale investments.

 

The company’s comprehensive loss totaled $1,933,735 for Interim 2019 compared with $1,803,841 for Interim 2018.

 

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2018 Compared to 2017

 

Our revenues increased to $4,682,528 in 2018 from $2,046,948 in 2017, an increase of 129%. The primary components of this increase were:

 

  Increase in StartEngine Premium revenue to $1,497,545 in 2018 from $215,500 in 2017 due primarily to higher volume from a full year of offering the service in 2018, compared to a half year in 2017, as well as adjustments to our pricing schedule.

 

  Increase in Regulation Crowdfunding platform fees to $1,414,064 in 2018 from $866,258 in 2017 due primarily to a higher aggregate amount raised by issuers in Regulation Crowdfunding offerings.

 

  Increase in events and sponsorship revenue to $596,687 in 2018 from $103,184 in 2017 due primarily to the company holding two events in 2018, as compared to one event in 2017, as well as increased sponsorship for events.

 

  Increase in other service revenue, which primarily includes bundled professional services and compliance fees for bad actor checks and amendments, to $483,079 in 2018 from $178,217 in 2017 related to higher volume of services and certain full-service posting agreements that included contractor costs for accounting and legal services for issuers.

 

Cost of revenues increased to $2,637,961 in 2018 from $729,108 in 2017, an increase of 262%. Cost of revenues consists of internal employees, hosting fees, processing fees, and certain software subscription fees that are required to provide services to our issuers. The primary components of this increase were:

 

  Increase in event costs to $677,228 in 2018 from $116,285 in 2017 due primarily to the company holding two events in 2018, as compared to one event in 2017, as well as higher attendance and a larger venue for the 2018 events.

 

  Increase in payroll costs to $732,216 in 2018 from $272,030 in 2017 attributable mainly to increased headcount for our due diligence and customer service teams to support a higher volume of campaign activity.

 

  Increase in transaction costs to $694,255 in 2018 from $203,119 in 2017 related to higher offering activity and an increase in the amount of investments made via credit cards, which incur additional fees.

 

Accordingly, our gross margins decreased to 44% in 2018 from 64% in 2017. The decrease was primarily due to an increase in investments made via credit cards, which incur additional transaction costs, as well as higher payroll costs and stock option compensation expense for the due diligence and customer service teams.

 

Operating expenses increased to $6,620,286 in 2018 from $3,502,600 in 2017, an increase of 89%. The primary components of this increase were:

 

  An increase in general and administrative expenses to $2,936,648 in 2018 from $2,228,369 in 2017 due to higher stock option compensation expense, legal fees, and bad debt expense.

 

  An increase in sales and marketing expenses to $2,932,405 in 2018 from $918,184 in 2017 due to higher payroll costs from increased headcount in the sales and marketing teams, lead generation costs, advertising costs, and stock option compensation expense.
     
  An increase in research and development expenses to $751,233 in 2018 from $356,047 in 2017 due to higher payroll costs from increased headcount in the research and development team and stock option compensation expense.

 

Other expense decreased to $7,300 in 2018 from $86,793 in 2017, a decrease of 92%, due primarily to a decrease in realized loss on available-for-sale securities from $79,100 in 2017 to $3,098 in 2018.

 

As a result of the foregoing, net loss increased to $4,600,089 in 2018 from $2,280,174 in 2017.

 

The company recognized other comprehensive loss of $406 in 2018, as compared to other comprehensive income of $70,332 in 2017, related to unrealized losses and gains on mutual funds, which are held as available-for-sale investments.

 

The company’s comprehensive loss increased to $4,600,495 in 2018 from $2,209,842 in 2017.

 

32

 

 

Liquidity and Capital Resources

 

Cash Flow

 

The following table summarizes, for the periods indicated, selected items in our condensed Statements of Cash Flows for Interim 2019 and Interim 2018:

 

    Six Months Ended  
    June 30,  
    2019     2018  
Net cash (used in) provided by:                
Operating activities   $ (1,758,413 )   $ (1,841,555 )
Investing activities   $ 1,043,000     $ (818,114 )
Financing activities   $ 1,188,365     $ 2,512,727  

 

Operating Activities

 

Cash used in operating activities decreased to $1,758,413 from $1,841,555 for the six months ended June 30, 2019 and 2018, respectively. The decrease in cash used in operating activities was primarily due to lower cash expenses and changes in working capital usage.

 

Investing Activities

 

Cash provided by investing activities was $1,043,000 for the six months ended June 30, 2019, compared to cash used in investing activities of $818,114 for the six months ended June 30, 2018. The change in cash related to investing activities is primarily due to higher sales of available-for-sale securities to fund operations during the six months ended June 30, 2019 and higher purchases of available-for-sale securities during the six months ended June 30, 2018.

 

Financing Activities

 

Cash provided by financing activities was $1,188,365 for the six months ended June 30, 2019, compared to cash provided by in financing activities of $2,512,727 for the six months ended June 30, 2018. The change in cash related to financing activities was primarily due to the company’s Regulation A offerings during those periods.

 

The following table summarizes selected items in our Statements of Cash Flows for the years ended December 31, 2018 and 2017:

 

    Year Ended  
    December 31,  
    2018     2017  
Net cash (used in) provided by:                
Operating activities   $ (4,443,918 )   $ (1,696,548 )
Investing activities   $ 259,500     $ 1,077,540  
Financing activities   $ 3,797,194     $ 1,424,430  

 

Operating Activities

 

Cash used in operating activities was $4,443,918 for the year ended December 31, 2018, as compared to $1,696,548 for the year ended December 31, 2017. The increase in cash used in operating activities was due to a higher net loss and higher working capital usage.

 

Investing Activities

 

Cash provided by investing activities was $259,500 for the year ended December 31, 2018, as compared to $1,077,540 for the year ended December 31, 2017. The decrease in cash provided by investing activities was due to higher purchases and lower sales of available-for-sale securities.

 

Financing Activities

 

Cash provided by financing activities was $3,797,194 for the year ended December 31, 2018, as compared to $1,424,430 for the year ended December 31, 2017. The increase in cash provided by financing activities was due to proceeds from the sale of common stock through the company’s Regulation A offering and the sale of Series T Preferred Stock in 2018 in private placements.

 

We do not currently have any significant loans or available credit facilities. As of June 30, 2019, the company’s current assets were $2,384,756. To date, our activities have been funded from investments from our founders, the previous sale of Series Seed Preferred Shares and Series A Preferred Shares, our Regulation A and Regulation CF offerings and our revenues.

 

33

 

 

Liquidity and Capital Resources

 

We have no off-balance sheet arrangements, including arrangements that would affect the liquidity, capital resources, market risk support, and credit risk support or other benefits.

 

The company currently has no material commitments for capital expenditures.

 

As of June 30, 2019, the company sold 102,790 shares of Common Stock and received $656,455 in net proceeds (including transaction and marketing costs) from the Regulation A offering. Though March 11, 2020, the company sold an additional 689,303 shares of Common Stock in its Regulation CF and Regulation A offerings. We are conducting a concurrent offering under Regulation CF. The terms of that offering are set out in offering page on TruCrowd.

 

We believe we have the cash, available-for-sale securities through our open Regulation A and Regulation CF offerings, other current assets available, and revenues, including new sources of revenue from StartEngine Primary, and access to funding that will be sufficient to fund operations in the near term.

 

Trend Information

 

We are operating in a new industry and there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. For those reasons and because we are still in the infancy of these new regulations, we expect to continue to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding offerings and the investments into those offerings generates sufficient revenues to cover our costs.

 

On June 10, 2019, our subsidiary, StartEngine Primary LLC was approved for membership as a broker-dealer with FINRA. We anticipate that our costs for payroll and training will increase relative to our revenue. In addition, we are waiting to be approved to operate an alternative trading system (“ATS”). We intend to launch the ATS, after we receive FINRA approval. We expect increased costs due to technology and operations related to the operation of our ATS. We anticipate operating the ATS will initially increase our overall expenses by $20,000 per month. Further, we anticipate receiving increased revenue related to offerings under Regulation A and eventually from offerings under Regulation D.

 

Relaxed Ongoing Reporting Requirements

 

If we become a public reporting company in the future, we will be required to publicly report on an ongoing basis as an “emerging growth company” (as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act) under the reporting rules set forth under the Exchange Act. For so long as we remain an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements that are applicable to other Exchange Act reporting companies that are not “emerging growth companies”, including but not limited to:

 

· not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

· taking advantage of extensions of time to comply with certain new or revised financial accounting standards;

 

· being permitted to comply with reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and

 

· being exempt from the requirement to hold a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

If we become a public reporting company in the future, we expect to take advantage of these reporting exemptions until we are no longer an emerging growth company. We would remain an “emerging growth company” for up to five years, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31.

 

If we do not become a public reporting company under the Exchange Act for any reason, we will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. The ongoing reporting requirements under Regulation A are more relaxed than for “emerging growth companies” under the Exchange Act. The differences include, but are not limited to, being required to file only annual and semiannual reports, rather than annual and quarterly reports. Annual reports are due within 120 calendar days after the end of the issuer’s fiscal year, and semiannual reports are due within 90 calendar days after the end of the first six months of the issuer’s fiscal year.

 

In either case, we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies”, and our shareholders could receive less information than they might expect to receive from more mature public companies.

 

34

 

 

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

 

As of March 11, 2020, our directors, executive officers and significant employees were as follows:

 

Name   Position   Age     Term of Office (if
indefinite, give date
appointed)
  Approximate hours per
week (if part-
time)/full-time
Executive Officers:                    
Howard Marks   CEO     57     January 1, 2014, Indefinitely   Full-time
Johanna Cronin   Chief Marketing Officer     31     March 2014, Indefinitely   Full-time
                     
Directors:                    
Howard Marks   Director     57     April 17, 2014, Indefinitely    
Ronald Miller   Director and Chairman     57     April 17, 2014, Indefinitely    
                     
Significant Employees:                    
N/A                    

 

Howard Marks, Co-founder, CEO and Director

 

Howard Marks is one of our co-founders and has served as our CEO since January 1, 2017. From our founding in March 2014 until December 2016, Howard served as our Executive Chairman. Howard founded StartEngine, an unrelated entity, in November 2011 as a startup accelerator with the mission to help make Los Angeles a top tech entrepreneurial city. In March 2014, Howard and Ron Miller founded the company as an equity crowdfunding platform. Howard was the founder and CEO of Acclaim Games, a publisher of online games now part of The Walt Disney company. Before Acclaim, Howard was the Chairman of Activision Studios from 1991 until 1997. As a former Board Member and Executive Vice-President of video-game giant Activision, he and a partner took control in 1991 and turned the ailing company into the $20 billion market cap video game industry leader. As a games industry expert, Howard built one of the largest and most successful games studios in the industry, selling millions of games. Howard is the 2015 "Treasure of Los Angeles" recipient, awarded for his work to transform Los Angeles into a leading technology city. Howard is a member of Mayor Eric Garcetti's technology council. Howard has a Bachelor of Science in Computer Engineering from the University of Michigan. He is bilingual and is a triple national of the United States, United Kingdom, and France.

 

Ronald Miller, Co-founder and Executive Chairman

 

Ron Miller is the executive chairman and cofounder of StartEngine. Ron served as our CEO and a director since our founding in March 2014 until December 2016. On January 1, 2017, Ron became our executive chairman. He is also currently the founder of the Disability Group Inc., and has served as its CEO since 2004. When Howard and Ron initially met in the fall of 2013, they recognized that the JOBS Act represented the greatest advancement for entrepreneurship in a generation. From direct experience as entrepreneurs, they recognized that the key to bringing new technologies and innovations to market required capital that is not readily available. As a serial start-up entrepreneur, Ron immediately went into action to advocate for SEC rulemaking to give life to the JOBS Act, raise the initial capital and built a leadership team to drive the sales and market plan to help StartEngine establish a leadership place in the market.

 

Prior to StartEngine, Ron founded built and sold five companies through management buyouts, private equity, private investors, and public markets. He was also nominated as a four-time Inc.500/5000 award recipient and was Ernst & Young entrepreneur of the year award finalist. As the executive chairman, Ron brings his deep experience as a leader and strategist to the company.

 

Johanna Cronin, Chief Marketing Officer

 

Johanna Cronin is the Chief Marketing Officer at StartEngine. She was the first employee and began working for StartEngine in 2014. Prior to that she served as an SEM analyst, managing paid media budgets and purchasing media placements for small businesses, for Dex Media, Inc. from March 2012 until March 2014. Johanna received her Bachelor of Arts from Northwestern University, where she was a psychology major with a Spanish minor.

 

35

 

 

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

 

For the fiscal year ended December 31, 2019, we compensated our three highest-paid directors and executive officers as follows:

 

Name   Capacities in which compensation
was received
  Cash
compensation
($)
    Other
compensation
($)(1)
    Total
compensation
($)
 
Howard Marks   Chief Executive Officer   $ 566,000     $ 0     $ 566,000  
Johanna Cronin   Chief Marketing Officer   $ 230,700     $ 281,443  (2)    $ 512,143  
John Shiple   Chief Technology Officer   $ 45,877     $ 0     $ 45,877  

 

(1) The executives also received medical and health benefits, generally available to all salaried employees.

 

(2) Other compensation is limited to stock options; the Black-Scholes formula was used to determine the value of the options at the date of grant.

 

(3) The employment of John Shiple with the company ended on March 20, 2019.

 

In 2019, neither of our two directors received compensation in their capacity as directors.

 

36

 

 

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS

 

The tables below show, as of March 11, 2020, the security ownership of the company’s directors, executive officers owning 10% or more of the company’s voting securities and other investors who own 10% or more of the company’s voting securities.

 

Title of class   Name and
address of
beneficial owner
(1)
  Amount and
nature of
beneficial
ownership
    Amount and nature of
beneficial
ownership
acquirable
  Percent
of class
(2)
 
Common Stock   Howard Marks (4)     3,440,000     200,000 (5)   41.3 %
                         
                1,488,364 Proxy Shares (6)      
                         
                59,722 shares available under stock options (7)      
                      51.4 %(3)
Common Stock   Miller Family Trust 1/2/96     2,580,000     200,000 (5)   30.9 %
    (Ron Miller)                 33.0 %(3)
                59,722 shares available under stock options (7)      
                         
Common Stock   All executive officers and     6,020,000     400,000 (5)   72.2 %
    directors as a group                 78.3 %(3)
    (including Howard Marks and Ron Miller)           1,488,364 Proxy Shares (6)      
                         
                437,220 shares available under stock options (7)      
Preferred Stock   Howard E. Marks Living Trust U/A
Dtd 12/21/2001 (Howard Marks)
    200,000           2.9 %
Preferred Stock   Miller Family Trust 1/2/96 (Ron Miller)     200,000           2.9 %
Preferred Stock   SE Agoura Investment LLC
333 South Grand Avenue
Suite 1470
Los Angeles, CA 90071 (8)
    3,201,024           46.1 %

 

  (1) The address for all the executive officers and directors is c/o StartEngine Crowdfunding, Inc., 8687 Melrose Ave, 7th Floor (Green Building), West Hollywood, CA 90069.  

 

  (2) Based on 8,337,932 shares of Common Stock, 6,947,574, shares of Preferred Stock outstanding.

 

  (3) This calculation is the amount the person owns now, plus the amount that person is entitled to acquire. That amount is then shown as a percentage of the outstanding amount of securities in that class if no other person exercised their rights to acquire those securities. The result is a calculation of the maximum amount that person could ever own based on their current and acquirable ownership, which is why the amounts in this column may not add up to 100% for each class.

 

  (4) These shares are held by Howard E. Marks Living Trust U/A Dated 12/21/2001 (Howard Marks) and Marks Irrevocable Trust (Howard Marks).

 

  (5) Shares available through conversion of Preferred Stock.

 

  (6) The Proxy Shares are the 1,488,364 common shares sold in the Regulation A offerings and the current Regulation CF offering, that Mr. Marks as CEO, has voting control over pursuant to the subscription agreement governing that offering.

 

  (7) The options were granted under the 2015 Equity Incentive Plan.

 

  (8) SE Agoura Investment LLC is beneficially owned by Aubrey Chernick.

 

37

 

 

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

 

None.

 

SECURITIES BEING OFFERED

 

General

 

StartEngine is offering Common Stock and Series T Preferred Stock to investors in this offering. Investors in Common Stock in this offering will be required to sign an irrevocable proxy, which will restrict their ability to vote. The proxy will remain in effect until the company’s sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act. Investors in our previous offering of Common Stock under Regulation A were also required to grant a proxy on the same terms. Investors in Preferred Stock will not be required to grant any proxy.

 

The following descriptions summarize important terms of our capital stock. This summary does not purport to be complete and is qualified in its entirety by the Fifth Amended and Restated Certificate of Incorporation and the Amended and Restated Bylaws, drafts of which have been filed as Exhibits to the Offering Statement of which this Offering Circular is a part. For a complete description of StartEngine’s capital stock, you should refer to our Fifth Amended and Restated Certificate of Incorporation and our Bylaws, as amended and restated, and applicable provisions of the Delaware General Corporation Law.

 

StartEngine’s authorized capital stock consists of 25,000,000 shares of Common Stock, $0.00001 par value per share, and 8,700,000 shares of Preferred Stock, $0.00001 par value per share, of which 3,550,000 shares are designated as Series Seed Preferred Stock, 3,450,000 shares are designated as Series A Preferred Stock, and 1,650,000 shares that will be designated Series T Preferred Stock.

 

As of March 11, 2020, the outstanding shares of StartEngine included: 8,337,932 shares of Common Stock, 3,550,000 shares of Series Seed Preferred Stock, 3,254,261 shares of Series A Preferred Stock, and 143,313 shares of Series T Preferred Stock.

 

Common Stock

 

Dividend Rights

 

Holders of Common Stock are entitled to receive dividends, as may be declared from time to time by the board of directors out of legally available funds, unless a dividend is paid with respect to all outstanding shares of Preferred Stock in an amount equal or greater than the amount those holders would receive on an as-converted basis to Common Stock. We have never declared or paid cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends after this offering or in the foreseeable future.

 

Voting Rights

 

Each holder of Common Stock is entitled to one vote for each share on all matters submitted to a vote of the shareholders, including the election of directors, but excluding matters that relate solely to the terms of a series of Preferred Stock. The investors in Common Stock in this offering will be required to grant a proxy to the company’s CEO, described in greater detail below under “Proxy.”

 

Right to Receive Liquidation Distributions

 

In the event of our liquidation, dissolution, or winding up, after the payment of all of our debts and other liabilities and the satisfaction of the liquidation preferences granted to the holders of Preferred Stock, the holders of Common Stock and the holders of Preferred Stock (calculated on an as-converted to Common Stock basis) will be entitled to share ratably in the net assets legally available for distribution to shareholders.

 

Additional Rights and Preferences

 

Holders of Common Stock have no preemptive, conversion, anti-dilution or other rights, and there are no redemptive or sinking fund provisions applicable to Common Stock.

 

38

 

 

The Proxy

 

Holders of Common Stock who purchase their shares in this offering will grant the company a proxy in Section 5 of the Subscription Agreement and agree to allow the company’s CEO to vote their shares on all matters submitted to a vote of the shareholders, including the election of directors. The proxy will be irrevocable and will remain in effect until the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of Common Stock or the effectiveness of a registration statement under the Securities Exchange Act of 1934 covering the Common Stock.

 

Forum Selection Provision

 

Section 7 of our Common Stock subscription agreement (which appears as an exhibit to the offering statement of which this offering circular forms a part) provides that any court of competent jurisdiction in the State of California is the exclusive forum for all actions or proceedings relating to the subscription agreement. However, this exclusive forum provision does not apply to actions arising under the federal securities laws.

 

Preferred Stock

 

We have authorized the issuance of three series of Preferred Stock, designated Series T Preferred Stock, Series Seed Preferred Stock and Series A Preferred Stock. The Series T Preferred Stock, Series Seed Preferred Stock and Series A Preferred Stock enjoy substantially similar rights, preferences, and privileges.

 

Dividend Rights

 

Holders of Preferred Stock are entitled to receive dividends, as may be declared from time to time by the board of directors out of legally available funds. Such dividends are non-cumulative and no right shall accrue to holders of Preferred Stock for undeclared dividends. Unpaid and undeclared dividends shall not bear or accrue interest. Holders of Preferred Stock are entitled to at least their share proportionally (calculated on an as-converted to Common Stock basis) in any dividends paid to the holders of Common Stock. We have never declared or paid cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends after this offering or in the foreseeable future.

 

Voting Rights

 

Each holder of Preferred Stock is entitled to one vote for each share of Common Stock issuable upon conversion of the Preferred Stock at the then-effective conversion rate. Fractional votes are not permitted and if the conversion results in a fractional share, it will be rounded to the closest whole number. Holders of Preferred Stock are entitled to vote on all matters submitted to a vote of the shareholders, including the election of directors, as a single class with the holders of Common Stock. Specific matters submitted to a vote of the shareholders require the approval of a majority of the holders of Preferred Stock voting as if their shares had been converted into Common Stock. These matters include any vote to:

 

  · enter into a transaction or series of related transactions involving a merger or consolidation, or sale, conveyance or disposal of all or substantially of the assets, unless the majority of the voting power in the surviving entity is substantially similar to that before the transaction with substantially the same rights, preferences, privileges and restrictions;

 

  · modify the rights preferences, privileges and restrictions so as to adversely affect the Preferred Stock;

 

  · increase the total number of authorized shares of Preferred Stock;

 

  · authorize or issue, or obligate to issue, any other equity security having a preferences over, or on a parity with the Preferred Stock with respect to dividends, liquidation, redemption or voting;

 

  · redeem, purchase or otherwise acquire any shares of Common Stock or Preferred Stock except as indicated, including the repurchase of shares from employees, directors and officers, and existing contractual rights;

 

  · declare or pay any dividend on the Common Stock, other than a dividend payable solely in Shares of Common Stock; and

 

  · amend the Certificate of Incorporation or Bylaws.

 

39

 

 

Right to Receive Liquidation Distributions

 

In the event of our liquidation, dissolution, or winding up, holders of Series A Preferred Stock and Series T Preferred Stock are entitled to liquidation preference superior Series Seed Preferred Stock. Collectively, holders of Preferred Stock are entitled to a liquidation preference superior to holders of Common Stock. Liquidation distributions will be first paid to holders of Series A Preferred Stock and Series T Preferred Stock, who will be paid ratably with each other in proportion to their liquidation preference. Holders of Series T Preferred Stock will receive an amount for each share equal to $8.80 per share of Series T Preferred Stock, adjusted for any stock splits, reverse stock splits, stock dividends, and similar recapitalization events (each a “Recapitalization Event”), plus all declared and unpaid dividends and holders of Series A Preferred Stock will receive an amount for each share equal to $1.7182 per share of Series A Preferred Stock, adjusted for any Recapitalization Event, plus all declared and unpaid dividends. The distributions will then go to holders of Series Seed Preferred Stock, who will receive an amount for each share equal to $0.50 per share of Series Seed Preferred Stock, adjusted for any Recapitalization Event, plus all declared and unpaid dividends. Finally, distributions will be payable ratably to holders of Common Stock and Preferred Stock on an as-converted basis. If, upon such liquidation, dissolution or winding up, the assets and funds that are distributable to the holders of Series A Preferred Stock and Series Seed Preferred Stock are insufficient to permit the payment to such holders of the full amount of their respective liquidation preference, then all of such assets and funds will be distributed ratably first among the holders of the Series A Preferred Stock in proportion to the full preferential amounts to which they would otherwise be entitled to receive, and then any remaining amounts to Series Seed Preferred Stock in proportion to the full preferential amounts which they would otherwise be entitled to receive.

 

Conversion Rights

 

Preferred Stock is convertible into Common Stock voluntarily and automatically. Each share of Preferred Stock is convertible at the option of the holder of the share at any time prior to the closing of a liquidation event. Each share of Preferred Stock is currently convertible into one share of Common Stock, but such conversion rate may be adjusted pursuant to the anti-dilution rights of the Preferred Stock set forth in Section 3(d) of the Fifth Amended and Restated Certificate of Incorporation.

 

Additionally, each share of the Preferred Stock will automatically convert into Common Stock (i) immediately prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 where the per share offering price is at least the minimum share price (as adjusted for Recapitalization Events) and our aggregate proceeds are greater than or equal to $15,000,000 or (ii) by a vote by a majority of holders of Preferred Stocks. The “minimum share price” is $8.59 for shares of Series Seed Preferred Stock and shares of Series A Preferred Stock and $8.80 for shares of Series T Preferred Stock. Preferred Stock converts into the same number of shares of Common Stock regardless of whether converted automatically or voluntarily.

 

Drag Along Rights

 

Holders of Preferred Stock are subject to a drag-along provision, pursuant to which each holder of Preferred Stock agrees that, in the event that the company’s Board, the holders of a majority of the company’s voting stock vote, and the holders of a majority of Common Stock issued or issuable upon conversion of Preferred Shares vote in favor of a sale of the company, then such holder of Preferred Stock and Howard E. Marks Living Trust U/A Dated 12/21/2001 (Howard Marks), Marks Irrevocable Trust (Howard Marks), and Miller Family Trust 1/2/96 (Ron Miller) (each a “Key Holder”) will vote in favor of the transaction if such vote is solicited, refrain from exercising dissenters’ rights with respect to such sale of the company, and deliver any documentation or take other actions reasonably required. The drag-along provision is set forth in the Amended and Restated Investors’ Rights Agreements for holders of Series A Preferred Stock and Series Seed Preferred Stock and in their respective subscription agreements for holders of Series T Preferred Stock.

 

Right of First Refusal, Participation and Tag Along Rights

 

Under the Amended and Restated Investors’ Rights Agreement (for holders of Series A Preferred Stock and Series Seed Preferred Stock) and under the Subscription Agreement (for holders of Series T Preferred Stock), holders of at least 100,000 shares of Preferred Stock (as adjusted for recapitalization events) at the time of the event are entitled to a right of first refusal if we propose to issue new shares of capital stock (subject to certain exceptions). Holders of Common Stock and holders of fewer than 100,000 shares of Preferred Stock do not enjoy such rights. All holders of Series A Preferred Stock and Series Seed Preferred Stock are entitled to tag along rights if any Key Holder proposes to sell any of their respective holdings. All holders of Preferred Stock are entitled to participation rights in certain future offerings.

 

Forum Selection Provision

 

Section 7 of our Preferred Stock subscription agreement (which appears as an exhibit to the offering statement of which this offering circular forms a part) provides that any court of competent jurisdiction in the State of California is the exclusive forum for all actions or proceedings relating to the subscription agreement. However, this exclusive forum provision does not apply to actions arising under the federal securities laws.

 

40

 

 

ONGOING REPORTING AND SUPPLEMENTS TO THIS OFFERING CIRCULAR

 

We will be required to make annual and semi-annual filings with the SEC. We will make annual filings on Form 1-K, which will be due by the end of April each year and will include audited financial statements for the previous fiscal year. We will make semi-annual filings on Form 1-SA, which will be due by September 28 each year, which will include unaudited financial statements for the six months to June 30. We will also file a Form 1-U to announce important events such as the loss of a senior officer, a change in auditors or other specified matters. We will be required to keep making these reports unless we file a Form 1-Z to exit the reporting system, which we will only be able to do if we have less than 300 shareholders of record and have filed at least one Form 1-K.

 

At least every 12 months, we will file a post-qualification amendment to the Offering Statement of which this Offering Circular forms a part, to include the company’s recent financial statements.

 

We may supplement the information in this Offering Circular by filing a Supplement with the SEC.

 

All these filings will be available on the SEC’s EDGAR filing system. You should read all the available information before investing.

 

41

 

 

STARTENGINE CROWDFUNDING, INC.

 

CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

(UNAUDITED)

 

June 30, 2019 and June 30, 2018  

 

F-1

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

    June 30,
2019
    December 31,
2018
 
Assets                
Current assets:                
Cash   $ 1,040,327     $ 567,375  
Available-for-sale securities     307,990       1,342,007  
Accounts receivable, net of allowance     442,186       298,933  
Deferred offering costs           30,000  
Other current assets     594,253       405,964  
Total current assets     2,384,756       2,644,279  
                 
Property and equipment, net     3,154       4,434  
Investments - warrants     201,227       203,884  
Intangible assets     20,000       20,000  
Other assets     35,350       25,300  
Total assets   $ 2,644,487     $ 2,897,897  
                 
Liabilities and Stockholders' Equity                
Current liabilities:                
Accounts payable   $ 69,637     $ 27,942  
Accrued liabilities     254,016       167,664  
Deferred revenue     361,873       345,418  
Total current liabilities     685,526       541,024  
                 
Total liabilities     685,526       541,024  
                 
Commitments and contingencies (Note 5)                
                 
Stockholders' equity:                
Series A Preferred Stock, par value $0.00001, 3,500,000 shares authorized, 3,254,261 issued and outstanding     5,566,473       5,556,473  
Series T Preferred Stock, par value $0.00001, 1,650,000 shares authorized, 143,313 and 100,000 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively     814,922       500,000  
Series Seed Preferred Stock, par value $0.00001, 3,500,000 shares authorized, issued, and outstanding     1,775,000       1,775,000  
Common stock, par value $0.00001, 25,000,000 shares authorized, 7,648,629 and 7,430,310 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively     76       74  
Additional paid-in capital     7,137,323       5,820,554  
Subscription receivable     (100,872 )     (5,002 )
Accumulated other comprehensive loss     (34,481 )     (34,537 )
Accumulated deficit     (13,199,480 )     (11,265,689 )
Total stockholders' equity     1,958,961       2,356,873  
Total liabilities and stockholders' equity   $ 2,644,487     $ 2,897,897  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

F-2

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

    Six Months Ended June 30,  
    2019     2018  
Revenues   $ 1,881,310     $ 2,421,061  
                 
Cost of revenues     912,327       1,150,009  
                 
Gross profit     968,983       1,271,052  
                 
Operating expenses:                
General and administrative     1,580,138       1,470,716  
Sales and marketing     952,327       1,328,609  
Research and development     361,059       286,382  
Total operating expenses     2,893,524       3,085,707  
                 
Operating loss     (1,924,541 )     (1,814,655 )
                 
Other expense (income):                
Other expense     21,143       6,309  
Other income     (16,646 )     (18,864 )
Total other expense (income)     4,497       (12,555 )
                 
Loss before provision for income taxes     (1,929,038 )     (1,802,100 )
                 
Provision for income taxes     4,753       4,532  
                 
Net loss   $ (1,933,791 )   $ (1,806,632 )
                 
Other comprehensive income:                
   Unrealized gain on available-for-sale investments     56       2,791  
Total other comprehensive income   $ 56     $ 2,791  
                 
Comprehensive loss   $ (1,933,735 )   $ (1,803,841 )
                 
Weighted average earnings per share - basic and diluted   $ (0.26 )   $ (0.25 )
Weighted average shares outstanding - basic and diluted     7,527,223       7,191,154  

  

In the opinion of management all adjustments necessary in order to make the interim financial statements not misleading have been included. 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

F-3

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Six Months Ended June 30,  
    2019     2018  
Cash flows from operating activities:                
Net loss   $ (1,933,791 )   $ (1,806,632 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     1,280       1,289  
Bad debt expense     246,316       87,596  
Fair value of warrants received for fees     (18,486 )     (32,509 )
Change in fair value of warrant investments     21,143       6,309  
Gain on available-for-sale securities     (8,927 )      
Stock-based compensation     377,458       440,148  
Changes in operating assets and liabilities:                
Accounts receivable     (389,569 )     (474,243 )
Other assets     (198,339 )     (423,854 )
Accounts payable     41,695       76,787  
Accrued liabilities     86,352       (9,459 )
Deferred revenue     16,455       293,013  
Net cash used in operating activities     (1,758,413 )     (1,841,555 )
                 
Cash flows from investing activities:                
Purchase of available-for-sale securities           (818,114 )
Sale of available-for-sale securities     1,043,000        
Net cash provided by (used in) investing activities     1,043,000       (818,114 )
                 
Cash flows from financing activities:                
Proceeds from sale of common stock     930,434       2,620,795  
Proceeds from sale of preferred stock     314,922        
Offering costs     (81,976 )     (108,068 )
Proceeds from exercise of employee stock options     24,985        
Net cash provided by financing activities     1,188,365       2,512,727  
                 
Increase (decrease) in cash and cash equivalents     472,952       (146,942 )
Cash and cash equivalents, beginning of period     567,375       954,599  
Cash and cash equivalents, end of period   $ 1,040,327     $ 807,657  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $     $  
Cash paid for income taxes   $ 4,753     $ 4,532  
                 
Non-cash investing and financing activities:                
Unrealized gain on available-for-sale securities   $ 56     $ 2,791  
Fair value of warrants received   $ 18,486     $ 32,509  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

F-4

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

    Series A Preferred
Stock
    Series T Preferred
Stock
    Series Seed Preferred
Stock
    Common Stock     Additional     Subscription     Accumulated
Other
Comprehensive
    Accumulated     Total
Stockholders'
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Paid-in Capital     Receivable     Loss     Deficit     Equity  
December 31, 2018     3,254,261     $ 5,566,473       100,000     $ 500,000       3,500,000     $ 1,775,000       7,430,310     $ 74     $ 5,820,554     $ (5,002 )   $ (34,537 )   $ (11,265,689 )   $ 2,356,873  
Sale of common stock                                         143,183       1       1,026,302       (95,870 )                 930,433  
Sale of preferred stock                 43,313       314,922                                                       314,922  
Offering costs                                                     (111,976 )                       (111,976 )
Exercise of stock options                                         75,136       1       24,985                         24,986  
Stock option compensation                                                     377,458                         377,458  
Net loss                                                                       (1,933,791 )     (1,933,791 )
Other comprehensive gain                                                                 56             56  
June 30, 2019     3,254,261     $ 5,566,473       143,313     $ 814,922       3,500,000     $ 1,775,000       7,648,629     $ 76     $ 7,137,323     $ (100,872 )   $ (34,481 )   $ (13,199,480 )   $ 1,958,961  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

F-5

 

 

STARTENGINE CROWDFUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – NATURE OF OPERATIONS

 

StartEngine Crowdfunding, Inc. was formed on March 19, 2014 (“Inception”) in the State of Delaware. The Company was originally incorporated as StartEngine Crowdsourcing, Inc. and changed to the current name on May 8, 2014. The consolidated financial statements of StartEngine Crowdfunding, Inc. (which may be referred to as the "Company," "we," "us," or "our") are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s headquarters are located in West Hollywood, California.

 

The Company aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding, Inc. operates under Title IV of the Jumpstart our Business Startups Act (“JOBS Act”), allowing private companies to advertise the sale of stock to both accredited and non-accredited investors. StartEngine Crowdfunding Inc. has wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. StartEngine Capital LLC, a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA), operates under Title III of the JOBS Act. StartEngine Secure LLC is a transfer agent registered with the SEC. StartEngine Primary LLC was formed in October 2017 and received approval to operate as a registered broker-dealer in July 2019. It is still in the process of seeking approval to operate as an alternative trading system. The Company’s mission is to empower thousands of companies to raise capital and create significant amounts of jobs over the coming years.

 

Management Plans

 

The Company’s revenue producing activities commenced in 2015 with the approved start of Title IV of the JOBS Act, which created new rules for Regulation A, and increased in 2016 with the start of Regulation Crowdfunding under Title III of the JOBS Act. Because this is a new industry, there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. Because there is a level of uncertainty and because we are still in the early stages of these new regulations, the Company is expected to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding campaigns and the investments in those campaigns is sufficient for revenues derived from those campaigns to cover our costs. These factors indicate there could be substantial doubt about the Company’s ability to continue as a going concern.

 

During the next 12 months, the Company intends to fund its operations through its increasing revenues, current working capital, and the sale of equity through its current Regulation A offering. We, therefore, believe that any substantial doubt about the Company’s ability to continue as a going concern has been alleviated.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with Rule 8-03 of Regulation S-X per Regulation A requirements. Certain information and disclosures normally included in the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of the Company for the years ended December 31, 2018 and 2017. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the full year.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of StartEngine Crowdfunding, Inc.’s wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. Significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of expenses during the reporting periods. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term.

 

F-6

 

 

Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

 

Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2- Include other inputs that are directly or indirectly observable in the marketplace.

 

Level 3- Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2019. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. The following are level 1, 2 and 3 assets.

 

Level 1

 

Investments: Available-for-sale securities are made up of mutual funds and shares of common stock that are valued based on quoted prices in active markets

 

Level 2

 

Investments - warrants (public portfolio): Fair value measurements of warrants of publicly traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable volatility assumptions based on comparable public company.

 

Level 3

 

Investments - warrants (private portfolio): Fair value measurements of warrants of private portfolio companies are priced based on a modified Black-Scholes option pricing model to estimate the asset value by using stated strike prices, warrant expiration dates modified to account for estimates to actual life relative to stated expiration, risk-free interest rates, and volatility assumptions based on comparable public companies. Option volatility assumptions used in the modified Black-Scholes model are based on public companies who operate in similar industries as companies in our private company portfolio. For these warrants, the fair value of the underlying stock may be estimated based on recent raises or based on information received from the portfolio company. Certain adjustments may be applied as determined appropriate by management for lack of liquidity.

 

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019:

 

 

    Level 1     Level 2     Level 3     Total  
Cash   $ 1,040,327     $     $     $ 1,040,327  
Available-for-sale securities                                
Mutual funds     302,357                   302,357  
Common stock equities     5,633                   5,633  
Investments - Warrants                 201,227       201,227  
    $ 1,348,317     $     $ 201,227     $ 1,549,544  

 

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018:

 

F-7

 

 

    Level 1     Level 2     Level 3     Total  
Cash   $ 567,375     $     $     $ 567,375  
Available-for-sale securities                                
Mutual funds     1,332,225                   1,332,225  
Common stock equities     9,782                   9,782  
Investments - Warrants                 203,884       203,884  
    $ 1,909,382     $     $ 203,884     $ 2,113,266  

 

The following table presents additional information about transfers in and out of Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2019:

 

    Investments -
Warrants
 
Fair Value at December 31, 2018     203,884  
Receipt of warrants     18,486  
Change in fair value of warrants     (21,143 )
Fair Value at June 30, 2019   $ 201,227  

 

The following range of variables were used in valuing Level 3 assets during the six months ended June 30, 2019 and the year ended December 31, 2018:

 

    June 30,
2019
    December 31,
2018
 
Expected life (years)     1-10       1-10  
Risk-free interest rate     1.7-2.1 %     2.4-2.7 %
Expected volatility     30-101 %     30-101 %
Annual dividend yield     0 %     0 %

 

Accounts Receivable

 

Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance for doubtful accounts as of June 30, 2019 and December 31, 2018 was $170,342 and $72,723, respectively. Bad debt expense for the six months ended June 30, 2019 and 2018 was $246,316 and $87,596, respectively.

 

Investment Securities

 

Available-for-Sale Securities

 

Our available-for-sale securities consist of mutual funds and common stock equities that are tradable in an active market. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of the Company’s stockholders' equity, until realized.

 

We analyze available-for-sale securities for other-than-temporary impairment quarterly or as there is indication that such review is necessary.

 

We apply the other-than-temporary impairment standards of Accounting Standards Codification (“ASC”) 320, Investments-Debt and Equity Securities.

 

Non-Marketable and Other Securities

 

Non-marketable and other securities include investments in non-public equities. Our accounting for investments in non-marketable and other securities depends on several factors, including the level of ownership, power to control and the legal structure of the subsidiary making the investment. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) equity method accounting, and (iii) cost method accounting.

 

Investments - Warrants

 

In connection with negotiated platform fee agreements, we may obtain warrants giving us the right to acquire stock in companies undergoing Regulation A offerings. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from these warrants.

 

F-8

 

 

We account for warrants in certain private and public (or publicly traded under the provisions of Regulation A) client companies as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815, Derivatives and Hedging. In general, the warrants entitle us to buy a specific number of shares of stock at a specific price within a specific time period. Certain warrants contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events. Our warrant agreements typically contain net share settlement provisions, which permit us to receive at exercise a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These warrants are recorded at fair value and are classified as Investments - warrants on our consolidated balance sheet at the time they are obtained.

 

The grant date fair values of warrants received in connection with services performed are deemed to be revenue and recognized upon receipt.

 

Any changes in fair value from the grant date fair value of warrants will be recognized as increases or decreases to investments on our balance sheet and as net gains or losses in other (income) expense, a component of consolidated net income.

 

In the event of an exercise for shares, the basis or value in the securities is reclassified from Investment - warrants to available-for-sale securities or non-marketable securities, as described below, on the consolidated balance sheet on the latter of the exercise date or corporate action date. The shares in public companies, or companies that trade over-the-counter as allowed by Regulation A, are classified as available-for-sale securities (provided they do not have a significant restriction from sale). Changes in fair value of securities designated as available-for-sale, after applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. The shares in private companies without an active trading market are classified as non-marketable securities. Typically, we account for these securities at cost and only record adjustments to the value at the time of exit or liquidation though gains or losses on investments securities, in non-interest income, a component of consolidated net income.

 

The fair value of the warrants portfolio is a critical accounting estimate and is reviewed semi-annually. We value our warrants using a modified Black-Scholes option pricing model, which incorporates the following significant inputs, in addition to certain adjustments for general lack of liquidity:

 

  An underlying asset value, which is estimated based on current information available in valuation reports, including any information regarding subsequent rounds of funding or performance of a company.

 

  Stated strike price, which can be adjusted for certain warrants upon the occurrence of subsequent funding rounds or other future events.

 

  Price volatility or risk associated with possible changes in the warrant price. The volatility assumption is based on historical price volatility of publicly traded companies within indices or companies similar in nature to the underlying client companies issuing the warrant.

 

  The expected remaining life of the warrants in each financial reporting period.

 

  The risk-free interest rate is derived from the Treasury yield curve and is calculated based on the risk-free interest rates that correspond closest to the expected remaining life of the warrant on the date of assessment.

 

Property and Equipment

 

Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over the estimated useful life of three (3) to five (5) years. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.

 

Intangible Assets

 

Intangible assets are amortized over their respective estimated lives, unless the lives are determined to be indefinite and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The impairment testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

Impairment of Long-Lived Assets

 

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

 

F-9

 

 

Preferred Stock

 

ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.

 

Management is required to determine the presentation for the preferred stock as a result of the liquidation and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, derivative liability accounting is not required by the Company.

 

Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock.

 

Dividends which are required to be paid upon redemption are accrued and recorded within preferred stock and accumulated deficit.

 

Equity Offering Costs

 

The Company accounts for offering costs in accordance with ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. Offering costs of $111,976 and $108,068 for the Company’s equity offerings were charged to stockholders’ equity during the six months ended June 30, 2019 and 2018, respectively.

 

Revenue Recognition

 

Effective January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers. ASC 606 introduces a new framework for analyzing potential revenue transactions by identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the Company satisfies a performance obligation.

 

Cost of Revenues

 

Cost of revenues consists of internal employees, hosting fees, processing fees, and certain software subscription fees that are required to provide services to our issuers.

 

Research and Development

 

We incur research and development costs during the process of researching and developing our technologies and future offerings. Our research and development costs consist primarily of non-capitalizable engineering fees for both employees and consultants related to our website and future product offerings, email and other tools that are utilized for client related services and outreach. During the six months ended June 30, 2019 and 2018, research and development costs were $361,059 and $286,382, respectively.

 

Stock Based Compensation

 

The Company accounts for stock options issued to employees under ASC 718, Share-Based Payment. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model.

 

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505, Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

 

Earnings per Common and Common Equivalent Share

 

The computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from the exercise of securities outstanding using the treasury stock method and the average market price per share during the year. Options and convertible preferred stock which are common stock equivalents are not included in the diluted earnings per share calculation for June 30, 2019 or 2018 since their effect is anti-dilutive.

 

F-10

 

 

Concentration of Credit Risk

 

The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy.  Balances are insured by the Federal Deposit Insurance Corporation up to $250,000.  At times, the Company may maintain balances in excess of the federally insured limits.

 

At times, the Company may have certain vendors or customers that make up over 10% of the balance at any given time. However, the Company is not dependent on any single or group of vendors or customers, and accordingly, the loss of any such vendors or customers would not have a significant impact on the Company’s operations.

 

Risks and Uncertainties

 

The Company’s operations are subject to new laws, regulation and compliance. Significant changes to regulations governing the way the Company derives revenues could impact the company negatively. Technological and advancements and updates as well as maintaining compliance standards are required to maintain the Company’s operations.

 

Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 will become effective for interim and annual reporting periods beginning on January 1, 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact of the adoption of ASU 2018-13 on its consolidated financial statements.

 

The FASB issues ASUs to amend the authoritative literature in the ASC. There have been a number of ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated financial statements.

 

NOTE 3 – MARKETABLE SECURITIES AND INVESTMENTS

 

Available-for-Sale Securities

 

Available-for-sale securities consisted of the following as of June 30, 2019 and December 31, 2018:

 

    June 30,
2019
    December 31,
2018
 
Mutual funds   $ 302,357     $ 1,332,225  
Common stock     5,633       9,782  
    $ 307,990     $ 1,342,007  

 

The Company had $56 and $2,791 in unrealized gains on mutual funds and common stocks held, which is included as unrealized gain within other comprehensive loss in the statement of operations and comprehensive loss for the six months ended June 30, 2019 and 2018, respectively.

 

Investments – Warrants

 

Equity warrants, as described in Note 2, are equity warrants received for services provided. The warrants are valued on the date they are earned in accordance with revenue recognition criteria. The change in value for the six months ended June 30, 2019 and 2018 was a decrease of $21,143 and $6,309, respectively.

 

F-11

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

As of June 30, 2019 and December 31, 2018, property and equipment consisted of the following:

 

    June 30,
2019
    December 31,
2018
 
Computer equipment   $ 6,744     $ 6,744  
Software     3,654       3,654  
Total property and equipment     10,398       10,398  
Accumulated depreciation     (7,244 )     (5,964 )
    $ 3,154     $ 4,434  

 

Depreciation expense for the six months ended June 30, 2019 and 2018 was $1,280 and $1,289, respectively.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

We are currently not involved with or know of any pending or threatening litigation against the Company or any of its officers.

 

The Company maintains offices on a month-to-month lease.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

We have authorized the issuance of 8,650,000 shares of our preferred stock with par value of $0.00001. Of these authorized shares, 3,500,000 are designated as Series A Preferred Stock (“Series A”), 1,650,000 are designated as Series T Preferred Stock (“Series T”), and 3,500,000 are designated as Series Seed Preferred Stock (“Series Seed”).

 

Series A Preferred Stock

 

The Series A have liquidation priority over the Series Seed and common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series A shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment is made to Series Seed or common stock, liquidation distributions, which will be paid ratably with the Series T in proportion to its respective liquidation preference. Holders of Series A will receive an amount equal to $1.7182 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A and Series T ratably in proportion to the full preferential amounts for which they are entitled. The Series A votes on an as-converted basis. The Series A is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series A is automatically convertible into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, coverts the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series A has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

Series T Preferred Stock

 

The Series T have liquidation priority over the Series Seed and common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series T shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment is made to Series Seed or common stock, liquidation distributions, which will be paid ratably with the Series A in proportion to its respective liquidation preference. Holders of Series T will receive an amount equal to $8.80 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A and Series T ratably in proportion to the full preferential amounts for which they are entitled. The Series T votes on an as-converted basis. The Series T is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series T is automatically convertible into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, coverts the offer and sale of common stock at an offering price of not less than $8.80 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series T has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

During the six months ended June 30, 2019, the Company sold 43,313 shares of Series T Preferred Stock for $314,922.

 

F-12

 

 

Series Seed Preferred stock

 

The Series Seed have liquidation priority over the common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series Seed shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, after any payment made to Series A and Series T, but before any payment is made to the Company’s common stock, an amount equal to $0.50 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of Series A and Series T first, then ratably in proportion to the full preferential amounts for which they are entitled to the Series Seed. The Series Seed votes on an as-converted basis. The Series Seed is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series Seed is automatically converted into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, converts the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series Seed has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

Common Stock

 

We have authorized the issuance of 25,000,000 shares of our common stock with par value of $0.00001.

 

During the six months ended June 30, 2019, the Company sold 143,183 shares of common stock through its Regulation A offering. The Company recognized gross proceeds of $1,026,303 and a subscription receivable of $95,870 related to the sale of these shares. In connection with the offering, the Company recognized offering costs of $111,976 during the six months ended June 30, 2019.

 

Stock Options

 

In 2015, our Board of Directors adopted the StartEngine Crowdfunding, Inc. 2015 Equity Incentive Plan (the “2015 Plan”).  The 2015 Plan provides for the grant of equity awards to employees, and consultants, including stock options, stock purchase rights and restricted stock units to purchase shares of our common stock.  Up to 2,030,000 shares of our common stock may be issued pursuant to awards granted under the 2015 Plan. The 2015 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board. 

 

During the six months ended June 30, 2019, the Company granted 295,000 stock options to employees. The Company valued these options under ASC 718 using the Black-Scholes pricing model. The granted options had exercise prices ranging from $5.00 to $7.50, vest over four years and expire in ten years. The stock options were valued using the Black-Scholes pricing model as indicated below:

 

    June 30,
2019
   
Expected life (years)     6.1    
Risk-free interest rate     2.2-2.5 %  
Expected volatility     50 %  
Annual dividend yield     0 %  

 

The risk-free interest rate assumption for options granted is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company's employee stock options.

 

The expected term of employee stock options is calculated using the simplified method which takes into consideration the contractual life and vesting terms of the options.

 

The Company determined the expected volatility assumption for options granted using the historical volatility of comparable public company's common stock. The Company will continue to monitor peer companies and other relevant factors used to measure expected volatility for future stock option grants, until such time that the Company’s common stock has enough market history to use historical volatility.

 

The dividend yield assumption for options granted is based on the Company's history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

 

The Company currently recognizes option forfeitures as they occur as there is insufficient historical data to accurately determine future forfeiture rates.

 

F-13

 

 

During the six months ended June 30, 2019, two employees exercised their vested options upon separation from the Company to purchase 75,136 shares of common stock, and the Company received aggregate exercise proceeds of $24,986.

 

Stock option expense for the six months ended June 30, 2019 and 2018 was $377,458 and $440,148, respectively, and are included within the consolidated statements of operations and comprehensive loss as follows:

 

    Six Months Ended  
    June 30,  
    2019     2018  
Cost of revenues   $ 54,272     $ 50,402  
General and administrative     149,084       282,933  
Sales and marketing     130,906       75,153  
Research and development     43,196       31,660  

 

NOTE 7 – SUBSEQUENT EVENTS

 

Subsequent to June 30, 2019, the Company sold an additional 85,218 shares of common stock for gross proceeds of $639,135 in connection with its Regulation A offering. The Company also incurred additional offering costs of $23,565. Additional cash proceeds of $600,563 were also disbursed from escrow.

 

The Company has evaluated subsequent events that occurred after June 30, 2019 through September 19, 2019. There have been no other events or transactions during this time which would have a material effect on these consolidated financial statements.

 

F-14

 

 

STARTENGINE CROWDFUNDING, INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2018 and 2017

 

Together with Independent Auditors’ Report

 

F-15

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholders

StartEngine Crowdfunding, Inc.

 

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of StartEngine Crowdfunding, Inc. and subsidiaries (collectively the “Company”) which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of StartEngine Crowdfunding, Inc. and subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ dbbmckennon  
Newport Beach, CA  
April 26, 2019  

 

 

F-16

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED BALANCE SHEETS

 

    December 31,  
    2018     2017  
Assets                
Current assets:                
Cash   $ 567,375     $ 954,599  
Available-for-sale securities     1,342,007       1,566,192  
Accounts receivable, net of allowance     298,933       159,100  
Deferred offering costs     30,000        
Other current assets     405,964       27,885  
Total current assets     2,644,279       2,707,776  
                 
Property and equipment, net     4,434       7,005  
Investments - warrants     203,884       201,124  
Intangible assets     20,000       20,000  
Other assets     25,300       20,950  
Total assets   $ 2,897,897     $ 2,956,855  
                 
Liabilities and Stockholders' Equity                
Current liabilities:                
Accounts payable   $ 27,942     $ 163,627  
Accrued liabilities     167,664       398,834  
Deferred revenue     345,418       219,425  
Total current liabilities     541,024       781,886  
                 
Total liabilities     541,024       781,886  
                 
Commitments and contingencies (Note 5)                
                 
Stockholders' equity:                
Series A Preferred Stock, par value $0.00001, 3,500,000 shares authorized, 3,254,261 issued and outstanding (liquidation preference of $5,591,471)     5,566,473       5,566,473  
Series T Preferred Stock, par value $0.00001, 1,650,000 shares authorized, 100,000 issued and outstanding as of December 31, 2018 (liquidation preference of $880,000)     500,000        
Series Seed Preferred Stock, par value $0.00001, 3,500,000 shares authorized, issued, and outstanding (liquidation preference of $1,750,000)     1,750,000       1,750,000  
Common stock, par value $0.00001, 25,000,000 shares authorized, 7,430,310 and 6,754,501 shares issued and outstanding at December 31, 2018 and 2017, respectively     74       68  
Additional paid-in capital     5,820,554       1,638,426  
Subscription receivable     (5,002 )     (105,267 )
Accumulated other comprehensive loss     (34,537 )     (34,131 )
Accumulated deficit     (11,240,689 )     (6,640,600 )
Total stockholders' equity     2,356,873       2,174,969  
Total liabilities and stockholders' equity   $ 2,897,897     $ 2,956,855  

 

See accompanying notes to consolidated financial statements.

 

F-17

 

  

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

    Year Ended December 31,  
    2018     2017  
             
Revenues   $ 4,682,528     $ 2,046,948  
                 
Cost of revenues     2,637,961       729,108  
                 
Gross profit     2,044,567       1,317,840  
                 
Operating expenses:                
General and administrative     2,936,648       2,228,369  
Sales and marketing     2,932,405       918,184  
Research and development     751,233       356,047  
Total operating expenses     6,620,286       3,502,600  
                 
Operating loss     (4,575,719 )     (2,184,760 )
                 
Other expense:                
Other expense     43,770       33,745  
Other income     (39,568 )     (26,052 )
Realized loss on available-for-sale securities     3,098       79,100  
Total other expense     7,300       86,793  
                 
Loss before provision for income taxes     (4,583,019 )     (2,271,553 )
                 
Provision for income taxes     17,070       8,621  
                 
Net loss   $ (4,600,089 )   $ (2,280,174 )
                 
Other comprehensive (loss) income:                
Unrealized (loss) gain on available-for-sale investments     (406 )     70,332  
Total other comprehensive (loss) income   $ (406 )   $ 70,332  
                 
Comprehensive loss   $ (4,600,495 )   $ (2,209,842 )
                 
Weighted average earnings per share - basic and diluted   $ (0.63 )   $ (0.35 )
Weighted average shares outstanding - basic and diluted     7,312,046       6,427,350  

 

See accompanying notes to consolidated financial statements.

 

F-18

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

    Series A Preferred Stock     Series T Preferred Stock     Series Seed Preferred Stock     Common Stock     Additional     Subscription     Accumulated
Other
Comprehensive
    Accumulated     Total
Stockholders'
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Paid-in Capital     Receivable     Income (Loss)     Deficit     Equity  
December 31, 2016     3,254,261     $ 5,566,473           $       3,500,000     $

1,750,000

      6,414,167     $ 64     $ 27,778     $     $ (104,463 )   $ (4,360,426 )   $ 2,879,426  
Sale of common stock                                         340,334       4       1,629,536       (105,267 )                 1,524,273  
Offering costs                                                     (99,843 )                       (99,843 )
Stock option compensation                                                     80,955                         80,955  
Net loss                                                                       (2,280,174 )     (2,280,174 )
Other comprehensive gain                                                                 70,332             70,332  
December 31, 2017     3,254,261     $ 5,566,473           $       3,500,000     $

1,750,000

      6,754,501     $ 68     $ 1,638,426     $ (105,267 )   $ (34,131 )   $ (6,640,600 )   $ 2,174,969  
Sale of common stock                                         675,809       6       3,276,317       100,265                   3,376,588  
Sale of preferred stock                 100,000       500,000                                                       500,000  
Offering costs                                                     (49,394 )                       (49,394 )
Stock option compensation                                                     955,205                         955,205  
Net loss                                                                       (4,600,089 )     (4,600,089 )
Other comprehensive loss                                                                 (406 )           (406 )
December 31, 2018     3,254,261     $ 5,566,473       100,000     $ 500,000       3,500,000     $ 1,750,000       7,430,310     $ 74     $ 5,820,554     $ (5,002 )   $ (34,537 )   $ (11,240,689 )   $ 2,356,873  

 

See accompanying notes to consolidated financial statements.

 

F-19

 

 

STARTENGINE CROWDFUNDING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended December 31,  
    2018     2017  
             
Cash flows from operating activities:                
Net loss   $ (4,600,089 )   $ (2,280,174 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     2,571       2,517  
Bad debt expense     145,341       70,700  
Fair value of warrants received for fees     (40,665 )     (159,707 )
Change in fair value of warrant investments     37,905       33,745  
(Gain) loss on available-for-sale securities     (35,721 )     79,100  
Stock-based compensation     955,205       80,955  
Changes in operating assets and liabilities:                
Accounts receivable     (285,174 )     (132,222 )
Other assets     (382,429 )     (27,885 )
Accounts payable     (135,685 )     145,033  
Accrued liabilities     (231,170 )     271,965  
Deferred revenue     125,993       219,425  
Net cash used in operating activities     (4,443,918 )     (1,696,548 )
                 
Cash flows from investing activities:                
Purchase of property and equipment           (2,294 )
Purchase of available-for-sale securities     (801,000 )     (577,307 )
Sale of available-for-sale securities     1,060,500       1,648,256  
Deposits and other           8,885  
Net cash provided by investing activities     259,500       1,077,540  
                 
Cash flows from financing activities:                
Proceeds from sale of common stock     3,376,588       1,524,273  
Offering costs     (79,394 )     (99,843 )
Proceeds from sale of Series T preferred stock     500,000        
Net cash provided by financing activities     3,797,194       1,424,430  
                 
(Decrease) increase in cash and cash equivalents     (387,224 )     805,422  
Cash and cash equivalents, beginning of year     954,599       149,177  
Cash and cash equivalents, end of year   $ 567,375     $ 954,599  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $     $  
Cash paid for income taxes   $ 17,070     $ 8,621  

 

See accompanying notes to consolidated financial statements.

 

F-20

 

 

STARTENGINE CROWDFUNDING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – NATURE OF OPERATIONS

 

StartEngine Crowdfunding, Inc. was formed on March 19, 2014 (“Inception”) in the State of Delaware. The Company was originally incorporated as StartEngine Crowdsourcing, Inc., but changed to the current name on May 8, 2014   The consolidated financial statements of StartEngine Crowdfunding, Inc. (which may be referred to as the "Company," "we," "us," or "our") are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company’s headquarters are located in West Hollywood, California.

 

The Company aims to revolutionize the startup financing model by helping both accredited and non-accredited investors invest in private companies on a public platform. StartEngine Crowdfunding, Inc. operates under Title IV of the Jumpstart our Business Startups Act (“JOBS Act”), allowing private companies to advertise the sale of stock to both accredited and non-accredited investors. StartEngine Crowdfunding Inc. has wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. StartEngine Capital LLC, a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA), operates under Title III of the JOBS Act. StartEngine Secure LLC is a transfer agent registered with the SEC. StartEngine Primary LLC was formed in October 2017 and is in the process of seeking approval to operate as a registered broker-dealer and alternative trading system. The Company’s mission is to empower thousands of companies to raise capital and create significant amounts of jobs over the coming years.

 

Management Plans

The Company’s revenue producing activities commenced in 2015 with the approved start of Title IV of the JOBS Act which created new rules for Regulation A and increased in 2016 based on the start of Regulation Crowdfunding under Title III of the JOBS Act. Because this is a new industry, there is a level of uncertainty about how fast the volume of activity will increase and how future regulatory requirements may change the landscape. Because there is a level of uncertainty and because we are still at the early stages of these new regulations, the Company is expected to incur losses until such time that the volume of Regulation A and Regulation Crowdfunding campaigns and the investments into those campaigns is sufficient for revenues derived from those campaigns to cover our costs. These factors indicate there could be substantial doubt about the Company’s ability to continue as a going concern.

 

During the next 12 months, the Company intends to fund its operations through its increasing revenues, current working capital, and the sale of equity through various offerings, and therefore, we believe that any substantial doubt about the Company’s ability to continue as a going concern has been alleviated.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of StartEngine Crowdfunding, Inc.’s wholly-owned subsidiaries, StartEngine Capital LLC, StartEngine Secure LLC, and StartEngine Primary LLC. Significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amount of expenses during the reporting periods. Actual results could materially differ from these estimates. It is reasonably possible that changes in estimates will occur in the near term.

 

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

 

F-21

 

 

Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2- Include other inputs that are directly or indirectly observable in the marketplace.

 

Level 3- Unobservable inputs which are supported by little or no market activity.

 

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2018 and 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. The following are level 1, 2 and 3 assets.

 

Level 1

Investments: Available-for-sale securities are made up of mutual funds and shares of common stock that are valued based on quoted prices in active markets.

 

Level 2

Investments - warrants (public portfolio): Fair value measurements of warrants of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable volatility assumptions based on comparable public company.

 

Level 3

Investments - warrants (private portfolio): Fair value measurements of warrants of private portfolio companies are priced based on a modified Black-Scholes option pricing model to estimate the asset value by using stated strike prices, warrant expiration dates modified to account for estimates to actual life relative to stated expiration, risk-free interest rates volatility assumptions based on comparable public companies. Option volatility assumptions used in the modified Black-Scholes model are based on public companies who operate in similar industries as companies in our private company portfolio. For these warrants the fair value of the underlying stock may be estimated based on recent raises or based on information received from the portfolio company. Certain adjustments may be applied as determined appropriate by management for lack of liquidity.

 

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018:

 

    Level 1     Level 2     Level 3     Total  
Cash   $ 567,375     $     $     $ 567,375  
Available-for-sale securities                                
Mutual funds     1,332,225                   1,332,225  
Common stock     9,782                   9,782  
Investments - Warrants                 203,884       203,884  
    $ 1,909,382     $     $ 203,884     $ 2,113,266  

 

F-22

 

 

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017:

 

    Level 1     Level 2     Level 3     Total  
Cash   $ 954,599     $     $     $ 954,599  
Available-for-sale securities                                
Mutual funds     1,556,070                   1,556,070  
Common stock     10,122                   10,122  
Investments - Warrants                 201,124       201,124  
    $ 2,520,791     $     $ 201,124     $ 2,721,915  

 

The following table presents additional information about transfers in and out of Level 3 assets measured at fair value on a recurring basis for 2018 and 2017:

 

    Investments -
Warrants
 
Fair Value at December 31, 2016   $ 75,162  
Receipt of warrants     159,707  
Change in fair value of warrants     (33,745 )
Fair Value at December 31, 2017   $ 201,124  
Receipt of warrants     40,665  
Change in fair value of warrants     (37,905 )
Fair Value at December 31, 2017   $ 203,884  

 

The following range of variables were used in valuing Level 3 assets during the years ended December 31:

 

    2018     2017  
Expected life (years)     1-10       1-10  
Risk-free interest rate     2.4-2.7 %     1.8-2.4 %
Expected volatility     30-101 %     44-134 %
Annual dividend yield     0 %     0 %

 

Cash and Cash Equivalents

For purpose of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest-bearing. The Company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables. The allowance for doubtful accounts as of December 31, 2018 and 2017 was $72,723 and $22,700, respectively. Bad debt expense for 2018 and 2017 was $145,341 and $70,700, respectively

 

Investment Securities

 

Available-for-Sale Securities

Our available-for-sale securities consist of mutual funds and common stock equities that are tradable in an active market. Unrealized gains and losses on available-for-sale securities, net of applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of the Company’s stockholders' equity, until realized.

 

We analyze available-for-sale securities for other-than-temporary impairment quarterly or as there is indication that such review is necessary.

 

We apply the other-than-temporary impairment standards of Accounting Standards Codification (“ASC”) 320, Investments-Debt and Equity Securities.

 

F-23

 

 

Non-Marketable and Other Securities

Non-marketable and other securities include investments in non-public equities. Our accounting for investments in non-marketable and other securities depends on several factors, including the level of ownership and the power to control. As further described below, we base our accounting for such securities on: (i) fair value accounting, (ii) equity method accounting, and (iii) cost method accounting.

 

Investments - Warrants

In connection with negotiated platform fee agreements, we may obtain warrants giving us the right to acquire stock in companies undergoing Regulation A offerings. We hold these assets for prospective investment gains. We do not use them to hedge any economic risks nor do we use other derivative instruments to hedge economic risks stemming from these warrants.

 

We account for warrants in certain private and public (or publicly traded under the provisions of Regulation A) client companies as derivatives when they contain net settlement terms and other qualifying criteria under ASC 815, Derivatives and Hedging. In general, the warrants entitle us to buy a specific number of shares of stock at a specific price within a specific time period. Certain warrants contain contingent provisions, which adjust the underlying number of shares or purchase price upon the occurrence of certain future events. Our warrant agreements typically contain net share settlement provisions, which permit us to receive at exercise a share count equal to the intrinsic value of the warrant divided by the share price (otherwise known as a “cashless” exercise). These warrants are recorded at fair value and are classified as Investments - warrants on our consolidated balance sheets at the time they are obtained.

 

The grant date fair values of warrants received in connection with services performed are deemed to be revenue and recognized when earned.

 

Any changes in fair value from the grant date fair value of warrants will be recognized as increases or decreases to investments on our balance sheet and as net gains or losses in other (income) expense, a component of consolidated net income.

 

In the event of an exercise for shares, the basis or value in the securities is reclassified from Investment - warrants to available-for-sale securities or non-marketable securities, as described below, on the consolidated balance sheet on the latter of the exercise date or corporate action date. The shares in public companies, or companies that trade over-the-counter as allowed by Regulation A, are classified as available-for-sale securities (provided they do not have a significant restriction from sale). Changes in fair value of securities designated as available-for-sale, after applicable taxes, are reported in accumulated other comprehensive income, which is a separate component of stockholders' equity. The shares in private companies without an active trading market are classified as non-marketable securities. Typically, we account for these securities at cost and only record adjustments to the value at the time of exit or liquidation though gains or losses on investments securities, in non-interest income, a component of consolidated net income.

 

The fair value of the warrants portfolio is a critical accounting estimate and is reviewed semi-annually. We value our warrants using a modified Black-Scholes option pricing model, which incorporates the following significant inputs, in addition to certain adjustments for general lack of liquidity:

 

  An underlying asset value, which is estimated based on current information available in valuation reports, including any information regarding subsequent rounds of funding or performance of a company.

 

  Stated strike price, which can be adjusted for certain warrants upon the occurrence of subsequent funding rounds or other future events.

 

  Price volatility or risk associated with possible changes in the warrant price. The volatility assumption is based on historical price volatility of publicly traded companies within indices or companies similar in nature to the underlying client companies issuing the warrant.

 

  The expected remaining life of the warrants in each financial reporting period.

 

  The risk-free interest rate is derived from the Treasury yield curve and is calculated based on the risk-free interest rates that correspond closest to the expected remaining life of the warrant on the date of assessment.

 

F-24

 

 

Property and Equipment

Property and equipment are stated at cost. The Company’s fixed assets are depreciated using the straight-line method over the estimated useful life of three (3) to five (5) years. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations.

 

Intangible Assets

Intangible assets are amortized over their respective estimated lives, unless the lives are determined to be indefinite and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The impairment testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined.

 

Impairment of Long-Lived Assets

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

 

Preferred Stock

ASC 480, Distinguishing Liabilities from Equity, includes standards for how an issuer of equity (including equity shares issued by consolidated entities) classifies and measures on its balance sheet certain financial instruments with characteristics of both liabilities and equity.

 

Management is required to determine the presentation for the preferred stock as a result of the liquidation and conversion provisions, among other provisions in the agreement. Specifically, management is required to determine whether the embedded conversion feature in the preferred stock is clearly and closely related to the host instrument, and whether the bifurcation of the conversion feature is required and whether the conversion feature should be accounted for as a derivative instrument. If the host instrument and conversion feature are determined to be clearly and closely related (both more akin to equity), derivative liability accounting under ASC 815, Derivatives and Hedging, is not required. Management determined that the host contract of the preferred stock is more akin to equity, and accordingly, derivative liability accounting is not required by the Company.

 

Costs incurred directly for the issuance of the preferred stock are recorded as a reduction of gross proceeds received by the Company, resulting in a discount to the preferred stock.

 

Dividends which are required to be paid upon redemption are accrued and recorded within preferred stock and accumulated deficit.

 

Equity Offering Costs

The Company accounts for offering costs in accordance with ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. Offering costs of $49,394 and $99,843 for the Company’s Regulation A offering were charged to stockholders’ equity during the years ended December 31, 2018 and 2017, respectively.

 

F-25

 

 

Revenue Recognition

Effective January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers. ASC 606 introduces a new framework for analyzing potential revenue transactions by identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract, and recognizing revenue when (or as) the Company satisfies a performance obligation.

 

The Company recognizes revenues from Regulation A and Regulation D platform fees at an agreed-upon per-investor rate based on the number of new investors subscribed to an offering. Platform fees are paid to the Company from customers’ escrow accounts. For certain Regulation A offerings, the Company earns a portion of its platform fees in warrants. The grant date fair values of warrants received, as determined using the modified Black-Scholes pricing model, are recognized as revenue when earned. The Company’s performance obligations are satisfied as services are rendered through the duration of the campaign. Revenues from Regulation A and Regulation D platform fees were $481,470 and $559,862 for the years ended December 31, 2018 and 2017, respectively. These revenues include $40,665 and $159,707 for the years ended December 31, 2018 and 2017, respectively, related to the fair value of warrants received for fees.

 

Revenues from Regulation Crowdfunding platform fees are recognized at an agreed-upon rate based on the amount invested in an offering. Platform fees are due upon the disbursement of funds from escrow and are paid to the Company from customers’ escrow accounts. The Company’s performance obligations are satisfied as services are rendered through the duration of the campaign. Revenues from Regulation Crowdfunding platform fees were $1,414,064 and $866,258 for the years ended December 31, 2018 and 2017, respectively.

 

The Company provides marketing services branded under the name “StartEngine Premium” that are deferred over three (3) months based on the expected timeline over which services are to be rendered and the Company’s performance obligations are to be satisfied. The expected timeline over which services are to be rendered is an estimate significantly affecting the determination of the timing of revenue, and it is evaluated on a periodic basis. There have been no changes to the expected timeline during the years ended December 31, 2018 and 2017. Payment for StartEngine Premium services are generally remitted by the customer upon the commencement of services. On occasion, the Company may allow a customer to defer payment for StartEngine Premium services until the first disbursement from the customer’s offering. Revenues from StartEngine Premium were $1,497,545 and $215,500 for the years ended December 31, 2018 and 2017, respectively.

 

The Company also provides transfer agent services branded under the name “StartEngine Secure” that are deferred over twelve (12) months based on the agreed-upon term for such services and the period over which the Company’s performance obligations are to be satisfied. Payment for StartEngine Secure services are generally paid via customers’ escrow accounts. Revenues from StartEngine Secure were $75,133 and $21,177 for the years ended December 31, 2018 and 2017, respectively.

 

During the year ended December 31, 2018, the Company introduced campaign advertising services branded under the name “StartEngine Promote.” The revenues for which are earned based on additional investments attributable to the campaign advertising services, and such revenues are recognized throughout the campaign. StartEngine Promote fees are due at the end of a campaign and are paid to the Company from customers’ escrow accounts. The Company’s performance obligations are satisfied as services are rendered. Revenues from StartEngine Promote were $59,550 for the year ended December 31, 2018.

 

The Company hosts periodic events, such as summits, and recognizes revenues from ticket sales and sponsorships. Payments from event attendees and event sponsors received prior to each event are deferred and recognized in revenue once the event occurs. Revenues from events, including sponsorships, were $596,687 and $103,184 for the years ended December 31, 2018 and 2017, respectively.

 

The Company licenses its crowdfunding data to a third party that tracks crowdfunding statistics. Payment for licensing arrangements is received at the beginning of the license term, and the Company recognizes the revenue over the license term during which the Company’s performance obligations are satisfied. Revenues from licensing were $75,000 and $112,500 for the years ended December 31, 2018 and 2017, respectively.

  

F-26

 

 

The Company also provides other services, primarily related to bad actor checks, amendments, certificates of good standing, escrow fees, and bundled professional services. Revenues for full-service offerings that include bundled professional services are recognized over the estimated duration of the offering. Revenues for all other services are recognized as such services are rendered. Revenues from other services were $483,079 and $168,467 for the years ended December 31, 2018 and 2017, respectively.

 

The Company’s contracts with customers generally have a term of one year or less. As of December 31, 2018 and 2017, the Company had deferred revenue of $345,418 and $219,425, respectively, related to performance obligations yet to be fulfilled. The Company had no other customer contract assets or liabilities.

 

The Company does not offer refunds for offerings that do not raise sufficient funds. From time to time, the Company provides refunds for StartEngine Premium services on a case-by-case basis, and such refunds to date have not been material.

 

Cost of Revenues

Cost of revenues consists of internal employees, hosting fees, processing fees, and certain software subscription fees that are required to provide services to our issuers.

   

Advertising

The Company expenses the cost of advertising and promotions as incurred.

 

Research and Development

We incur research and development costs during the process of researching and developing our technologies and future offerings. Our research and development costs consist primarily of non-capitalizable engineering fees for both employees and consultants related to our website and future product offerings, email and other tools that are utilized for client related services and outreach. During the years ended December 31, 2018 and 2017, research and development costs were $751,233 and $356,047, respectively.

 

Stock-Based Compensation

The Company accounts for stock options issued to employees under ASC 718, Share-Based Payment. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite vesting period. The fair value of each stock option or warrant award is estimated on the date of grant using the Black-Scholes option valuation model.

 

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 Equity. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

 

Income Taxes

The Company applies ASC 740, Income Taxes (“ASC 740”).  Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial statement reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax expense for the period, if any and the change during the period in deferred tax assets and liabilities.

 

ASC 740 also provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions.  A tax benefit from an uncertain position is recognized only if it is “more likely than not” that the position is sustainable upon examination by the relevant taxing authority based on its technical merit. There were no uncertain tax positions as of December 31, 2018 and 2017.

 

The Company is subject to tax in the United States (“U.S.”) and files tax returns in the U.S. Federal jurisdiction and California state jurisdiction.  The Company is subject to U.S. Federal, state and local income tax examinations by tax authorities for all periods since Inception.  The Company currently is not under examination by any tax authority.

 

F-27

 

 

Earnings per Common and Common Equivalent Share

The computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from the exercise of securities outstanding using the treasury stock method and the average market price per share during the year. Stock options totaling 1,458,542 and 675,000 shares on an as-converted basis, as well as convertible preferred stock, were excluded from the calculation of diluted earnings per share for the years ended December 31, 2018 and 2017, respectively, because their effect is anti-dilutive.

  

Concentration of Credit Risk

The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy.  Balances are insured by the Federal Deposit Insurance Corporation up to $250,000.  At times, the Company may maintain balances in excess of the federally insured limits.

  

Risks and Uncertainties

The Company’s operations are subject to new laws, regulation and compliance. Significant changes to regulations governing the way the Company derives revenues could impact the company negatively. Technological and advancements and updates as well as maintaining compliance standards are required to maintain the Company’s operations.

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 will become effective for interim and annual reporting periods beginning on January 1, 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the impact of the adoption of ASU 2018-13 on its consolidated financial statements.  

 

The FASB issues ASUs to amend the authoritative literature in the ASC. There have been a number of ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact our consolidated financial statements.

 

NOTE 3 – MARKETABLE SECURITIES AND INVESTMENTS

 

Available-for-Sale Securities

Available-for-sale securities consisted of the following as of December 31:

 

    2018     2017  
Mutual funds   $ 1,332,225     $ 1,556,070  
Common stock     9,782       10,122  
    $ 1,342,007     $ 1,566,192  

 

The Company’s available-for-sale securities are comprised of investments in mutual funds and common stock that are intended for operating capital to fund the Company’s operations as needed. These investments provide the Company with a high level of liquidity while providing modest returns with minimal risk.

 

F-28

 

 

The Company had $406 and $70,332 in unrealized losses and gains, respectively, on mutual funds and common stock held, which is included as unrealized (loss) gain within other comprehensive loss in the consolidated statement of operations and comprehensive loss, for the years ended December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, the Company had realized losses on mutual funds sold of $3,098 and $79,100, respectively.

 

Investments – Warrants

Equity warrants, as described in Note 2, are equity warrants received for services provided. The warrants are valued on the date they are earned. The change in value of the warrants was a decrease of $37,905 and $33,745 for the years ended December 31, 2018 and 2017, respectively.

  

NOTE 4 – PROPERTY AND EQUIPMENT

 

As of December 31, 2018 and 2017, property and equipment consisted of the following:

 

    2018     2017  
Computer equipment   $ 6,744     $ 6,744  
Software     3,654       3,654  
Total property and equipment     10,398       10,398  
Accumulated Depreciation     (5,964 )     (3,393 )
    $ 4,434     $ 7,005  

 

Depreciation expense for the years ended December 31, 2018 and 2017 was $2,571 and $2,517, respectively.

 

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

We are currently not involved with or know of any pending or threatening litigation against the Company or any of its officers.

 

The Company maintains offices on a month-to-month lease.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

We have authorized the issuance of 8,650,000 shares of our preferred stock with par value of $0.00001. Of these authorized shares, 3,500,000 are designated as Series A Preferred Stock (“Series A”), 1,650,000 are designated as Series T Preferred Stock (“Series T”), and 3,500,000 are designated as Series Seed Preferred Stock (“Series Seed”).

 

F-29

 

 

Series A Preferred Stock

The Series A have liquidation priority over the Series Seed and common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series A shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment is made to Series Seed or common stock, liquidation distributions, which will be paid ratably with the Series T in proportion to its respective liquidation preference. Holders of Series A will receive an amount equal to $1.7182 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A and Series T ratably in proportion to the full preferential amounts for which they are entitled. The Series A votes on an as-converted basis. The Series A is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series A is automatically convertible into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, coverts the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series A has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

Series T Preferred Stock

The Series T have liquidation priority over the Series Seed and common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series T shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment is made to Series Seed or common stock, liquidation distributions, which will be paid ratably with the Series A in proportion to its respective liquidation preference. Holders of Series T will receive an amount equal to $8.80 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A and Series T ratably in proportion to the full preferential amounts for which they are entitled. The Series T votes on an as-converted basis. The Series T is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series T is automatically convertible into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, coverts the offer and sale of common stock at an offering price of not less than $8.80 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series T has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

During the year ended December 31, 2018, the Company sold 100,000 shares of Series T Preferred Stock for $500,000.

 

Series Seed Preferred stock

The Series Seed have liquidation priority over the common stock. In the event of the liquidation, dissolution or winding up of the Company, the Series Seed shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, after any payment made to Series A and Series T, but before any payment is made to the Company’s common stock, an amount equal to $0.50 per share, as adjusted, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If upon such event the assets of the Company legally available for distribution are insufficient to permit payment of the full preferential amount, the entire assets available for distribution to stockholders shall be distributed to the holders of Series A and Series T first, then ratably in proportion to the full preferential amounts for which they are entitled to the Series Seed. The Series Seed votes on an as-converted basis. The Series Seed is convertible by the holder at any time after issuance at the conversion price, which equates to a one-to-one basis for common stock. The Series Seed is automatically converted into common stock upon the earlier of 1) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of preferred stock or 2) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, converts the offer and sale of common stock at an offering price of not less than $8.59 per share, as adjusted, with aggregate gross proceeds to the Company of not less than $15,000,000. In addition, the Series Seed has various anti-dilution provisions which take into account future sales and issuances of common stock and other dilutive instruments.

 

Common Stock

We have authorized the issuance of 25,000,000 shares of our common stock with par value of $0.00001.

 

During the year ended December 31, 2018, the Company sold 675,809 shares of common stock through a Regulation A offering. The Company recognized gross proceeds of $3,276,323 related to the sale of these shares. In connection with the offering, the Company recognized offering costs of $49,394, which reduced additional paid-in capital.

 

During the year ended December 31, 2017, the Company sold 340,334 shares of common stock through the same Regulation A offering. The Company recognized gross proceeds of $1,629,540 and a subscription receivable of $105,267 related to the sale of these shares. In connection with the offering, the Company recognized offering costs of $99,843, which reduced additional paid-in capital.

 

F-30

 

 

Common Stock Options

In 2015, our Board of Directors adopted the StartEngine Crowdfunding, Inc. 2015 Equity Incentive Plan (the “2015 Plan”).  The 2015 Plan provides for the grant of equity awards to employees, and consultants, including stock options, stock purchase rights and restricted stock units to purchase shares of our common stock.  Up to 2,030,000 shares of our common stock may be issued pursuant to awards granted under the 2015 Plan. The 2015 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board. 

 

In 2018 and 2017, the Company granted 990,000 and 335,000 stock options, respectively, under the 2015 Plan to various employees and nonemployees. The options granted in 2018 had exercise prices ranging from $0.79 to $5.00, and the options granted in 2017 had exercise prices ranging from $0.29 to $0.79. The stock options vest over four years and expire in ten years. The stock options were valued using the Black-Scholes pricing model as indicated below:

 

    December 31,
2018
    December 31,
2017
 
Expected life (years)     6.1       6.1-6.3  
Risk-free interest rate     2.4-2.9 %     1.9-2.0 %
Expected volatility     50 %     50 %
Annual dividend yield     0 %     0 %

 

The risk-free interest rate assumption for options granted is based upon observed interest rates on the United States government securities appropriate for the expected term of the Company's stock options.

 

The expected term of employee stock options is calculated using the simplified method which takes into consideration the contractual life and vesting terms of the options. The expected term of non-employee stock options is based on the contractual life of the options.

 

The Company determined the expected volatility assumption for options granted using the historical volatility of comparable public company's common stock. The Company will continue to monitor peer companies and other relevant factors used to measure expected volatility for future stock option grants, until such time that the Company’s common stock has enough market history to use historical volatility.

 

The dividend yield assumption for options granted is based on the Company's history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

 

A summary of the Company’s stock options activity and related information is as follows:

 

    Number of
Shares
    Weighted
Average Exercise
Price
    Weighted average
Remaining
Contractual Term
 
Outstanding at December 31, 2016     350,000     $ 0.26       8.8  
Granted     335,000       0.43       10.0  
Exercised                  
Expired/Cancelled     (10,000 )     0.29       8.9  
Outstanding at December 31, 2017     675,000     $ 0.35       8.5  
Granted     990,000       1.47       10.0  
Exercised                  
Expired/Cancelled     (206,458 )     1.03       8.8  
Outstanding at December 31, 2018     1,458,542     $ 1.01       8.5  
                         
Exercisable at December 31, 2017     271,865     $ 0.26       7.6  
Exercisable at December 31, 2018     454,271     $ 0.33       7.2  

 

F-31

 

 

Stock option expense for the year ended December 31, 2018 was $955,205. Of which, $97,581 was recorded in cost of revenues, $618,729 was recorded in general and administrative expenses, $182,498 was recorded in sales and marketing expenses, and $56,397 was recorded in research and development expenses. Stock option expense for the year ended December 31, 2017 was $80,955 and recorded in general and administrative expenses.

 

The Company expects to recognize the remaining value of the options through 2022 approximately as follows: $1,006,000 in 2019, $1,005,000 in 2020, $823,000 in 2021, and $89,000 in 2022.

 

NOTE 7 – RELATED PARTY TRANSACTIONS

 

In March 2016, the company entered into a three-year Platform Network Collaboration and Data Licensing Agreement (the “Platform Agreement”) with NextGen Crowdfunding, LLC, an entity affiliated with one of our significant preferred stockholders, SE Agoura Investment LLC, which is beneficially owned by Aubrey Chernick. The Platform Agreement calls for the Company and the outside entity to collaborate and for the Company to provide data and certain information to the entity for tracking crowdfunding statistics. In consideration, the Company received $75,000 per annum. The Company recognized licensing revenue of $75,000 related to the Platform Agreement during both of the years ended December 31, 2018 and 2017.

 

From time to time, the Company advances funds to the Company’s Chief Executive Officer to cover significant expenses he pays on behalf of the Company. Those advances are netted against expense reimbursement claims provided. As of December 31, 2018, the Company had prepayments of $231,304 that were included in other current assets. Such amounts were relieved in 2019 upon receipt of expense claims.

 

NOTE 8 – INCOME TAXES

 

The following table presents the current and deferred tax provision for federal and state income taxes for the years ended December 31:

 

    2018     2017  
Current tax provision:                
Federal   $     $  
State     17,070       8,621  
Total     17,070       8,621  
                 
Deferred tax provision:                
Federal     (2,147,263 )     (2,206,309 )
State     (743,927 )     (378,410 )
Total     (2,891,190 )     (2,584,719 )
Valuation allowance     2,891,190       2,584,719  
Total provision for income taxes   $ 17,070     $ 8,621  

 

Reconciliations of the U.S. federal statutory rate to the actual tax rate are as follows for the period ended December 31:

 

    2018     2017  
Federal tax benefit at statutory rate     21.0 %     34.0 %
Permanent differences:                
State taxes, net of federal benefit     5.9 %     5.2 %
Meals and entertainment     -0.1 %     -0.5 %
Stock option compensation     -2.3 %     -1.3 %
Temporary differences:                
Other temporary differences    

-2.1

%    

 
Change in valuation allowance     -22.0 %     -37.0 %
Total provision     0.4 %     0.4 %

 

F-32

 

 

The components of our deferred tax assets (liabilities) for federal and state income taxes consisted of the following as of December 31:

 

    Asset (Liability)  
    2018     2017  
Depreciation and amortization   $ 447     $ (56 )
Reserves and accruals     76,413       93,750  
Net operating loss carryforwards     2,814,330       1,647,436  
Valuation allowance     (2,891,190 )     (1,741,130 )
Net deferred tax asset, non-current   $     $  

 

Based on federal tax returns filed, or to be filed, through December 31, 2018, we had available approximately $10,400,000 in U.S. tax net operating loss carryforwards, pursuant to the Tax Reform Act of 1986, which assesses the utilization of a Company’s net operating loss carryforwards resulting from retaining continuity of its business operations and changes within its ownership structure.  Net operating loss carryforwards start to expire 2034 or 20 years for federal income and state tax reporting purposes. 

 

In December 2017, the Tax Cuts and Jobs Act, which provides tax relief for certain corporations, effective January 1, 2018, was passed. The Company’s deferred tax assets decreased $843,589 due to the decrease in the federal statutory rate from 34% to 21%.

 

The Company is subject to tax in the United States (“U.S.”) and files tax returns in the U.S. Federal jurisdiction and California state jurisdiction. 

  

NOTE 9 – SUBSEQUENT EVENTS

 

In February and March 2019, the Company granted 120,000 options to purchase common stock to employees which will vest over four years.

 

Subsequent to December 31, 2018, the Company sold 43,180 shares of Series T Preferred Stock for consideration of $313,922, of which $105,555 is still in escrow. The Company also sold 27,804 shares of common stock for consideration of $195,413, of which $12,147 is still in escrow, in connection with a Regulation Crowdfunding offering that commenced in January 2019, as well as 47,204 shares of common stock for consideration of $354,030, of which $151,290 is still in escrow, in connection with a Regulation A offering that commenced in March 2019.

 

The Company has evaluated subsequent events that occurred after December 31, 2018 through April 26, 2019, the issuance date of these consolidated financial statements. There have been no other events or transactions during this time which would have a material effect on these consolidated financial statements.

 

F-33

 

 

PART III

 

INDEX TO EXHIBITS

 

2.1 Fifth Amended and Restated Certificate of Incorporation
2.2 Amended and Restated Bylaws
3.1 Second Amended and Restated Investors’ Rights Agreement
4.1 Form of Common Stock Subscription Agreement
4.2 Form of Preferred Stock Subscription Agreement
6.1 2015 Equity Incentive Plan
6.2 Employment Agreement effective as of January 1, 2020 (Howard Marks)
6.3 Observer Rights Agreement dated November 2, 2016 (Ronald Miller)
8. Escrow Services Agreement dated March 11, 2020
11. Consent of dbbmckennon
12. Attorney opinion on legality of the offering
13. “Test the waters” materials

 

57

 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this Offering Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Los Angeles, State of California, on March 12, 2020.

 

StartEngine Crowdfunding, Inc.  
   
/s/ Howard Marks  
   
By Howard Marks  
CEO of StartEngine Crowdfunding, Inc.  

 

This Offering Statement has been signed by the following persons in the capacities and on the dates indicated.

 

/s/ Howard Marks  

Howard Marks, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Director

Date: March 12, 2020  

 

/s/ Ronald Miller  
Ronald Miller, Director and Chairman  
Date: March 12, 2020  

 

58

 

 

Exhibit 2.1

 

FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF StartEngine Crowdfunding, Inc.

 

StartEngine Crowdfunding, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows:

 

1.       The name of the corporation is StartEngine Crowdfunding, Inc.

 

2.       The date of filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was March 19, 2014. The corporation was originally incorporated under the name of StartEngine Crowdsourcing, Inc.

 

3.       This Fifth Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of the corporation as herein set forth in full:

 

ARTICLE I

 

The name of the corporation (hereinafter, the “Corporation”) is StartEngine Crowdfunding, Inc.

 

ARTICLE II

 

The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801 and the name of the registered agent at that address is The Corporation Trust Company.

 

ARTICLE III

 

The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law.

 

ARTICLE IV

 

The Corporation is authorized to issue two classes of stock, designated “Common Stock” and “Preferred Stock,” each with a par value of $0.00001 per share. The total number of shares of Common Stock that the Corporation is authorized to issue is 25,000,000 shares. The total number of shares of Preferred Stock that the Corporation is authorized to issue is 8,650,000 shares.

 

The Preferred Stock may be issued from time to time in one or more series. The first series of Preferred Stock shall be comprised of 3,550,000 shares and shall be designated “Series Seed Preferred Stock.” The second series of Preferred Stock shall be comprised of 3,450,000 shares and shall be designated “Series A Preferred Stock.” The third series of Preferred Stock shall be comprised of 1,650,000 shares and shall be designated “Series T Preferred Stock.”

 

 

 

 

Each outstanding share of Series Token Preferred Stock of the Corporation as of the date of this Amended and Restated Certificate of Incorporation is hereby reclassified and reconstituted as one share of Series T Preferred Stock.

 

The relative rights, preferences, privileges and restrictions granted to or imposed upon the Series Seed, Series A Preferred Stock and Series T Preferred Stock are as follows:

 

1.                  Dividends. No dividends shall be paid on any share of Common Stock unless a dividend is paid with respect to all outstanding shares of Preferred Stock in an amount for each such share of Preferred Stock equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Preferred Stock could then be converted. The right to dividends on shares of Preferred Stock shall not be cumulative, and no right shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared in any period, nor shall any undeclared or unpaid dividend bear or accrue interest.

 

2.                  Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the assets and funds of the Corporation available for distribution to stockholders shall be distributed as follows:

 

(a)               First, the holders of shares of Series A Preferred Stock and the holders of shares of Series T Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made in respect of the Corporation’s Series Seed Preferred Stock and Common Stock, an amount equal to the Original Series A Price (as defined below) for shares of Series A Preferred Stock and the Original Series T Price (as defined below) for shares of Series T Preferred Stock, plus all declared and unpaid dividends thereon to the date fixed for such distribution. If, upon the occurrence of such event, the assets of the Corporation legally available for distribution are insufficient to permit the payment to the holders of Series A Preferred Stock and the holders of Series T Preferred Stock of the full preferential amount, then the entire assets available for distribution to stockholders shall be distributed to the holders of the Series A Preferred Stock and the holders of the Series T Preferred Stock ratably in proportion to the full preferential amounts which they would be entitled to receive pursuant to the preceding sentence of this Section 2(a). The “Original Series A Price” shall mean $1.7182 per share of Series A Preferred Stock, as adjusted for any stock splits, reverse stock splits, stock dividends, and similar recapitalization events (each a “Recapitalization Event”) and the “Original Series T Price” shall mean $8.80 per share of Series T Preferred Stock, as adjusted for any Recapitalization Events.

 

(b)               After the full preferential amounts due the holders of Series A Preferred Stock and the holders of shares of Series T Preferred Stock pursuant to Section 2(a) have been paid or set aside, the holders of shares of Series Seed Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made in respect of the Corporation’s Common Stock, an amount equal to $0.50 per share of Series Seed Preferred Stock, as adjusted for any Recapitalization Events (the “Original Series Seed Price”), plus all declared and unpaid dividends thereon to the date fixed for such distribution. If, upon the occurrence of such event, the assets of the Corporation legally available for distribution are insufficient to permit the payment to the holders of Series Seed Preferred Stock of the full preferential amount, then the entire assets available for distribution to stockholders shall be distributed to the holders of the Series Seed Preferred Stock ratably in proportion to the full preferential amounts which they would be entitled to receive pursuant to the preceding sentence of this Section 2(b).

 

2 

 

 

(c)               After the full preferential amounts due the holders of Preferred Stock pursuant to Sections 2(a) and 2(b) have been paid or set aside, any remaining assets of the Corporation legally available for distribution to stockholders shall be distributed to the holders of Common Stock and Preferred Stock ratably in proportion to the number of shares of Common Stock then held, or issuable upon conversion of the shares of Preferred Stock then held, by each holder.

 

(d)               (i) A merger or consolidation of the Corporation into or with another entity after which the stockholders of the Corporation immediately prior to such transaction do not own, immediately following the consummation of the transaction by virtue of their shares in the Corporation or securities received in exchange for such shares in connection with the transaction, a majority of the voting power of the surviving entity in proportions substantially identical to those that existed immediately prior to such transaction and with substantially the same rights, preferences, privileges and restrictions as the shares they held immediately prior to the transaction, (ii) the sale, transfer or other disposition (but not including a transfer or disposition by pledge or mortgage to a bona fide lender) of all or substantially all of the assets of the Corporation (other than to a wholly-owned subsidiary), or (iii) the sale or transfer by the Corporation or its stockholders of more than 50% of the voting power of the Corporation in a transaction or series of related transactions other than in a transaction or series of transactions effected by the Corporation primarily for financing purposes, shall be deemed to be a liquidation of the Corporation as that term is used in this Section 2(d) (each a “Deemed Liquidation”). A Deemed Liquidation may be waived upon the vote of holders of at least a majority of the voting power of the Preferred Stock, voting together as a single class.

 

In the event of a Deemed Liquidation pursuant to Section 2(d)(i), if any portion of the consideration payable to the stockholders of the Corporation is payable only upon satisfaction of contingencies (the “Additional Consideration”), the definitive agreement providing therefor shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the “Initial Consideration”) shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2(a) and 2(b) as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation; and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon satisfaction of such contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2(a) and 2(b) after taking into account the previous payment of the Initial Consideration as part of the same transaction. For the purposes hereof, consideration placed into escrow or retained as holdback to be available for satisfaction of indemnification or similar obligations in connection with such Deemed Liquidation shall be deemed to be Additional Consideration.

 

3 

 

 

(e)               In the event of any liquidation of the Corporation involving the distribution of assets other than cash to the stockholders of the Corporation, the value of the assets to be distributed shall be determined as follows:

 

(i)                 In the case of securities that are not subject to investment letter or other similar restrictions on free tradability,

 

(A)             if traded on a national securities exchange, the value shall be deemed to be the average of the closing prices of the securities over the 10 day period ending three days prior to the closing;

 

(B)              if actively traded over-the-counter (including on online platforms or alternative trading systems), the value shall be deemed to be the average of (i) the average of the last bid and ask prices or (ii) the closing sale prices (whichever is applicable) over the 30 day period ending three days prior to the closing; and

 

(C)              if there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

 

(ii)              In the case of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate), the value shall be based on an appropriate discount from the market value determined as above in Section 2(e)(i) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

 

(iii)            In the case of any other property, the value shall be equal to the property’s fair market value, as mutually determined by the Corporation and the holders of at least a majority of the voting power of all then outstanding shares of Preferred Stock.

 

3.                  Conversion. The holders of the Preferred Stock shall have conversion rights as follows:

 

(a)               Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into a number of fully paid and nonassessable shares of Common Stock equal to the Original Series Seed Price, in the case of the Series Seed Preferred Stock, the Original Series A Price, in the case of the Series A Preferred Stock, or the Original Series T Price, in the case of the Series T Preferred Stock, divided by the Conversion Price for such series of Preferred Stock in effect at the time of conversion. The “Conversion Prices” for the Series Seed Preferred Stock, Series A Preferred Stock and Series T Preferred Stock shall initially be $0.50, $1.7182, and $8.80, respectively, and shall be subject to adjustment as provided in Section 3(d).

 

4 

 

 

(b)               Automatic Conversion. Each share of Preferred Stock shall automatically be converted into fully paid and nonassessable shares of Common Stock, at the then effective Conversion Price, upon (i) the vote or written consent of at least a majority of the voting power represented by the then outstanding shares of Preferred Stock or (ii) the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock at an offering price of not less than the Minimum Share Price, as adjusted for any Recapitalization Event, with aggregate gross proceeds to the Corporation (prior to underwriters’ commissions and expenses) of not less than $15,000,000. The “Minimum Share Price” is $8.59 for shares of Series Seed Preferred Stock and shares of Series A Preferred Stock and $8.80 for shares of Series T Preferred Stock. Preferred

 

(c)               Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall give written notice to the Corporation at the headquarters of the Corporation that the holder elects to convert the same and shall state therein the name or names in which the shares of Common Stock are to be issued and, if such shares are certificated, shall surrender the certificate or certificates therefor, duly endorsed, at the headquarters of the Corporation or of any transfer agent for the Corporation (except that no such written notice of election to convert shall be necessary in the event of an automatic conversion pursuant to Section 3(b)). The Corporation shall, as soon as practicable thereafter, either (i) instruct the transfer agent to note the conversion of the shares on the stock ledger of the Corporation or (ii) issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted (except that, in the case of an automatic conversion upon an initial public offering pursuant to Section 3(b), such conversion shall be deemed to have been made immediately prior to the closing of the offering) and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Upon the occurrence of either of the events specified in Section 3(b), the outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates, if applicable, representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion, if the shares were previously in certificate form, unless either the certificates evidencing such shares of Preferred Stock are delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation against any loss incurred by it in connection with such certificates.

 

5 

 

 

(d)               Adjustments to Conversion Price for Dilutive Issuances.

 

(i)                 Special Definitions. For purposes of this Section 3(d), the following definitions shall apply:

 

(A)             Original Issue Date” shall mean, with respect to any series of Preferred Stock, the date on which shares of such series are first issued by the Corporation.

 

(B)              Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section 3(d)(ii), deemed to be issued) by the Corporation after the Original Issue Date, other than (collectively, “Excluded Securities”):

 

(1)   shares of Common Stock issued upon conversion of Preferred Stock;

 

(2)   shares issued or issuable to officers, directors or employees of, or consultants to, the Corporation pursuant to any stock option plan or agreement or other stock incentive program or agreement approved by the Board of Directors;

 

(3)   issued or issuable to landlords, equipment lessors, lenders or other financial institutions in a commercial transaction or arrangement approved by the Board of Directors;

 

(4)   shares issuable upon exercise or conversion of any warrants that are outstanding as of the date of this Fifth Amended and Restated Certificate of Incorporation; or

 

(5)   shares for which an adjustment is made pursuant to Section 3(d)(v).

 

(C)              Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (as defined below).

 

(D)             Convertible Securities” shall mean any evidences of indebtedness, shares of Preferred Stock or other securities convertible into or exchangeable for Common Stock.

 

(ii)              Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the following provisions shall apply:

 

(A)             The maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities shall be deemed to be Additional Shares of Common Stock issued as of the time of the issuance of such Option or Convertible Security or, in case such a record date shall have been fixed, as of the close of business on such record date.

 

6 

 

 

 

(B)              Except as provided in Sections 3(d)(ii)(C) and 3(d)(ii)(D), no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities.

 

(C)              If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Corporation or the number of shares of Common Stock issuable upon the exercise, conversion or exchange thereof (other than a change resulting from the antidilution provisions of such Options or Convertible Securities), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto) and any subsequent adjustments based thereon shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; provided, however, that such recomputed Conversion Price shall not exceed the Conversion Price that would have been in effect had the original issuance of Options or Convertible Securities not been deemed to constitute an issuance of Additional Shares of Common Stock.

 

(D)             Upon the expiration of any such Options or Convertible Securities, the Conversion Price, to the extent in any way affected by or computed using such Options or Convertible Securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such Options or Convertible Securities.

 

(iii)            Adjustment of Conversion Price for Dilutive Issuances. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 3(d)(ii)) after the Original Issue Date of any series of Preferred Stock without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to such issuance, then and in each such event the Conversion Price for such series shall be reduced to a price (rounded to the nearest one tenth of one cent) equal to such Conversion Price multiplied by a fraction:

 

(x)       the numerator of which is equal to the number of shares of Common Stock outstanding or deemed to be outstanding immediately prior to such issuance plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect immediately prior to such issuance; and

 

(y)       the denominator of which is equal to the number of shares of Common Stock outstanding or deemed to be outstanding immediately prior to such issuance plus the number of Additional Shares of Common Stock so issued.

 

For the purposes of this Section 3(d)(iii), the number of shares of Common Stock deemed to be outstanding shall be deemed to include the Common Stock issuable upon full exercise and conversion of all then outstanding Options and Convertible Securities, not including shares excluded from the definition of “Additional Shares of Common Stock” pursuant to Section 3(d)(i)(B)(2). Any adjustment to the Conversion Price of a particular series of Preferred Stock made pursuant to this Section 3(d)(iii) may be waived upon the vote of holders of at least a majority of the voting power of such series of Preferred Stock, voting as a single class.

 

7 

 

 

(iv)             Determination of Consideration. For purposes of this Section 3(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

 

(A)             Cash and Property. Such consideration shall:

 

(1)   insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof;

 

(2)   insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

 

(3)   in the event Additional Shares of Common Stock are issued together with other securities or other assets of the Corporation for consideration that covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors.

 

(B)              Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3(d) relating to Options and Convertible Securities shall be equal to:

 

(x)       the total amount, if any, received or receivable by the Corporation as consideration for the issuance of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, divided by

 

(y)       the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

 

(v)               Other Adjustments to Conversion Price.

 

(A)             Subdivisions, Combinations or Consolidations of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided, combined or consolidated, by stock split, reverse stock split or similar event, into a greater or lesser number of shares of Common Stock after the Original Issue Date of a series of Preferred Stock, the Conversion Price for such series in effect immediately prior to such subdivision, combination or consolidation shall, concurrently with the effectiveness of such subdivision, combination or consolidation, be proportionately adjusted.

 

8 

 

 

(B)              Common Stock Dividends and Distributions. If, after the Original Issue Date of a series of Preferred Stock, the Corporation at any time or from time to time issues, or fixes a record date for determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then in each such event, as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, the Conversion Price for such series that is then in effect shall be decreased by multiplying the Conversion Price then in effect by a fraction, (x) the numerator of which is the number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (y) the denominator of which is the number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend or distribution is not paid in full on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 3(d)(v)(B) to reflect the actual payment of such dividend or distribution.

 

(C)              Other Distributions. In case the Corporation shall distribute to holders of its Common Stock shares of its capital stock (other than shares of Common Stock and other than as otherwise subject to adjustment pursuant to this Section 3(d)), stock or other securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights (excluding options to purchase and rights to subscribe for Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock), or shall fix a record date for determination of holders of Common Stock entitled to receive such a distribution, then, in each such case, provision shall be made so that the holders of Preferred Stock shall be entitled to receive, upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that they would have received had their Preferred Stock been converted into Common Stock on the date of such event (or on the record date with respect thereto, if such record date is fixed) and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 3 with respect to the rights of the holders of the Preferred Stock.

 

(D)             Recapitalizations and Reorganizations. In the case of any capital recapitalization or reorganization (other than a subdivision, combination or other recapitalization provided for elsewhere in this Section 3 or a merger or sale of assets provided for in Section 2), or the fixing of any record date for determination of holders of Common Stock affected by such recapitalization or reorganization, provision shall be made so that the holders of Preferred Stock shall be entitled to receive, upon conversion thereof, the type and number of shares of stock or other securities or property of the Corporation or otherwise that they would have received had their Preferred Stock been converted into Common Stock on the date of such event (or on the record date with respect thereto, if such record date is fixed) and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 3 with respect to the rights of the holders of the Preferred Stock. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 to the end that the provisions of this Section 3 shall be applicable after the recapitalization or reorganization to the greatest extent practicable.

 

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(e)               Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price for a series of Preferred Stock pursuant to this Section 3, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of a share of such series of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based including the consideration received for any Additional Shares of Common Stock issued. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for the series of Preferred Stock held by such holder and (iii) the number of shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon the conversion of a share of such series of Preferred Stock.

 

(f)                Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of shares of Preferred Stock. In lieu of any fractional shares to which the holder of Preferred Stock would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of one share of Common Stock as determined by the Board of Directors of the Corporation. The number of whole shares issuable to each holder of a series of Preferred Stock upon such conversion shall be determined on the basis of the number of shares of Common Stock issuable upon conversion of the total number of shares of such series of Preferred Stock being converted into Common Stock by such holder at that time.

 

(g)               Notices of Record Date. In the event (i) the Corporation shall take a record of the holders of its capital stock for the purpose of entitling them to receive a dividend or other distribution (other than a cash dividend) or to subscribe for or purchase any shares of stock of any class or to receive any other rights, (ii) of any capital reorganization, reclassification or recapitalization (other than a subdivision or combination of its outstanding shares of Common Stock), or (iii) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation or any Deemed Liquidation, then, and in any such case, the Corporation shall cause to be mailed to each holder of record of the Preferred Stock at the address of record of such stockholder as set forth on the Corporation’s books, at least 20 days prior to the earliest date hereinafter specified, a notice stating the material terms of the proposed transaction and the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights or (y) such reorganization, reclassification, recapitalization, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which holders of capital stock of record shall be entitled to exchange their shares of capital stock for securities or other property deliverable upon such reorganization, reclassification, recapitalization, dissolution, liquidation or winding up; provided, however, that such notice period may be shortened upon the written consent of holders of Preferred Stock that are entitled to such notice rights or similar notice rights and that represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. If any material change in the facts set forth in the written notice shall occur, the Corporation shall promptly give written notice of such material change to each holder of shares of Preferred Stock.

 

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(h)               No Impairment. Without obtaining such consent of the holders of Preferred Stock as may be required under Section 6, the Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Preferred Stock against impairment.

 

(i)                 Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

 

4.                  Redeemed or Otherwise Acquired Shares. Any shares of Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following redemption.

 

5.                  Voting Rights.

 

(a)               General. Each holder of Preferred Stock shall be entitled to a number of votes equal to the number of whole shares of Common Stock into which such holder’s shares of Preferred Stock could then be converted and, except as otherwise required by law or as set forth herein, shall have voting rights and powers equal to the voting rights and powers of the Common Stock. Each holder of Preferred Stock shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation and shall be entitled to vote with the holders of Common Stock with respect to any matter upon which holders of Common Stock have the right to vote, except as otherwise provided herein or those matters required by law to be submitted to a class vote.

 

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6.                  Protective Provisions. So long as any shares of Preferred Stock are outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the voting power represented by the then outstanding shares of Preferred Stock, voting together as a class:

 

(a)               enter into transaction or series of related transactions involving a merger or consolidation with another entity, or a sale, conveyance or disposal of all or substantially all of its assets, unless the stockholders of the Corporation immediately prior to such transaction own, immediately following the consummation of the transaction by virtue of their shares in the Corporation or securities received in exchange for such shares in connection with the transaction, a majority of the voting power of the surviving or purchasing entity in proportions substantially similar to those that existed immediately prior to such transaction and with substantially the same rights, preferences, privileges and restrictions as the shares they held immediately prior to the transaction;

 

(b)               modify the rights, preferences, privileges or restrictions of the Preferred Stock so as to adversely affect the Preferred Stock;

 

(c)               increase the total number of authorized shares of Preferred Stock;

 

(d)               authorize or issue, or obligate itself to issue, any other equity security having a preference over, or on a parity with, the Preferred Stock with respect to dividends, liquidation, redemption or voting;

 

(e)               redeem, purchase or otherwise acquire any shares of Common Stock or Preferred Stock other than in connection with (i) the repurchase of Common Stock at the original purchase price from employees, officers, directors, consultants or other service providers pursuant to agreements providing for such repurchase upon termination of employment, (ii) the exercise of a contractual right of first refusal entitling the Corporation to purchase such shares upon substantially the same terms offered by a third party, provided that the purchase is approved by the Board of Directors, or (iii) the redemption of Series Seed Preferred Stock pursuant to Section 8.1 of the Corporation’s Series A Preferred Stock Purchase Agreement;

 

(f)                declare or pay any dividend on the Common Stock, other than a dividend payable solely in shares of Common Stock; or

 

(g)               amend the Certificate of Incorporation or Bylaws of the Corporation.

 

7.                  Waiver. Any of the rights, powers, privileges and other terms of the Preferred Stock set forth herein may be waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of the holders of a majority of the voting power represented by the then outstanding shares of Preferred Stock, voting together as a class.

 

8.                  Notices. Except as otherwise provided herein, any notice required or permitted by the provisions of this Article IV to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the Delaware General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

 

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9.                  Status of Converted Stock. In the event any shares of Preferred Stock shall be converted pursuant to Section 3, or otherwise acquired by the Corporation, the shares so converted shall be canceled and shall not be issuable by the Corporation, and the Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation’s authorized capital stock.

 

10.              Residual Rights. All rights accruing to the outstanding shares of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock.

 

11.              Certain Repurchases of Stock. For purposes of Section 500 of the California Corporations Code (to the extent applicable), in connection with any repurchase of shares of Common Stock permitted under this Fifth Amended and Restated Certificate of Incorporation from employees, officers, directors or consultants of the Corporation in connection with a termination of employment or services pursuant to agreements or arrangements approved by the Board (in addition to any other consent required under this Fifth Amended and Restated Certificate of Incorporation), such repurchase may be made without regard to any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined in Section 500 of the California Corporations Code).  Accordingly, for purposes of making any calculation under California Corporations Code Section 500 in connection with such repurchase, the amount of any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined therein) shall be deemed to be zero.

 

ARTICLE V

 

The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Fifth Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot, unless the Bylaws so provide.

 

ARTICLE VI

 

The Board of Directors is authorized to make, adopt, amend, alter or repeal the Bylaws of the Corporation. The stockholders shall also have power to make, adopt, amend, alter or repeal the Bylaws of the Corporation.

 

ARTICLE VII

 

To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended, a director of the Corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of stockholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits on indemnification set forth in Sections 204 and 317 of the California Corporations Code with respect to actions for breach of duty to the Corporation or its stockholders, to the extent the Corporation is subject to those provisions pursuant to Section 2115 of the California Corporations Code. Any repeal or modification of the foregoing provisions of this Article VII by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of, or increase the liability of any director of the corporation with respect to any acts or omissions occurring prior to, such repeal or modification.

 

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ARTICLE VIII

 

The Corporation reserves the right to amend or repeal any of the provisions contained in this Fifth Amended and Restated Certificate of Incorporation in any manner now or hereafter permitted by law, and the rights of the stockholders of the Corporation are granted subject to this reservation.

 

Article IX

 

Pursuant to Section 122(17) of the Delaware General Corporation Law, the Corporation hereby renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any and all business opportunities that are presented to any of the holders of Preferred Stock or their respective affiliates (collectively, the “Preferred Investor Parties”) at any time that such holders hold any securities of the Corporation. Without limiting the foregoing renunciation, the Corporation acknowledges that the Preferred Investor Parties are in the business of making investments in, and have investments in, other businesses similar to and that may compete with the Corporation’s businesses (“Competing Businesses”), and agrees that the Preferred Investor Parties shall have the unfettered right to make additional investments in or have relationships with other Competing Businesses independent of their investments in the Corporation. By virtue of a Preferred Investor Party holding securities of the Corporation or by having persons designated by or affiliated with such Preferred Investor Party serving on or observing at meetings of the Corporation’s Board of Directors or otherwise, no Preferred Investor Party shall have any obligation to the Corporation, any of its subsidiaries or any other holder of securities of the Corporation to refrain from competing with the Corporation and any of its subsidiaries, making investments in or having relationships with Competing Businesses, or otherwise engaging in any commercial activity; and none of the Corporation, any of its subsidiaries or any other holder of securities of the Corporation shall have any right with respect to any such investments or activities undertaken by such Preferred Investor Party. Without limitation of the foregoing, each Preferred Investor Party may engage in or possess any interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Corporation or any of its subsidiaries, and none of the Corporation, any of its subsidiaries or any other holder of securities of the Corporation shall have any rights or expectancy by virtue of such Preferred Investor Party’s relationships with the Corporation, or otherwise in and to such independent ventures or the income or profits derived therefrom; and the pursuit of any such venture, even if such investment is in a Competing Business shall not be deemed wrongful or improper. No Preferred Investor Party shall be obligated to present any particular investment opportunity to the Corporation or any of its subsidiaries even if such opportunity is of a character that, if presented to the Corporation or such subsidiary, could be taken by the Corporation or such subsidiary, and the Preferred Investor Party shall continue to have the right to take for its own respective account or to recommend to others any such particular investment opportunity. The provisions of this Article IX shall in no way limit or eliminate any Preferred Investor Party’s duties, responsibilities and obligations with respect to the protection of any confidential or proprietary information of the Corporation and any of its subsidiaries, including any applicable duty to not disclose or use such confidential or proprietary information improperly or to obtain therefrom an improper personal benefit.

 

* * *

 

4.       This Fifth Amended and Restated Certificate of Incorporation has been duly adopted by the board of directors and stockholders of the Corporation in accordance with the applicable provisions of Sections 228, 242 and 245 of the Delaware General Corporation Law.

 

[Signature Page Follows]

 

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IN WITNESS WHEREOF, this Fifth Amended and Restated Certificate of Incorporation has been executed by the Chief Executive Officer of the Corporation this 10th day of March 2020.

 

  StartEngine Crowdfunding, Inc.  
     
     
  By: /s/ Howard Marks  
    Howard Marks  
    Chief Executive Officer  

 

 

 

Exhibit 2.2

 

 

 

AMENDED AND RESTATED
 

BYLAWS

 

OF

 

STARTENGINE CROWDFUNDING, INC.

 

NOVEMBER 12, 2018

 

 

 

 

 

 

TABLE OF CONTENTS

  

  Page
   
article I CORPORATE OFFICES 1
     
1.1 Registered Office 1
     
1.2 Other Offices 1
     
article II MEETINGS OF STOCKHOLDERS 1
     
2.1 Place of Meetings 1
     
2.2 Annual Meeting 1
     
2.3 Special Meeting 2
     
2.4 Notice of Stockholders' Meetings 2
     
2.5 Manner of Giving Notice; Affidavit of Notice 2
     
2.6 Quorum 2
     
2.7 Adjourned Meeting; Notice 2
     
2.8 Conduct of Business 3
     
2.9 Voting 3
     
2.10 Waiver of Notice 3
     
2.11 Stockholder Action by Written Consent Without a Meeting 3
     
2.12 Record Date for Stockholder Notice; Voting; Giving Consents 4
     
2.13 Proxies 5
     
2.14 List of Stockholders Entitled to Vote 5
     
article III DIRECTORS 6
     
3.1 Powers 6
     
3.2 Number of Directors 6
     
3.3 Election, Qualification and Term of Office of Directors 6

 

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3.4 Resignation and Vacancies 6
     
3.5 Place of Meetings; Meetings by Telephone 7
     
3.6 First Meetings 7
     
3.7 Regular Meetings 8
     
3.8 Special Meetings; Notice 8
     
3.9 Quorum 8
     
3.10 Waiver of Notice 8
     
3.11 Adjourned Meeting; Notice 8
     
3.12 Board Action by Written Consent Without a Meeting 9
     
3.13 Fees and Compensation of Directors 9
     
3.14 Approval of Loans to Officers 9
     
3.15 Removal of Directors 9
     
article IV COMMITTEES 9
     
4.1 Committees of Directors 9
     
4.2 Committee Minutes 10
     
4.3 Meetings and Action of Committees 10
     
article V OFFICERS 10
     
5.1 Officers 10
     
5.2 Election of Officers 10
     
5.3 Subordinate Officers 11
     
5.4 Removal and Resignation of Officers 11
     
5.5 Vacancies in Offices 11
     
5.6 Chairman of the Board 11
     
5.7 Chief Executive Officer 11
     
5.8 President 12

 

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5.9 Chief Financial Officer 12
     
5.10 Vice President 12
     
5.11 Secretary 13
     
5.12 Treasurer 13
     
5.13 Assistant Secretary 13
     
5.14 Assistant Treasurer 14
     
5.15 Authority and Duties of Officers 14
     
article VI INDEMNITY 14
     
6.1 Indemnification of Directors and Officers 14
     
6.2 Indemnification of Others 14
     
6.3 Insurance 15
     
6.4 Prepayment of Expenses 15
     
6.5 Claims 15
     
6.6 Non-exclusivity of Rights 15
     
6.7 Other Indemnification 15
     
6.8 Effect of Amendment or Repeal 15
     
article VII RECORDS AND REPORTS 16
     
7.1 Maintenance and Inspection of Records 16
     
7.2 Inspection by Directors 16
     
7.3 Annual Statement to Stockholders 16
     
7.4 Annual Report 17
     
7.5 Representation of Shares of Other Corporations 17
     
article VIII GENERAL MATTERS 17
     
8.1 Checks 17
     
8.2 Execution of Corporate Contracts and Instruments 17

 

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8.3 Stock Certificates; Partly Paid Shares 17
     
8.4 Special Designation on Certificates 18
     
8.5 Lost Certificates 18
     
8.6 Construction; Definitions 18
     
8.7 Dividends 19
     
8.8 Fiscal Year 19
     
8.9 Seal 19
     
8.10 Transfer of Stock 19
     
8.11 Stock Transfer Agreements 19
     
8.12 Registered Stockholders 19
     
article IX AMENDMENTS 20
     
article X DISSOLUTION 20
     
article XI CUSTODIAN 21
     
11.1 Appointment of a Custodian in Certain Cases 21
     
11.2 Duties of Custodian 21
     
article XII NOTICE BY ELECTRONIC TRANSMISSION 21
     
12.1 Notice by Electronic Transmission 21
     
12.2 Definition of Electronic Transmission 22
     
12.3 Inapplicability 22

 

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STARTENGINE CROWDFUNDING, INC.

 

BYLAWS

 

article I

CORPORATE OFFICES

 

1.1 Registered Office

 

The registered office of the corporation in the State of Delaware shall be 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The name of the registered agent of the corporation at such location is The Corporation Trust Company.

 

1.2 Other Offices

 

The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business.

 

article II

MEETINGS OF STOCKHOLDERS

 

2.1 Place of Meetings

 

Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. The board of directors may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the Delaware General Corporation Law. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation.

 

2.2 Annual Meeting

 

An annual meeting of stockholders shall be held for the election of directors at such date and time as may be designated by resolution of the board of directors from time to time. Any other proper business may be transacted at the annual meeting. The corporation shall not be required to hold an annual meeting of stockholders provided that (i) the stockholders are permitted to act by written consent under the corporation’s certificate of incorporation and these bylaws, (ii) the stockholders take action by written consent to elect directors and (iii) the stockholders unanimously consent to such action or, if such consent is less than unanimous, all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action.

 

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2.3 Special Meeting

 

A special meeting of the stockholders may be called, at any time for any purpose or purposes, by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or the bylaws.

 

2.4 Notice of Stockholders' Meetings

 

All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with either Section 2.5 or Section 12 of these bylaws not less than 10 or more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, if any, date and hour of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

 

2.5 Manner of Giving Notice; Affidavit of Notice

 

Written notice of any meeting of stockholders, (i) if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation, or (ii) if electronically transmitted, as provided in Section 12 of these bylaws. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

 

2.6 Quorum

 

The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

 

2.7 Adjourned Meeting; Notice

 

When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place if any thereof, and the means of remote communications if any by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

 

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2.8 Conduct of Business

 

Meetings of stockholders shall be presided over by the chairman of the board, if any, or in his or her absence by the vice chairman of the board, if any, or in his or her absence by the president, or in his or her absence by a vice president, or in the absence of the foregoing persons by a chairperson designated by the board of directors, or in the absence of such designation by a chairperson chosen at the meeting. The secretary shall act as secretary of the meeting, but in his or her absence the chairperson of the meeting may appoint any person to act as secretary of the meeting. The chairperson of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business.

 

2.9 Voting

 

The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.12 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements, respectively).

 

Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder.

 

2.10 Waiver of Notice

 

Whenever notice is required to be given under any provision of the Delaware General Corporation Law, the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.

 

2.11 Stockholder Action by Written Consent Without a Meeting

 

Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

 

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No written consent shall be effective to take the corporate action referred to therein unless written consents signed by a sufficient number of holders or members to take action are delivered to the corporation in the manner required by this section 2.11 within 60 days of the first date on which any written consent is so delivered to the corporation. .

 

A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written and signed provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (A) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and (B) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. Delivery shall be given in accordance with applicable law.

 

Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

 

Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. In the event that the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware, if such action had been voted on by stockholders at a meeting thereof, the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given as provided in Section 228 of the General Corporation Law of Delaware.

 

2.12 Record Date for Stockholder Notice; Voting; Giving Consents

 

In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action.

 

If the board of directors does not so fix a record date:

 

(i)       The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.

 

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(ii)       The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed.

 

(iii)       The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.

 

A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.

 

2.13 Proxies

 

Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, electronically or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware.

 

2.14 List of Stockholders Entitled to Vote

 

The corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the corporation’s principal executive office. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them.

 

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article III

DIRECTORS

 

3.1 Powers

 

Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.

 

3.2 Number of Directors

 

The exact number of directors shall be determined from time to time by resolution of the board of directors, provided the board of directors shall consist of at least one member. This number of directors may be changed by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation.

 

No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires.

 

3.3 Election, Qualification and Term of Office of Directors

 

Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting or special meeting called for such purpose. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until such director's successor is elected and qualified or until such director's earlier resignation or removal.

 

Elections of directors need not be by written ballot.

 

3.4 Resignation and Vacancies

 

Any director may resign at any time upon written notice to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

 

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Unless otherwise provided in the certificate of incorporation or these bylaws:

 

(i)       Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director.

 

(ii)       Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected.

 

If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware.

 

If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10 percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable.

 

3.5 Place of Meetings; Meetings by Telephone

 

The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware.

 

Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

 

3.6 First Meetings

 

The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors.

 

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3.7 Regular Meetings

 

Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board of directors.

 

3.8 Special Meetings; Notice

 

Special meetings of the board of directors may be called by the president on three days' notice to each director either personally by hand, by courier, mail, telegram, facsimile, telex, electronic mail or telephone; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director.

 

3.9 Quorum

 

At all meetings of the board of directors, a majority of the number of directors then elected to and serving on the board of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

 

3.10 Waiver of Notice

 

Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws.

 

3.11 Adjourned Meeting; Notice

 

If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

 

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3.12 Board Action by Written Consent Without a Meeting

 

Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board of directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

 

3.13 Fees and Compensation of Directors

 

Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors.

 

3.14 Approval of Loans to Officers

 

The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.

 

3.15 Removal of Directors

 

Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.

 

No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office.

 

article IV

COMMITTEES

 

4.1 Committees of Directors

 

The board of directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to the following matter: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the corporation.

 

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4.2 Committee Minutes

 

Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.

 

4.3 Meetings and Action of Committees

 

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.

 

article V

OFFICERS

 

5.1 Officers

 

The officers of the corporation shall include a president, a secretary, and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person.

 

5.2 Election of Officers

 

The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment.

 

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5.3 Subordinate Officers

 

The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine.

 

5.4 Removal and Resignation of Officers

 

Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors.

 

Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

 

5.5 Vacancies in Offices

 

Any vacancy occurring in any office of the corporation shall be filled by the board of directors.

 

5.6 Chairman of the Board

 

The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws.

 

5.7 Chief Executive Officer

 

Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer (if such an officer is appointed) shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws.

 

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The person serving as chief executive officer shall also be the acting president of the corporation whenever no other person is then serving in such capacity.

 

5.8 President

 

Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, or the chief executive officer, the president shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws.

 

The person serving as president shall also be the acting chief executive officer, secretary or treasurer of the corporation, as applicable, whenever no other person is then serving in such capacity.

 

5.9 Chief Financial Officer

 

The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.

 

The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws.

 

The person serving as the chief financial officer shall also be the acting treasurer of the corporation whenever no other person is then serving in such capacity. Subject to such supervisory powers (if any) as may be given by the Board of Directors to another officer of the corporation, the chief financial officer shall supervise and direct the responsibilities of the treasurer whenever someone other than the chief financial officer is serving as treasurer of the corporation.

 

5.10 Vice President

 

In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board.

 

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5.11 Secretary

 

The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof.

 

The secretary shall administer or allow to be administered on company’s behalf, as determined by resolution of the board of directors, a stock ledger, which consists of records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded.

 

The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws.

 

5.12 Treasurer

 

The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director.

 

The treasurer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws.

 

5.13 Assistant Secretary

 

The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe.

 

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5.14 Assistant Treasurer

 

The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe.

 

5.15 Authority and Duties of Officers

 

In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders.

 

article VI

INDEMNITY

 

6.1 Indemnification of Directors and Officers

 

The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a “director” or “officer” of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

 

6.2 Indemnification of Others

 

The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an “employee” or “agent” of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

 

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6.3 Insurance

 

The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware.

 

6.4 Prepayment of Expenses

 

The corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article or otherwise.

 

6.5 Claims

 

If a claim for indemnification or payment of expenses under this Article VI is not paid in full within sixty days after a written claim therefor has been received by the corporation the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.

 

6.6 Non-exclusivity of Rights

 

The rights conferred on any person by this Article VI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

 

6.7 Other Indemnification

 

The corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.

 

6.8 Effect of Amendment or Repeal

 

Any amendment or repeal of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such amendment or repeal.

 

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article VII

RECORDS AND REPORTS

 

7.1 Maintenance and Inspection of Records

 

The corporation shall administer or allow to be administered on its behalf, its stock ledger, a copy of these bylaws as amended to date, accounting books, and other records. These records may be kept on, or by means of, or be in the form of, any information storage device, method, or one or more electronic networks or databases (including one or more distributed electronic networks or databases), provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The corporation shall so convert any records so kept upon the request of any person entitled to inspect such records in such form pursuant to applicable law. The “stock ledger” means one or more records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded

 

Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. Nothing contained in this section 7.1 shall require the corporation to include electronic mail addresses or other electronic contact information on such list. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business.

 

7.2 Inspection by Directors

 

Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper.

 

7.3 Annual Statement to Stockholders

 

The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.

 

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7.4 Annual Report

 

The corporation shall cause an annual report to be sent to the stockholders of the corporation to the extent required by applicable law. If and so long as there are fewer than 100 holders of record of the corporation’s shares, the requirement of sending of an annual report to the stockholders of the corporation is expressly waived (to the extent permitted under applicable law).

 

7.5 Representation of Shares of Other Corporations

 

The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

 

article VIII

GENERAL MATTERS

 

8.1 Checks

 

From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.

 

8.2 Execution of Corporate Contracts and Instruments

 

The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

 

8.3 Stock Certificates; Partly Paid Shares

 

The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

 

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The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.

 

8.4 Special Designation on Certificates

 

If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of any certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

 

8.5 Lost Certificates

 

Except as provided in this Section 8.5, no new certificates for certificated shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

 

8.6 Construction; Definitions

 

Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

 

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8.7 Dividends

 

The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock.

 

The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies.

 

8.8 Fiscal Year

 

The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors.

 

8.9 Seal

 

The seal of the corporation shall be such as from time to time may be approved by the board of directors.

 

8.10 Transfer of Stock

 

Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books.

 

8.11 Stock Transfer Agreements

 

The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware.

 

8.12 Registered Stockholders

 

The corporation shall be entitled to recognize the exclusive right of a person registered on its stock ledger as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its stock ledger as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

 

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article IX

AMENDMENTS

 

The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws.

 

article X

DISSOLUTION

 

If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution.

 

At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved.

 

Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation.

 

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article XI

CUSTODIAN

 

11.1 Appointment of a Custodian in Certain Cases

 

The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when:

 

(i)       at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or

 

(ii)       the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or

 

(iii)       the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.

 

11.2 Duties of Custodian

 

The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.

 

article XII

NOTICE BY ELECTRONIC TRANSMISSION

 

12.1 Notice by Electronic Transmission

 

Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the Delaware General Corporation Law, the certificate of incorporation or these bylaws, any notice to stockholders given by the corporation under any provision of the Delaware General Corporation Law, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:

 

(i)       the corporation is unable to deliver by electronic transmission two consecutive notices given by the corporation in accordance with such consent; and

 

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(ii)       such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.

 

However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

 

Any notice given pursuant to the preceding paragraph shall be deemed given:

 

(i)       if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice;

 

(ii)       if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice;

 

(iii)       if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and

 

(iv)       if by any other form of electronic transmission, when directed to the stockholder.

 

An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

 

12.2 Definition of Electronic Transmission

 

An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, including the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks or databases), that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

 

12.3 Inapplicability

 

Notice by a form of electronic transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the Delaware General Corporation Law.

 

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Exhibit 3.1

 

SECOND AMENDED AND RESTATED
INVESTORS’ RIGHTS AGREEMENT

 

This Second Amended and Restated Investors’ Rights Agreement (this “Agreement”) is made and shall be effective as of March 8, 2020 by and among StartEngine Crowdfunding, Inc., a Delaware corporation (the “Company”), the parties listed on Exhibit A attached hereto (the “Investors”) and the parties listed on Exhibit B attached hereto (the “Key Holders”).

 

RECITALS

 

A.           Company, the Key Holders and the Investors are parties to an Amended and Restated Investors’ Rights Agreement dated as of December 21, 2015 (the “Prior Agreement”), which sets forth certain rights granted by Company as a result of the purchase of Shares (“Shares”) under a Series A Stock Purchase Agreement dated December 21, 2015 (the “Series A Agreement”).

 

B.           Company, the Key Holders and the Investors desire to terminate the Prior Agreement and enter into this Agreement.

 

NOW, THEREFOREin consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree that the Prior Agreement shall be superseded and replaced in its entirety by this Agreement and further agree as follows:

 

  1. COVENANTS OF THE COMPANY.

 

1.1           Information Rights.

 

(a)          Basic Financial Information. The Company will furnish to each Investor holding more than 100,000 shares of Preferred Stock (a “Major Investor”) and any entity which requires such information pursuant to its organizational documents when available (1) annual unaudited financial statements for each fiscal year of the Company, including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such year, all prepared in accordance with generally accepted accounting principles and practices; and (2) quarterly unaudited financial statements for each fiscal quarter of the Company (except the last quarter of the Company’s fiscal year), including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such quarter, all prepared in accordance with generally accepted accounting principles and practices, subject to changes resulting from normal year-end audit adjustments. If the Company has audited records of any of the foregoing, it shall provide those in lieu of the unaudited versions.

 

(b)          Confidentiality. Anything in this Agreement to the contrary notwithstanding, no Investor by reason of this Agreement shall have access to any trade secrets or confidential information of the Company. The Company shall not be required to comply with any information rights in respect of any Investor whom the Company reasonably determines to be a competitor or an officer, employee, director or holder of ten percent (10%) or more of a competitor. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement other than to any of the Investor’s attorneys, accountants, consultants, and other professionals, to the extent necessary to obtain their services in connection with monitoring the Investor’s investment in the Company.

 

(c)          Inspection Rights. The Company shall permit each Major Investor to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Investor.

 

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1.2           Board Observer Rights. As long as the Lead Investor or any of its affiliates own not less than 1,500,000 shares of Preferred Stock (or an equivalent amount of Common Stock issued upon conversion thereof), the Company shall invite a representative of the Lead Investor to attend all meetings of its Board of Directors (the “Board”) in a nonvoting observer capacity and, in this respect, shall give such representative copies of all notices, minutes, consents, and other materials that it provides to its directors at the same time and in the same manner as provided to such directors; provided, however, that such representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and provided further, that Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could result in disclosure of trade secrets or a conflict of interest (unless covered by an enforceable confidentiality agreement, in form acceptable to Company) or adversely affect the attorney-client privilege between Company and its counsel, or if Company reasonably determines that such Investor or its representative is a competitor of Company or an officer, employee, director or greater-than-10% shareholder of a competitor.

 

1.3           Proprietary Inventions and Information Agreement. The Company shall require all employees to execute and deliver the Company’s standard form of Proprietary Inventions and Information Agreement.

 

1.4           Option Vesting. Except as unanimously approved by the Board of Directors, all options, restricted stock and similar equity compensation shall vest at the rate of 1/4 of the shares one year following either the date of grant or the commencement of the optionee’s employment and 1/48 per month thereafter.

 

1.5           Key Person Life Insurance. The Company shall maintain term life insurance in the amount of $5,000,000 for Howard Marks, naming the Company as beneficiary. The Company shall obtain such insurance as soon as reasonably practicable following the closing of the sale of the Series A Preferred Stock pursuant to the Series A Agreement.

 

1.6           Insurance. Except as otherwise decided in accordance with policies adopted by the Board of Directors, the Company will keep any of its assets that are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire and other risks customarily insured against by companies in the Company’s line of business, and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customers for companies in similar businesses similarly situated.

 

1.7           Qualified Small Business Stock. The Company shall use its best efforts to cause the shares of Series A Preferred Stock issued pursuant to the Series A Agreement, as well as any shares into which such shares are converted, within the meaning of Section 1202(f) of the Internal Revenue Code (the “Code”), to constitute “qualified small business stock” as defined in Section 1202(c) of the Code.  The Company shall submit to its stockholders (including the Investors) and to the Internal Revenue Service any reports that may be required under Section 1202(d)(1)(C) of the Code and the regulations promulgated thereunder.

 

1.8           Non-affiliate Status; Qualification as Broker/Dealer or Crowdfunding Portal.

 

(a)          The Company acknowledges that Lead Investor, after giving effect to its investment, is not an “affiliate” of the Company and that Lead Investor does not “control,” is not controlled by, and is not under common control with the Company. Furthermore, the Company covenants and agrees that it shall not take any action that might result in the Lead Investor becoming an “affiliate” of the Company.

 

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(b)         Nothing herein shall prohibit a subsidiary of the Company from registering as a broker/dealer, investment adviser or funding portal (a “Subsidiary Registration Event”), provided that, if the Subsidiary Registration Event would potentially cause the Lead Investor or any individual or entity associated with or affiliated with the Lead Investor (together the “Lead Investor Affiliates”), to be disclosed in response to any item, question or schedule on Form BD, Form ADV or Form Funding Portal (a “Subsidiary Registration Listing”), the Company shall, at least sixty (60) days prior to the filing of any such form, provide to the Lead Investor written notice thereof (a “Subsidiary Registration Notice”). Upon receipt of a Subsidiary Registration Notice, the Company and the Lead Investor shall negotiate in good faith to avoid such Subsidiary Registration Listing by restructuring the Lead Investor’s investment in the Company so as to avoid a Subsidiary Registration Listing; provided that if (x) the parties do not reach a mutually agreeable resolution within a period of thirty (30) days following Lead Investor’s receipt of a Subsidiary Registration Notice and (y) in the opinion of the Company’s counsel, a Subsidiary Registration Listing is required by applicable Law, then the Lead Investor shall have the right to exchange its Series A Preferred Stock for a new class of Preferred Stock that would have identical rights, preferences and privileges except that the new class of Preferred Stock would have no voting rights, and/or would be convertible into a new and special class of Common Stock that would be identical to the existing Common Stock, except that the new and special class of Common Stock would not have voting rights (the “Conversion Right”).

 

(c)          If, notwithstanding the Lead Investor’s exercise of the Conversion Right, in the opinion of the Company’s counsel a Subsidiary Registration Listing is required by applicable Law, then the Lead Investor shall have the right, but not the obligation, to require the Company, before any filing on Form BD, Form ADV or Form Funding Portal is made disclosing or referencing one or more of the Lead Investor Affiliates, to purchase the Lead Investor’s investment in the Company for the greater of: 1) a premium of 100% over the amount invested by Lead Investor; or 2) the then current value of Lead Investor’s holdings based on the book value of the Company. For any amounts owed to the Lead Investor pursuant to this sub-section, the Company shall execute an interest-bearing note set at LIBOR + 1, which requires fully amortized monthly payments of principal and interest over no more than a five year period (with no prepayment penalty), and which is secured by a first priority lien on the Company’s assets or other collateral reasonably acceptable to the Lead Investor.

 

1.9           Approval Rights, Additional Rights.

 

(a)          In the event that the Company issues securities in its next equity financing after the date hereof (the “Next Financing”) which have (a) rights, preferences or privileges that are more favorable than the terms of the Shares, such as price based anti-dilution protection or (b) provides all such future investors other contractual terms such as preemptive rights or registration rights, the Company shall provide substantially equivalent rights to the Investors with respect to the Shares (with appropriate adjustment for economic terms or other contractual rights, subject to such Investor’s execution of any documents, including, if applicable, investors’ rights, co-sale, voting and other agreements, executed by the investors purchasing securities in the Next Financing (such documents referred to herein as the “Next Financing Documents”). Any Major Investor will remain a Major Investor for all purposes in the Next Financing Documents to the extent such concept exists. Notwithstanding anything herein to the contrary, upon the execution and delivery of the Next Financing Documents by Investors holding a majority of the then outstanding Shares held by all Investors, this Agreement (excluding any then-existing obligations) shall be amended and restated by and into such Next Financing Documents.

 

  2. RESTRICTIONS ON TRANSFER; DRAG ALONG.

 

2.1           Limitations on Disposition. Each person owning of record shares of Common Stock of the Company issued or issuable pursuant to the conversion of the Shares and any shares of Common Stock of the Company issued as a dividend or other distribution with respect thereto or in exchange therefor or in replacement thereof (collectively, the “Securities”) or any assignee of record of Securities (each such person, a “Holder”) hereby agrees not to make any disposition of all or any portion of any Securities unless and until:

 

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(a)          there is then in effect a registration statement or Regulation A offering statement under the Securities Act of 1933, as amended (the “Securities Act”), covering such proposed disposition and such disposition is made in accordance with such registration statement or offering statement; or

 

(b)          such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and, at the expense of such Holder or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act.

 

Notwithstanding the provisions of Sections 2.1(a) and (b) above, no such registration statement or opinion of counsel shall be required: (i) for any transfer of any Securities in compliance with SEC Rule 144 or Rule 144A, or (ii) for any transfer of any Securities by a Holder that is a partnership, limited liability company, a corporation or a venture capital fund to (A) a partner of such partnership, a member of such limited liability company or stockholder of such corporation, (B) an affiliate of such partnership, limited liability company or corporation (including, without limitation, any affiliated investment fund of such Holder), (C) a retired partner of such partnership or a retired member of such limited liability company, (D) the estate of any such partner, member or stockholder, or (iii) for the transfer by gift, will or intestate succession by any Holder to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing; provided that in the case of clauses (ii) and (iii) the transferee agrees in writing to be subject to the terms of this Agreement to the same extent as if the transferee were an original Investor hereunder and in the case of clause (iii) the transfer was without additional consideration or at no greater than cost.

 

2.2           “Market Stand-Off’ Agreement. Each Holder hereby agrees that it shall not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Securities or other shares of stock of the Company then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of any registration statement of the Company filed under the Securities Act; provided however that, if during the last seventeen (17) days of the restricted period the Company issues an earnings release or material news or a material event relating to the Company occurs, or prior to the expiration of the restricted period the Company announces that it will release earnings results during the 16-day period beginning on the last day of the restricted period, and if the Company’s securities are listed on the Nasdaq Stock Market and Rule 2711 thereof applies, then the restrictions imposed by this Section 2.2 shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. In no event will the restricted period extend beyond two hundred fifteen (215) days after the effective date of the registration statement.

 

For purposes of this Section 2.2, the term “Company” shall include any wholly-owned subsidiary of the Company into which the Company merges or consolidates. To enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the shares subject to this Section 2.2 and to impose stop transfer instructions with respect to the Securities and such other shares of stock of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. Each Holder further agrees to enter into any agreement reasonably required by the underwriters to implement the foregoing within any reasonable timeframe so requested.

 

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2.3           Drag Along Right. In the event that each of (i) the holders of a majority of the shares of Common Stock, (ii) the holders of a majority of the shares of Common Stock then issued or issuable upon conversion of the shares of Preferred Stock and (iii) the Board of Directors approve a Deemed Liquidation Event, then each Holder and Key Holder hereby agrees to vote (in person, by proxy or by action by written consent, as applicable) all shares of capital stock of the Company now or hereafter directly or indirectly owned of record or beneficially by such Holder or Key Holder in favor of, and adopt, such Deemed Liquidation Event and to execute and deliver all related documentation and take such other action in support of the Deemed Liquidation Event as shall reasonably be requested by the Company in order to carry out the terms and provision of this Section 2.3, including without limitation executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents (“Drag Along Sale”). The obligation of any party to participate in a Drag-Along Sale pursuant to this Section shall not apply to a Deemed Liquidation Event, where the other party involved in such transaction is an affiliate or stockholder holding more than 10% of the voting power of the Company.

 

2.4           Tag-Along Right for Sales by Key Holders.

 

(a)          Notice of Proposed Transfer. Subject to compliance with any other applicable transfer restrictions imposed on the Key Holders, if any Key Holder (a “Selling Holder”) desires to transfer any of such Selling Holder’s shares other than to an affiliate or pursuant to a Drag-Along Sale, such Selling Holder shall first notify the Investors (each, a “Non-Selling Holder”) by written notice (the “Sale Notice”) stating the number and class of shares such Selling Holder desires to transfer, the proposed price, the terms of transfer, and the name of the proposed transferee of such Shares. Each Non-Selling Holder shall then have 15 days from the date of the Sale Notice within which to give notice (the “Tag-Along Notice”) that such Non- Selling Holder desires to have a proportionate number of its shares transferred in the same transaction at the specified price and terms, and in such event the Selling Holder may not transfer any Shares unless the proposed transferee also acquires a pro rata portion of the Shares of each Non-Selling Holder that requested that such Non-Selling Holder’s shares be included in such transfer. The term “pro rata portion” shall mean that each Investor may sell all or any part of that number of shares equal to the product obtained by multiplying (i) the aggregate number of shares of Key Holder shares covered by the Sale Notice by (ii) a fraction of the numerator of which is the number of Investor Shares and the denominator of which is the total number of shares of Common Stock held by such Key Holder plus the number of Investor Shares held by all Investors at the time of the Sale Notice. Copies of each Tag-Along Notice shall be sent to the Selling Holder and the Non-Selling Holders.

 

(b)          Right to Sell. The Selling Holder shall have 90 days after delivery of the Sale Notice to transfer the shares specified in the Sale Notice, together with any shares to be included in such transfer by the Non-Selling Holders pursuant to Section 2.4(a) to the proposed transferee and on the terms set forth in the Sale Notice. Any Non-Selling Holder whose shares are being transferred pursuant to Section 2.4 shall, in order to be entitled to have such shares transferred, deliver such Shares to be transferred at the date and place specified by the Selling Holder, duly assigned for transfer, free and clear of all liens, restrictions, claims and encumbrances. The Selling Holder shall provide the Non-Selling Holders with at least 30 days’ notice of the date and place of the closing of the proposed transfer. After the expiration of such 90-day period, the Selling Holder may not transfer such shares unless and until they are again offered to the Non-Selling Holders under the procedures specified in this Section 2.4, where applicable.

 

(c)          Cooperation by Members. Each Non-Selling Holder who elects to transfer shares pursuant to Section 2.4 will (i) cooperate reasonably with the Selling Holder in connection with any such transfer, (ii) not dissent to or otherwise attempt to prohibit or delay any such transfer or seek appraisal of such Non-Selling Holder’s shares in connection with any such transfer or exercise any other similar rights, and (iii) execute and deliver any and all agreements, documents and instruments required by the Selling Holder in connection with any such transfer, provided that such agreements, documents and instruments are substantially similar to those executed by the Selling Holder.

 

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  3. PARTICIPATION RIGHT.

 

3.1           General. Each Major Investor has the right of first refusal to purchase such Major Investor’s Pro Rata Share (as defined below) of all (or any part) of any New Securities (as defined in Section 3.2) that the Company may from time to time issue after the date of this Agreement, provided, however, such Major Investor shall have no right to purchase any such New Securities if such Major Investor cannot demonstrate to the Company’s reasonable satisfaction that such Major Investor is at the time of the proposed issuance of such New Securities an “accredited investor” as such term is defined in Regulation D under the Securities Act. A Major Investor’s “Pro Rata Share” for purposes of this right of first refusal is the ratio of (a) the number of shares of the Company’s Common Stock issued or issuable upon conversion of the Shares owned by such Major Investor, to (b) a number of shares of Common Stock of the Company equal to the sum of (1) the total number of shares of Common Stock of the Company then outstanding plus (2) the total number of shares of Common Stock of the Company into which all then outstanding shares of Preferred Stock of the Company are then convertible plus (3) the number of shares of Common Stock of the Company reserved for issuance under any stock purchase and stock option plans of the Company and outstanding warrants.

 

3.2           New Securities. “New Securities” shall mean any Common Stock or Preferred Stock of the Company, whether now authorized or not, and rights, options or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into such Common Stock or Preferred Stock; provided, however, that the term “New Securities” does not include: (a) shares of Common Stock issued or issuable upon conversion of the outstanding shares of all the series of the Preferred Stock; (b) shares of Common Stock or Preferred Stock issuable upon exercise of any options, warrants or rights to purchase any securities of the Company outstanding as of the date of this Agreement and any securities issuable upon the conversion thereof; (c) shares of Common Stock or Preferred Stock issued in connection with any stock split or stock dividend or recapitalization; (d) shares of Common Stock (or options, warrants or rights therefor) granted or issued hereafter to employees, officers, directors, contractors, consultants or advisers to, the Company or any subsidiary of the Company pursuant to incentive agreements, stock purchase or stock option plans, stock bonuses or awards, warrants, contracts or other arrangements that are approved by the Board; (e) shares of the Company’s Series A Preferred Stock issued pursuant to the Series A Agreement; (f) any other shares of Common Stock or Preferred Stock (and/or options or warrants therefor) issued or issuable primarily for other than equity financing purposes and approved by the Board; (g) shares of Common Stock issued or issuable by the Company to the public pursuant to a registration statement filed under the Securities Act; and (h) shares of Common Stock or Preferred Stock issued or issuable by the Company to the public pursuant to Regulation A under the Securities Act or Regulation CF under the Securities Act.

 

3.3           Procedures. In the event that the Company proposes to undertake an issuance of New Securities, it shall give to each Major Investor a written notice of its intention to issue New Securities (the “Notice”), describing the type of New Securities and the price and the general terms upon which the Company proposes to issue such New Securities given in accordance with Section 4.2. Each Major Investor shall have ten (10) days from the date such Notice is effective, as determined pursuant to Section 4.2 based upon the manner or method of notice, to agree in writing to purchase such Major Investor’s Pro Rata Share of such New Securities for the price and upon the general terms specified in the Notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased (not to exceed such Major Investor’s Pro Rata Share).

 

3.4           Failure to Exercise. In the event that the Major Investors fail to exercise in full the right of first refusal within such ten (10) day period, then the Company shall have one hundred twenty (120) days thereafter to sell the New Securities with respect to which the Major Investors’ rights of first refusal hereunder were not exercised, at a price and upon general terms not materially more favorable to the purchasers thereof than specified in the Company’s Notice to the Major Investors. In the event that the Company has not issued and sold the New Securities within such one hundred twenty (120) day period, then the Company shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Major Investors pursuant to this Section 3.

 

  4. GENERAL PROVISIONS.

 

4.1           Amendment and Waiver of Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors (and/or any of their permitted successors or assigns) holding Shares representing and/or convertible into a majority of all the Investors’ Shares. As used herein, the term “Investors’ Shares” shall mean the shares of Common Stock then issuable upon conversion of all then outstanding Shares issued under the Series A Agreement plus all then outstanding shares issued upon the conversion of any Shares issued under the Series A Agreement. Any amendment or waiver effected in accordance with this Section 4.1 shall be binding upon each Investor, each Holder, each permitted successor or assignee of such Investor or Holder and the Company.

 

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4.2           Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (a) personal delivery to the party to be notified, (b) when sent, if sent by facsimile, PDF or other electronic method, during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a national1y recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on the signature page or Exhibit A or Exhibit B hereto, or to such address or facsimile number as subsequently modified by written notice given in accordance with this Section 4.2. If notice is given to the Company, it shall be sent to StartEngine Crowdfunding, Inc., 8687 Melrose Ave, 7th Floor (Green Building), West Hollywood, CA 90069, Attn: Chief Executive Officer.

 

4.3           Entire Agreement. This Agreement and the documents referred to herein, together with all the Exhibits hereto, constitute the entire agreement and understanding of the parties with respect to the subject matter of this Agreement, and supersede any and all prior understandings and agreements, whether oral or written, between or among the parties hereto with respect to the specific subject matter hereof.

 

4.4           Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law.

 

4.5           Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

 

4.6           Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement.

 

4.7           Successors and Assigns. This Agreement, and any and all rights, duties and obligations hereunder, shall not be assigned, transferred, delegated or sublicensed by an Investors without the prior written consent of the Company. Any attempt by an Investor without such permission to assign, transfer, delegate or sublicense any rights, duties or obligations that arise under this Agreement shall be void. Subject to the foregoing, and except as otherwise provided herein, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon and inure to the benefit of their respective successors, assigns, heirs, executors, administrators and legal representatives.

 

4.8           Titles and Headings. The titles, captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement. Unless otherwise specifically stated, all references herein to “sections” and “exhibits” will mean “sections” and “exhibits” to this Agreement.

 

4.9           Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and all of which together sha11 constitute one and the same agreement.

 

4.10         Costs and Attorneys’ Fees. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party shall recover all of such party’s costs and attorneys’ fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom.

 

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4.11         Adjustments for Stock Splits, Etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Stock of the Company of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted to reflect the effect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend.

 

4.12         Further Assurances. The parties agree to execute such further documents and instruments and to take such further actions as may be reasonably necessary to carry out the purposes and intent of this Agreement.

 

4.13         Facsimile Signatures. This Agreement may be executed and delivered by facsimile and upon such delivery the facsimile signature will be deemed to have the same effect as if the original signature had been delivered to the other party.

 

4.14         Termination. The rights, duties and obligations under Sections 1 and 3 of this Agreement shall terminate immediately prior to the closing of the Company’s initial public offering of Common Stock pursuant to an effective registration statement filed under the Securities Act. Notwithstanding anything to the contrary herein, this Agreement (excluding any then-existing obligations) shall terminate upon the closing of a Deemed Liquidation Event as defined in the Company’s Second Amended Restated Certificate of Incorporation, as amended from time to time. Section 1.1(b) shall survive any such termination of the Agreement.

 

4.15         Dispute Resolution. Each party (a) hereby irrevocably and unconditionally submits to the jurisdiction of the federal or state courts located in the Central District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or the Transaction Documents (as defined in the Series A Agreement dated of even date herewith), (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement or the Transaction Documents except in the federal or state courts located in the Central District of California, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement, the Transaction Documents or the subject matter hereof and thereof may not be enforced in or by such court.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above.

 

  THE COMPANY
   
  STARTENGINE CROWDFUNDING, INC.
   
  By: /s/ Howard Marks
    Howard Marks
    Chief Executive Officer

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above.

 

  KEY HOLDERS:
   
  Howard E. Marks Living Trust U/A Dated 12/21/2001
     
  By: /s/ Howard Marks
    Howard Marks
    Trustee
     
    Marks Irrevocable Trust
     
  By: /s/ Joseph Carieri
    Joseph Carieri
    Trustee
     
    Miller Family Trust 1/2/96
     
  By: /s/ Ron Miller
    Ron Miller
    Trustee

 

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above.

 

  LEAD INVESTOR:
   
  SE AGOURA INVESTMENT LLC
   
  By: Agoura Management LLC, its Manager
     
  By: /s/ Aubrey Chernick  
  Name: Aubrey Chernick  
  Title: Manager      
     
     

 

 

 

Exhibit 4.1

 

FORM OF COMMON STOCK SUBSCRIPTION AGREEMENT

 

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. THIS INVESTMENT IS SUITABLE ONLY FOR PERSONS WHO CAN BEAR THE ECONOMIC RISK FOR AN INDEFINITE PERIOD OF TIME AND WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. FURTHERMORE, INVESTORS MUST UNDERSTAND THAT SUCH INVESTMENT IS ILLIQUID AND IS EXPECTED TO CONTINUE TO BE ILLIQUID FOR AN INDEFINITE PERIOD OF TIME. NO PUBLIC MARKET EXISTS FOR THE SECURITIES, AND NO PUBLIC MARKET IS EXPECTED TO DEVELOP FOLLOWING THIS OFFERING.

 

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND STATE SECURITIES OR BLUE SKY LAWS. ALTHOUGH AN OFFERING STATEMENT HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”), THAT OFFERING STATEMENT DOES NOT INCLUDE THE SAME INFORMATION THAT WOULD BE INCLUDED IN A REGISTRATION STATEMENT UNDER THE ACT. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE MERITS OF THIS OFFERING OR THE ADEQUACY OR ACCURACY OF THE SUBSCRIPTION AGREEMENT OR ANY OTHER MATERIALS OR INFORMATION MADE AVAILABLE TO SUBSCRIBER IN CONNECTION WITH THIS OFFERING OVER OUR WEB-BASED PLATFORM (THE “PLATFORM”). ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

 

INVESTORS WHO ARE NOT “ACCREDITED INVESTORS” (AS THAT TERM IS DEFINED IN SECTION 501 OF REGULATION D PROMULGATED UNDER THE ACT) ARE SUBJECT TO LIMITATIONS ON THE AMOUNT THEY MAY INVEST, AS SET OUT IN SECTION 4. THE COMPANY IS RELYING ON THE REPRESENTATIONS AND WARRANTIES SET FORTH BY EACH SUBSCRIBER IN THIS SUBSCRIPTION AGREEMENT AND THE OTHER INFORMATION PROVIDED BY SUBSCRIBER IN CONNECTION WITH THIS OFFERING TO DETERMINE THE APPLICABILITY TO THIS OFFERING OF EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT.

 

 

 

THE SUBSCRIPTION AGREEMENT, THE OFFERING CIRCULAR OR ANY OF THE OTHER MATERIALS AVAILABLE ON THE PLATFORM (COLLECTIVELY, THE “OFFERING MATERIALS”) MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

 

THE COMPANY MAY NOT BE OFFERING THE SECURITIES IN EVERY STATE. THE OFFERING MATERIALS DO NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR JURISDICTION IN WHICH THE SECURITIES ARE NOT BEING OFFERED.

 

THE COMPANY RESERVES THE RIGHT IN ITS SOLE DISCRETION AND FOR ANY REASON WHATSOEVER TO MODIFY, AMEND AND/OR WITHDRAW ALL OR A PORTION OF THE OFFERING AND/OR ACCEPT OR REJECT IN WHOLE OR IN PART ANY PROSPECTIVE INVESTMENT IN THE SECURITIES OR TO ALLOT TO ANY PROSPECTIVE INVESTOR LESS THAN THE AMOUNT OF SECURITIES SUCH INVESTOR DESIRES TO PURCHASE. EXCEPT AS OTHERWISE INDICATED, THE OFFERING MATERIALS SPEAK AS OF THEIR DATE. NEITHER THE DELIVERY NOR THE PURCHASE OF THE SECURITIES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THAT DATE.

 

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TO: StartEngine Crowdfunding, Inc.
  8687 Melrose Ave, 7th Floor (Green Building)
  West Hollywood, California 90069

 

Ladies and Gentlemen:

 

1. Subscription.

 

(a) The undersigned (“Subscriber”) hereby irrevocably subscribes for and agrees to purchase Common Stock (the “Securities”), of StartEngine Crowdfunding, Inc., a Delaware Corporation (the “Company”), at a purchase price of $]____] per share of Common Stock (the “Per Security Price”), upon the terms and conditions set forth herein. The minimum subscription is $500. The rights of the Common Stock are as set forth in Fourth Amended and Restated Certificate of Incorporation and Bylaws included in the Exhibits to the Offering Statement of the Company filed with the SEC (the “Offering Statement”).

 

(b) Subscriber understands that the Securities are being offered pursuant to an offering circular dated [___________] (the “Offering Circular”) filed with the SEC as part of the Offering Statement. By executing this Subscription Agreement, Subscriber acknowledges that Subscriber has received this Subscription Agreement, copies of the Offering Circular and Offering Statement including exhibits thereto and any other information required by the Subscriber to make an investment decision.

 

(c) The Subscriber’s subscription may be accepted or rejected in whole or in part, at any time prior to a Closing Date (as hereinafter defined), by the Company at its sole discretion. In addition, the Company, at its sole discretion, may allocate to Subscriber only a portion of the number of Securities Subscriber has subscribed for. The Company will notify Subscriber whether this subscription is accepted (whether in whole or in part) or rejected. If Subscriber’s subscription is rejected, Subscriber’s payment (or portion thereof if partially rejected) will be returned to Subscriber without interest and all of Subscriber’s obligations hereunder shall terminate.

 

(d) The aggregate number of Securities sold shall not exceed [_________] (the “Maximum Offering”). The Company may accept subscriptions until [_______________], unless otherwise extended by the Company in its sole discretion in accordance with applicable SEC regulations for such other period required to sell the Maximum Offering (the “Termination Date”). The Company may elect at any time to close all or any portion of this offering, on various dates at or prior to the Termination Date (each a “Closing Date”).

 

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(e) In the event of rejection of this subscription in its entirety, or in the event the sale of the Securities (or any portion thereof) is not consummated for any reason, this Subscription Agreement shall have no force or effect, except for Section 5 hereof, which shall remain in force and effect.

 

(f) The terms of this Subscription Agreement shall be binding upon Subscriber and its transferees, heirs, successors and assigns (collectively, “Transferees”); provided that for any such transfer to be deemed effective, the Transferee shall have executed and delivered to the Company in advance an instrument in a form acceptable to the Company in its sole discretion, pursuant to which the proposed Transferee shall be acknowledge, agree, and be bound by the representations and warranties of Subscriber, terms of this Subscription Agreement.

 

2. Purchase Procedure.

 

(a) Payment. The purchase price for the Securities shall be paid simultaneously with the execution and delivery to the Company of the signature page of this Subscription Agreement. Subscriber shall deliver a signed copy of this Subscription Agreement , along with payment for the aggregate purchase price of the Securities by cash, ACH electronic transfer or wire transfer to an account designated by the Company, or by any combination of such methods.

 

(b) Escrow arrangements. Payment for the Securities shall be received by Prime Trust, LLC (the “Escrow Agent”) from the undersigned by transfer of immediately available funds, check or other means approved by the Company at least two days prior to the applicable Closing Date, in the amount as set forth in Appendix A on the signature page hereto. Upon such Closing Date, the Escrow Agent shall release such funds to the Company. The undersigned shall receive notice and evidence of the digital entry of the number of the Securities owned by undersigned reflected on the books and records of the Company and verified by StartEngine Secure LLC (the “Transfer Agent”), which books and records shall bear a notation that the Securities were sold in reliance upon Regulation A.

 

Escrow Agent Name Prime Trust, LLC
Address  
Routing Number  
Account Number  
Account Name  
Further Instructions  

 

3. Representations and Warranties of the Company.

 

The Company represents and warrants to Subscriber that the following representations and warranties are true and complete in all material respects as of the date of each Closing Date, except as otherwise indicated. For purposes of this Agreement, an individual shall be deemed to have “knowledge” of a particular fact or other matter if such individual is actually aware of such fact. The Company will be deemed to have “knowledge” of a particular fact or other matter if one of the Company’s current officers has, or at any time had, actual knowledge of such fact or other matter.

 

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(a) Organization and Standing. The Company is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite power and authority to own and operate its properties and assets, to execute and deliver this Subscription Agreement, and any other agreements or instruments required hereunder. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business.

 

(b) Issuance of the Securities. The issuance, sale and delivery of the Securities in accordance with this Subscription Agreement has been duly authorized by all necessary corporate action on the part of the Company. The Securities, when so issued, sold and delivered against payment therefor in accordance with the provisions of this Subscription Agreement, will be duly and validly issued, fully paid and non-assessable.

 

(c) Authority for Agreement. The execution and delivery by the Company of this Subscription Agreement and the consummation of the transactions contemplated hereby (including the issuance, sale and delivery of the Securities) are within the Company’s powers and have been duly authorized by all necessary corporate action on the part of the Company. Upon full execution hereof, this Subscription Agreement shall constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (iii) with respect to provisions relating to indemnification and contribution, as limited by considerations of public policy and by federal or state securities laws.

 

(d) No filings. Assuming the accuracy of the Subscriber’s representations and warranties set forth in Section 4 hereof, no order, license, consent, authorization or approval of, or exemption by, or action by or in respect of, or notice to, or filing or registration with, any governmental body, agency or official is required by or with respect to the Company in connection with the execution, delivery and performance by the Company of this Subscription Agreement except (i) for such filings as may be required under Regulation A or under any applicable state securities laws, (ii) for such other filings and approvals as have been made or obtained, or (iii) where the failure to obtain any such order, license, consent, authorization, approval or exemption or give any such notice or make any filing or registration would not have a material adverse effect on the ability of the Company to perform its obligations hereunder.

 

(e) Capitalization. The authorized and outstanding units securities of the Company immediately prior to the initial investment in the Securities is as set forth under “Securities being Offered” in the Offering Circular. Except as set forth in the Offering Circular, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), or agreements of any kind (oral or written) for the purchase or acquisition from the Company of any of its securities.

 

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(f) Financial statements. Complete copies of the Company’s consolidated financial statements consisting of the balance sheets of the Company as of December 31, 2018 and December 31, 2017 and the related statements of income, stockholders’ equity and cash flows for the two-year period then ended (the “Financial Statements”) have been made available to the Subscriber and appear in the Offering Circular. The Financial Statements are based on the books and records of the Company and fairly present in all material respects the consolidated financial condition of the Company as of the respective dates they were prepared and the results of the operations and cash flows of the Company for the periods indicated. dbbmckennon, which has audited the Financial Statements, is an independent accounting firm within the rules and regulations adopted by the SEC.

 

(g) Proceeds. The Company shall use the proceeds from the issuance and sale of the Securities as set forth in “Use of Proceeds to issuer” in the Offering Circular.

 

(h) Litigation. Except as set forth in the Offering Circular, there is no pending action, suit, proceeding, arbitration, mediation, complaint, claim, charge or investigation before any court, arbitrator, mediator or governmental body, or to the Company’s knowledge, currently threatened in writing (a) against the Company or (b) against any consultant, officer, manager, director or key employee of the Company arising out of his or her consulting, employment or board relationship with the Company or that could otherwise materially impact the Company.

 

4. Representations and Warranties of Subscriber. By executing this Subscription Agreement, Subscriber (and, if Subscriber is purchasing the Securities subscribed for hereby in a fiduciary capacity, the person or persons for whom Subscriber is so purchasing) represents and warrants, which representations and warranties are true and complete in all material respects as of such Subscriber’s respective Closing Date(s):

 

(a) Requisite Power and Authority. Such Subscriber has all necessary power and authority under all applicable provisions of law to execute and deliver this Subscription Agreement and other agreements required hereunder and to carry out their provisions. All action on Subscriber’s part required for the lawful execution and delivery of this Subscription Agreement and other agreements required hereunder have been or will be effectively taken prior to the Closing Date. Upon their execution and delivery, this Subscription Agreement and other agreements required hereunder will be valid and binding obligations of Subscriber, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and (b) as limited by general principles of equity that restrict the availability of equitable remedies.

 

(b) Investment Representations. Subscriber understands that the Securities have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Subscriber also understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Subscriber’s representations contained in this Subscription Agreement.

 

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(c) Illiquidity and Continued Economic Risk. Subscriber acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. Subscriber must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. Subscriber acknowledges that Subscriber is able to bear the economic risk of losing Subscriber’s entire investment in the Securities. Subscriber also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.

 

(d) Accredited Investor Status or Investment Limits. Subscriber represents that either:

 

(i) Subscriber is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act. Subscriber represents and warrants that the information set forth in response to question (c) on the signature page hereto concerning Subscriber is true and correct; or

 

(ii) The purchase price set out in paragraph (b) of the signature page to this Subscription Agreement, together with any other amounts previously used to purchase Securities in this offering, does not exceed 10% of the greater of the Subscriber’s annual income or net worth.

 

Subscriber represents that to the extent it has any questions with respect to its status as an accredited investor, or the application of the investment limits, it has sought professional advice.

 

(e) Shareholder information. Within five days after receipt of a request from the Company, the Subscriber hereby agrees to provide such information with respect to its status as a shareholder (or potential shareholder) and to execute and deliver such documents as may reasonably be necessary to comply with any and all laws and regulations to which the Company is or may become subject. Subscriber further agrees that in the event it transfers any Securities, it will require the transferee of such Securities to agree to provide such information to the Company as a condition of such transfer.

 

(f) Company Information. Subscriber understands that the Company is subject to all the risks that apply to early-stage companies, whether or not those risks are explicitly set out in the Offering Circular. Subscriber has had such opportunity as it deems necessary (which opportunity may have presented through online chat or commentary functions) to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. Subscriber has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. Subscriber acknowledges that except as set forth herein, no representations or warranties have been made to Subscriber, or to Subscriber’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.

 

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(g) Valuation. The Subscriber acknowledges that the price of the Securities was set by the Company on the basis of the Company’s internal valuation and no warranties are made as to value. The Subscriber further acknowledges that future offerings of Securities may be made at lower valuations, with the result that the Subscriber’s investment will bear a lower valuation.

 

(h) Domicile. Subscriber maintains Subscriber’s domicile (and is not a transient or temporary resident) at the address shown on the signature page.

 

(i) No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by this Subscription Agreement or related documents based on any arrangement or agreement binding upon Subscriber.

 

(j) Foreign Investors. If Subscriber is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Subscription Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Securities. Subscriber’s subscription and payment for and continued beneficial ownership of the Securities will not violate any applicable securities or other laws of the Subscriber’s jurisdiction.

 

5. Proxy.

 

(a) The Subscriber hereby appoints the Chief Executive Officer of the Company (the “CEO”), or his or her successor, as the Subscriber’s true and lawful proxy and attorney, with the power to act alone and with full power of substitution, to, consistent with this instrument and on behalf of the Subscriber, (i) vote all Securities, (ii) give and receive notices and communications, (iii) execute any instrument or document that the CEO determines is necessary or appropriate in the exercise of its authority under this instrument, and (iv) take all actions necessary or appropriate in the judgment of the CEO for the accomplishment of the foregoing. The proxy and power granted by the Subscriber pursuant to this Section are coupled with an interest. Such proxy and power will be irrevocable. The proxy and power, so long as the Subscriber is an individual, will survive the death, incompetency and disability of the Subscriber and, so long as the Subscriber is an entity, will survive the merger or reorganization of the Subscriber or any other entity holding the Securities. However, the Proxy will terminate upon the closing of a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 covering the offer and sale of Common Stock or the effectiveness of a registration statement under the Securities Exchange Act of 1934 covering the Common Stock. The CEO is an intended third-party beneficiary of this Section and has the right, power and authority to enforce the provisions hereof as though he or she was a party hereto.

 

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(b) Other than with respect to the gross negligence or willful misconduct of the CEO, in his or her capacity as the Subscriber’s true and lawful proxy and attorney pursuant to this Section (collectively, the “Proxy”), the Proxy will not be liable for any act done or omitted in his, her or its capacity as representative of the Subscriber pursuant to this instrument while acting in good faith, and any act done or omitted pursuant to the written advice of outside counsel will be conclusive evidence of such good faith. The Proxy has no duties or responsibilities except those expressly set forth in this instrument, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on behalf of the Subscriber otherwise exist against the Proxy. The Subscriber shall indemnify, defend and hold harmless the Proxy from and against any and all losses, liabilities, damages, claims, penalties, fines, forfeitures, actions, fees, costs and expenses (including the fees and expenses of counsel and experts and their staffs and all expense of document location, duplication and shipment) (collectively, “Proxy Losses”) arising out of or in connection with any act done or omitted in the Proxy’s capacity as representative of the Subscriber pursuant to this instrument, in each case as such Proxy Losses are suffered or incurred; provided, that in the event that any such Proxy Losses are finally adjudicated to have been directly caused by the gross negligence or willful misconduct of the Proxy, the Company shall reimburse the Subscriber the amount of such indemnified Proxy Losses to the extent attributable to such gross negligence or willful misconduct (provided that the Proxy’s aggregate liability hereunder shall in no event exceed the Purchase Price). In no event will the Proxy be required to advance his, her or its own funds on behalf of the Subscriber or otherwise. The Subscriber acknowledges and agrees that the foregoing indemnities will survive the resignation or removal of the Proxy or the termination of this instrument.

 

(c) A decision, act, consent or instruction of the Proxy constitutes a decision of the Subscriber and is final, binding and conclusive upon the Subscriber. The Company, shareholders of the Company and any other third party may rely upon any decision, act, consent or instruction of the Proxy as being the decision, act, consent or instruction of the Subscriber. The Company, shareholders of the Company and any other third party are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Proxy.

 

(d) The Subscriber hereby agrees to take any and all actions determined by the Company’s board of directors in good faith to be advisable to reorganize this instrument and any Securities held by the Subscriber into a special-purpose vehicle or other entity designed to aggregate the interests of holders of Securities issued in this Offering.

 

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6. Survival of Representations and Indemnity. The representations, warranties and covenants made by the Subscriber herein shall survive the Termination Date of this Agreement. The Subscriber agrees to indemnify and hold harmless the Company and its respective officers, directors and affiliates, and each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all reasonable attorneys’ fees, including attorneys’ fees on appeal) and expenses reasonably incurred in investigating, preparing or defending against any false representation or warranty or breach of failure by the Subscriber to comply with any covenant or agreement made by the Subscriber herein or in any other document furnished by the Subscriber to any of the foregoing in connection with this transaction.

 

7. Governing Law; Jurisdiction. This Subscription Agreement shall be governed and construed in accordance with the laws of the State of New York.

 

EACH OF THE SUBSCRIBER AND THE COMPANY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION LOCATED WITHIN THE STATE OF CALIFORNIA AND NO OTHER PLACE AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS RELATING TO THIS SUBSCRIPTION AGREEMENT MAY BE LITIGATED IN SUCH COURTS. EACH OF SUBSCRIBER AND THE COMPANY ACCEPTS FOR ITSELF AND HIMSELF AND IN CONNECTION WITH ITS AND HIS RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS SUBSCRIPTION AGREEMENT. EACH OF SUBSCRIBER AND THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN THE MANNER AND IN THE ADDRESS SPECIFIED IN SECTION 8 AND THE SIGNATURE PAGE OF THIS SUBSCRIPTION AGREEMENT. HOWEVER, NOTHING IN THIS PARAGRAPH SHALL BE CONSTRUED TO BE APPLICABLE TO ANY ACTION ARISING UNDER THE FEDERAL SECURITIES LAWS.

 

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS SUBSCRIPTION AGREEMENT OR THE ACTIONS OF EITHER PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF, EACH OF THE PARTIES HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF SUCH PARTY. EACH OF THE PARTIES HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS SUBSCRIPTION AGREEMENT. IN THE EVENT OF LITIGATION, THIS SUBSCRIPTION AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. BY AGREEING TO THIS PROVISION, EACH SUBSCRIBER WILL NOT BE DEEMED TO HAVE WAIVED THE COMPANY’S COMPLIANCE WITH U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.

 

8. Notices. Notice, requests, demands and other communications relating to this Subscription Agreement and the transactions contemplated herein shall be in writing and shall be deemed to have been duly given if and when (a) delivered personally, on the date of such delivery; or (b) mailed by registered or certified mail, postage prepaid, return receipt requested, in the third day after the posting thereof; or (c) emailed, telecopied or cabled, on the date of such delivery to the address of the respective parties as follows:

 

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  If to the Company, to: with a required copy to:
     
  StartEngine Crowdfunding Inc.  
  8687 Melrose Ave, 7th Floor (Green Building)  
  West Hollywood, California 90069  
     
  If to a Subscriber, to Subscriber’s address as shown on the signature page hereto

 

or to such other address as may be specified by written notice from time to time by the party entitled to receive such notice. Any notices, requests, demands or other communications by telecopy or cable shall be confirmed by letter given in accordance with (a) or (b) above.

 

9. Miscellaneous.

 

(a) All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons or entity or entities may require.

 

(b) This Subscription Agreement is not transferable or assignable by Subscriber.

 

(c) The representations, warranties and agreements contained herein shall be deemed to be made by and be binding upon Subscriber and its heirs, executors, administrators and successors and shall inure to the benefit of the Company and its successors and assigns.

 

(d) None of the provisions of this Subscription Agreement may be waived, changed or terminated orally or otherwise, except as specifically set forth herein or except by a writing signed by the Company and Subscriber.

 

(e) In the event any part of this Subscription Agreement is found to be void or unenforceable, the remaining provisions are intended to be separable and binding with the same effect as if the void or unenforceable part were never the subject of agreement.

 

(f) The invalidity, illegality or unenforceability of one or more of the provisions of this Subscription Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Subscription Agreement in such jurisdiction or the validity, legality or enforceability of this Subscription Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law.

 

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(g) This Subscription Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof and contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof.

 

(h) The terms and provisions of this Subscription Agreement are intended solely for the benefit of each party hereto and their respective successors and assigns, and it is not the intention of the parties to confer, and no provision hereof shall confer, third-party beneficiary rights upon any other person.

 

(i) The headings used in this Subscription Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.

 

(j) This Subscription Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

 

(k) If any recapitalization or other transaction affecting the stock of the Company is effected, then any new, substituted or additional securities or other property which is distributed with respect to the Securities shall be immediately subject to this Subscription Agreement, to the same extent that the Securities, immediately prior thereto, shall have been covered by this Subscription Agreement.

 

(l) No failure or delay by any party in exercising any right, power or privilege under this Subscription Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

 

[SIGNATURE PAGE FOLLOWS]

 

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Exhibit 4.2

 

FORM OF PREFERRED STOCK SUBSCRIPTION AGREEMENT

 

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. THIS INVESTMENT IS SUITABLE ONLY FOR PERSONS WHO CAN BEAR THE ECONOMIC RISK FOR AN INDEFINITE PERIOD OF TIME AND WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. FURTHERMORE, INVESTORS MUST UNDERSTAND THAT SUCH INVESTMENT IS ILLIQUID AND IS EXPECTED TO CONTINUE TO BE ILLIQUID FOR AN INDEFINITE PERIOD OF TIME. NO PUBLIC MARKET EXISTS FOR THE SECURITIES, AND NO PUBLIC MARKET IS EXPECTED TO DEVELOP FOLLOWING THIS OFFERING.

 

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND STATE SECURITIES OR BLUE SKY LAWS. ALTHOUGH AN OFFERING STATEMENT HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”), THAT OFFERING STATEMENT DOES NOT INCLUDE THE SAME INFORMATION THAT WOULD BE INCLUDED IN A REGISTRATION STATEMENT UNDER THE ACT. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE MERITS OF THIS OFFERING OR THE ADEQUACY OR ACCURACY OF THE SUBSCRIPTION AGREEMENT OR ANY OTHER MATERIALS OR INFORMATION MADE AVAILABLE TO SUBSCRIBER IN CONNECTION WITH THIS OFFERING OVER OUR WEB-BASED PLATFORM (THE “PLATFORM”). ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

 

INVESTORS WHO ARE NOT “ACCREDITED INVESTORS” (AS THAT TERM IS DEFINED IN SECTION 501 OF REGULATION D PROMULGATED UNDER THE ACT) ARE SUBJECT TO LIMITATIONS ON THE AMOUNT THEY MAY INVEST, AS SET OUT IN SECTION 4. THE COMPANY IS RELYING ON THE REPRESENTATIONS AND WARRANTIES SET FORTH BY EACH SUBSCRIBER IN THIS SUBSCRIPTION AGREEMENT AND THE OTHER INFORMATION PROVIDED BY SUBSCRIBER IN CONNECTION WITH THIS OFFERING TO DETERMINE THE APPLICABILITY TO THIS OFFERING OF EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT.

 

 

 

 

THE SUBSCRIPTION AGREEMENT, THE OFFERING CIRCULAR OR ANY OF THE OTHER MATERIALS AVAILABLE ON THE PLATFORM (COLLECTIVELY, THE “OFFERING MATERIALS”) MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

 

THE COMPANY MAY NOT BE OFFERING THE SECURITIES IN EVERY STATE. THE OFFERING MATERIALS DO NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR JURISDICTION IN WHICH THE SECURITIES ARE NOT BEING OFFERED.

 

THE COMPANY RESERVES THE RIGHT IN ITS SOLE DISCRETION AND FOR ANY REASON WHATSOEVER TO MODIFY, AMEND AND/OR WITHDRAW ALL OR A PORTION OF THE OFFERING AND/OR ACCEPT OR REJECT IN WHOLE OR IN PART ANY PROSPECTIVE INVESTMENT IN THE SECURITIES OR TO ALLOT TO ANY PROSPECTIVE INVESTOR LESS THAN THE AMOUNT OF SECURITIES SUCH INVESTOR DESIRES TO PURCHASE. EXCEPT AS OTHERWISE INDICATED, THE OFFERING MATERIALS SPEAK AS OF THEIR DATE. NEITHER THE DELIVERY NOR THE PURCHASE OF THE SECURITIES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THAT DATE.

 

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TO: StartEngine Crowdfunding, Inc.
8687 Melrose Ave, 7th Floor (Green Building)
West Hollywood, California 90069

 

Ladies and Gentlemen:

 

1. Subscription.

 

(a) The undersigned (“Subscriber”) hereby irrevocably subscribes for and agrees to purchase Series T Preferred Stock (the “Securities”), of StartEngine Crowdfunding, Inc., a Delaware Corporation (the “Company”), at a purchase price of [___________]per share of Series T Preferred Stock (the “Per Security Price”), upon the terms and conditions set forth herein. The minimum subscription is $200,000. The rights of the Series T Preferred Stock are as set forth in Fourth Amended and Restated Certificate of Incorporation and Bylaws included in the Exhibits to the Offering Statement of the Company filed with the SEC (the “Offering Statement”).

 

(b) Subscriber understands that the Securities are being offered pursuant to an offering circular dated [___________] (the “Offering Circular”) filed with the SEC as part of the Offering Statement. By executing this Subscription Agreement, Subscriber acknowledges that Subscriber has received this Subscription Agreement, copies of the Offering Circular and Offering Statement including exhibits thereto and any other information required by the Subscriber to make an investment decision.

 

(c) The Subscriber’s subscription may be accepted or rejected in whole or in part, at any time prior to a Closing Date (as hereinafter defined), by the Company at its sole discretion. In addition, the Company, at its sole discretion, may allocate to Subscriber only a portion of the number of Securities Subscriber has subscribed for. The Company will notify Subscriber whether this subscription is accepted (whether in whole or in part) or rejected. If Subscriber’s subscription is rejected, Subscriber’s payment (or portion thereof if partially rejected) will be returned to Subscriber without interest and all of Subscriber’s obligations hereunder shall terminate.

 

(d) The aggregate number of Securities sold shall not exceed [___________] (the “Maximum Offering”). The Company may accept subscriptions until [_______________], unless otherwise extended by the Company in its sole discretion in accordance with applicable SEC regulations for such other period required to sell the Maximum Offering (the “Termination Date”). The Company may elect at any time to close all or any portion of this offering, on various dates at or prior to the Termination Date (each a “Closing Date”).

 

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(e) In the event of rejection of this subscription in its entirety, or in the event the sale of the Securities (or any portion thereof) is not consummated for any reason, this Subscription Agreement shall have no force or effect, except for Section 5 hereof, which shall remain in force and effect.

 

(f) The terms of this Subscription Agreement shall be binding upon Subscriber and its transferees, heirs, successors and assigns (collectively, “Transferees”); provided that for any such transfer to be deemed effective, the Transferee shall have executed and delivered to the Company in advance an instrument in a form acceptable to the Company in its sole discretion, pursuant to which the proposed Transferee shall be acknowledge, agree, and be bound by the representations and warranties of Subscriber, terms of this Subscription Agreement.

 

2. Purchase Procedure.

 

(a) Payment. The purchase price for the Securities shall be paid simultaneously with the execution and delivery to the Company of the signature page of this Subscription Agreement. Subscriber shall deliver a signed copy of this Subscription Agreement , along with payment for the aggregate purchase price of the Securities by cash, ACH electronic transfer or wire transfer to an account designated by the Company, or by any combination of such methods.

 

(b) Escrow arrangements. Payment for the Securities shall be received by Prime Trust, LLC (the “Escrow Agent”) from the undersigned by transfer of immediately available funds, check or other means approved by the Company at least two days prior to the applicable Closing Date, in the amount as set forth in Appendix A on the signature page hereto. Upon such Closing Date, the Escrow Agent shall release such funds to the Company. The undersigned shall receive notice and evidence of the digital entry of the number of the Securities owned by undersigned reflected on the books and records of the Company and verified by StartEngine Secure LLC (the “Transfer Agent”), which books and records shall bear a notation that the Securities were sold in reliance upon Regulation A.

 

Escrow Agent Name Prime Trust, LLC
Address  
Routing Number  
Account Number  
Account Name  
Further Instructions  

 

3. Representations and Warranties of the Company.

 

The Company represents and warrants to Subscriber that the following representations and warranties are true and complete in all material respects as of the date of each Closing Date, except as otherwise indicated. For purposes of this Agreement, an individual shall be deemed to have “knowledge” of a particular fact or other matter if such individual is actually aware of such fact. The Company will be deemed to have “knowledge” of a particular fact or other matter if one of the Company’s current officers has, or at any time had, actual knowledge of such fact or other matter.

 

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(a) Organization and Standing. The Company is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware. The Company has all requisite power and authority to own and operate its properties and assets, to execute and deliver this Subscription Agreement, and any other agreements or instruments required hereunder. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business.

 

(b) Issuance of the Securities. The issuance, sale and delivery of the Securities in accordance with this Subscription Agreement has been duly authorized by all necessary corporate action on the part of the Company. The Securities, when so issued, sold and delivered against payment therefor in accordance with the provisions of this Subscription Agreement, will be duly and validly issued, fully paid and non-assessable.

 

(c) Authority for Agreement. The execution and delivery by the Company of this Subscription Agreement and the consummation of the transactions contemplated hereby (including the issuance, sale and delivery of the Securities) are within the Company’s powers and have been duly authorized by all necessary corporate action on the part of the Company. Upon full execution hereof, this Subscription Agreement shall constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies and (iii) with respect to provisions relating to indemnification and contribution, as limited by considerations of public policy and by federal or state securities laws.

 

(d) No filings. Assuming the accuracy of the Subscriber’s representations and warranties set forth in Section 4 hereof, no order, license, consent, authorization or approval of, or exemption by, or action by or in respect of, or notice to, or filing or registration with, any governmental body, agency or official is required by or with respect to the Company in connection with the execution, delivery and performance by the Company of this Subscription Agreement except (i) for such filings as may be required under Regulation A or under any applicable state securities laws, (ii) for such other filings and approvals as have been made or obtained, or (iii) where the failure to obtain any such order, license, consent, authorization, approval or exemption or give any such notice or make any filing or registration would not have a material adverse effect on the ability of the Company to perform its obligations hereunder.

 

(e) Capitalization. The authorized and outstanding units securities of the Company immediately prior to the initial investment in the Securities is as set forth under “Securities being Offered” in the Offering Circular. Except as set forth in the Offering Circular, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), or agreements of any kind (oral or written) for the purchase or acquisition from the Company of any of its securities.

 

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(f) Financial statements. Complete copies of the Company’s consolidated financial statements consisting of the balance sheets of the Company as of December 31, 2018 and December 31, 2017 and the related statements of income, stockholders’ equity and cash flows for the two-year period then ended (the “Financial Statements”) have been made available to the Subscriber and appear in the Offering Circular. The Financial Statements are based on the books and records of the Company and fairly present in all material respects the consolidated financial condition of the Company as of the respective dates they were prepared and the results of the operations and cash flows of the Company for the periods indicated. dbbmckennon, which has audited the Financial Statements, is an independent accounting firm within the rules and regulations adopted by the SEC.

 

(g) Proceeds. The Company shall use the proceeds from the issuance and sale of the Securities as set forth in “Use of Proceeds to issuer” in the Offering Circular.

 

(h) Litigation. Except as set forth in the Offering Circular, there is no pending action, suit, proceeding, arbitration, mediation, complaint, claim, charge or investigation before any court, arbitrator, mediator or governmental body, or to the Company’s knowledge, currently threatened in writing (a) against the Company or (b) against any consultant, officer, manager, director or key employee of the Company arising out of his or her consulting, employment or board relationship with the Company or that could otherwise materially impact the Company.

 

4. Representations and Warranties of Subscriber. By executing this Subscription Agreement, Subscriber (and, if Subscriber is purchasing the Securities subscribed for hereby in a fiduciary capacity, the person or persons for whom Subscriber is so purchasing) represents and warrants, which representations and warranties are true and complete in all material respects as of such Subscriber’s respective Closing Date(s):

 

(a) Requisite Power and Authority. Such Subscriber has all necessary power and authority under all applicable provisions of law to execute and deliver this Subscription Agreement and other agreements required hereunder and to carry out their provisions. All action on Subscriber’s part required for the lawful execution and delivery of this Subscription Agreement and other agreements required hereunder have been or will be effectively taken prior to the Closing Date. Upon their execution and delivery, this Subscription Agreement and other agreements required hereunder will be valid and binding obligations of Subscriber, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and (b) as limited by general principles of equity that restrict the availability of equitable remedies.

 

(b) Investment Representations. Subscriber understands that the Securities have not been registered under the Securities Act of 1933, as amended (the “Securities Act”). Subscriber also understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Subscriber’s representations contained in this Subscription Agreement.

 

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(c) Illiquidity and Continued Economic Risk. Subscriber acknowledges and agrees that there is no ready public market for the Securities and that there is no guarantee that a market for their resale will ever exist. Subscriber must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Securities on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Securities. Subscriber acknowledges that Subscriber is able to bear the economic risk of losing Subscriber’s entire investment in the Securities. Subscriber also understands that an investment in the Company involves significant risks and has taken full cognizance of and understands all of the risk factors relating to the purchase of Securities.

 

(d) Accredited Investor Status or Investment Limits. Subscriber represents that either:

 

(i) Subscriber is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act. Subscriber represents and warrants that the information set forth in response to question (c) on the signature page hereto concerning Subscriber is true and correct; or

 

(ii) The purchase price set out in paragraph (b) of the signature page to this Subscription Agreement, together with any other amounts previously used to purchase Securities in this offering, does not exceed 10% of the greater of the Subscriber’s annual income or net worth.

 

Subscriber represents that to the extent it has any questions with respect to its status as an accredited investor, or the application of the investment limits, it has sought professional advice.

 

(e) Shareholder information. Within five days after receipt of a request from the Company, the Subscriber hereby agrees to provide such information with respect to its status as a shareholder (or potential shareholder) and to execute and deliver such documents as may reasonably be necessary to comply with any and all laws and regulations to which the Company is or may become subject. Subscriber further agrees that in the event it transfers any Securities, it will require the transferee of such Securities to agree to provide such information to the Company as a condition of such transfer.

 

(f) Company Information. Subscriber understands that the Company is subject to all the risks that apply to early-stage companies, whether or not those risks are explicitly set out in the Offering Circular. Subscriber has had such opportunity as it deems necessary (which opportunity may have presented through online chat or commentary functions) to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. Subscriber has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. Subscriber acknowledges that except as set forth herein, no representations or warranties have been made to Subscriber, or to Subscriber’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.

 

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(g) Valuation. The Subscriber acknowledges that the price of the Securities was set by the Company on the basis of the Company’s internal valuation and no warranties are made as to value. The Subscriber further acknowledges that future offerings of Securities may be made at lower valuations, with the result that the Subscriber’s investment will bear a lower valuation.

 

(h) Domicile. Subscriber maintains Subscriber’s domicile (and is not a transient or temporary resident) at the address shown on the signature page.

 

(i) No Brokerage Fees. There are no claims for brokerage commission, finders’ fees or similar compensation in connection with the transactions contemplated by this Subscription Agreement or related documents based on any arrangement or agreement binding upon Subscriber.

 

(j) Foreign Investors. If Subscriber is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities or any use of this Subscription Agreement, including (i) the legal requirements within its jurisdiction for the purchase of the Securities, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Securities. Subscriber’s subscription and payment for and continued beneficial ownership of the Securities will not violate any applicable securities or other laws of the Subscriber’s jurisdiction.

 

5. Drag-along. In the event that each of (i) the holders of a majority of the shares of Common Stock, (ii) the holders of a majority of the shares of Common Stock then issued or issuable upon conversion of the shares of Preferred Stock and (iii) the Board of Directors approve a Deemed Liquidation (as such term is defined in the Fourth Amended and Restated Certificate of Incorporation) then the Subscriber agrees to vote (in person, by proxy or by action by written consent, as applicable) all Subscriber’s shares of capital stock of the Company now or hereafter directly or indirectly owned of record or beneficially in favor of, and adopt, such Deemed Liquidation and to execute and deliver all related documentation and take such other action in support of the Deemed Liquidation as shall reasonably be requested by the Company in order to carry out the terms and provision of this Section 5, including without limitation executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances) and any similar or related documents (“Drag Along Sale”). The obligation of any party to participate in a Drag-Along Sale pursuant to this Section shall not apply to a Deemed Liquidation, where the other party involved in such transaction is an affiliate or stockholder holding more than 10% of the voting power of the Company.

 

6.  Participation Rights.

 

(a) Each Subscriber who holds more than 100,000 shares of Preferred Stock (“Major Investor”) will have the right of first refusal to purchase such Major Investor’s Pro Rata Share (as defined below) of all (or any part) of any New Securities (as defined in Section 6(b)) that the Company may from time to time issue after the date of this Agreement, provided, however, such Major Investor shall have no right to purchase any such New Securities if such Major Investor cannot demonstrate to the Company’s reasonable satisfaction that such Major Investor is at the time of the proposed issuance of such New Securities an “accredited investor” as such term is defined in Regulation D under the Securities Act. A Major Investor’s “Pro Rata Share” for purposes of this right of first refusal is the ratio of (a) the number of shares of the Company’s Common Stock issued or issuable upon conversion of the Shares owned by such Major Investor, to (b) a number of shares of Common Stock of the Company equal to the sum of (1) the total number of shares of Common Stock of the Company then outstanding plus (2) the total number of shares of Common Stock of the Company into which all then outstanding shares of Preferred Stock of the Company are then convertible plus (3) the number of shares of Common Stock of the Company reserved for issuance under any stock purchase and stock option plans of the Company and outstanding warrants.

 

(b) “New Securities” shall mean any Common Stock or Preferred Stock of the Company, whether now authorized or not, and rights, options or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into such Common Stock or Preferred Stock; provided, however, that the term “New Securities” does not include: (a) shares of Common Stock issued or issuable upon conversion of the outstanding shares of all the series of the Preferred Stock; (b) shares of Common Stock or Preferred Stock issuable upon exercise of any options, warrants or rights to purchase any securities of the Company outstanding as of the date of the Termination Date and any securities issuable upon the conversion thereof; (c) shares of Common Stock or Preferred Stock issued in connection with any stock split or stock dividend or recapitalization; (d) shares of Common Stock (or options, warrants or rights therefor) granted or issued hereafter to employees, officers, directors, contractors, consultants or advisers to, the Company or any subsidiary of the Company pursuant to incentive agreements, stock purchase or stock option plans, stock bonuses or awards, warrants, contracts or other arrangements that are approved by the Board; (e) shares of the Company’s Series T Preferred Stock issued pursuant to the Offering Statement; (f) any other shares of Common Stock or Preferred Stock (and/or options or warrants therefor) issued or issuable primarily for other than equity financing purposes and approved by the Board; (g) shares of Common Stock issued or issuable by the Company to the public pursuant to a registration statement filed under the Securities Act; and (h) shares of Common Stock or Preferred Stock issued or issuable by the Company to the public pursuant to Regulation A under the Securities Act or Regulation CF under the Securities Act.

 

(c) In the event that the Company proposes to undertake an issuance of New Securities, it shall give to each Major Investor a written notice of its intention to issue New Securities (the “Notice”), describing the type of New Securities and the price and the general terms upon which the Company proposes to issue such New Securities. The Notice shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (i) personal delivery to the party to be notified, (ii) when sent, if sent by facsimile, PDF or other electronic method, during normal business hours of the recipient, and if not sent during normal business hours, then on the recipient’s next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) business day after deposit with a national1y recognized overnight courier, freight prepaid, specifying next business day delivery, with written verification of receipt. Each Major Investor shall have ten (10) days from the date such Notice is effective to agree in writing to purchase such Major Investor’s Pro Rata Share of such New Securities for the price and upon the general terms specified in the Notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased (not to exceed such Major Investor’s Pro Rata Share).

 

(d) In the event that the Major Investors fail to exercise in full the right of first refusal within such ten (10) day period, then the Company shall have one hundred twenty (120) days thereafter to sell the New Securities with respect to which the Major Investors’ rights of first refusal hereunder were not exercised, at a price and upon general terms not materially more favorable to the purchasers thereof than specified in the Company’s Notice to the Major Investors. In the event that the Company has not issued and sold the New Securities within such one hundred twenty (120) day period, then the Company shall not thereafter issue or sell any New Securities without again first offering such New Securities to the Major Investors pursuant to this Section 6.

 

8

 

 

7. Survival of Representations and Indemnity. The representations, warranties and covenants made by the Subscriber herein shall survive the Termination Date of this Agreement. The Subscriber agrees to indemnify and hold harmless the Company and its respective officers, directors and affiliates, and each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all reasonable attorneys’ fees, including attorneys’ fees on appeal) and expenses reasonably incurred in investigating, preparing or defending against any false representation or warranty or breach of failure by the Subscriber to comply with any covenant or agreement made by the Subscriber herein or in any other document furnished by the Subscriber to any of the foregoing in connection with this transaction.

 

8. Governing Law; Jurisdiction. This Subscription Agreement shall be governed and construed in accordance with the laws of the State of New York.

 

EACH OF THE SUBSCRIBER AND THE COMPANY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION LOCATED WITHIN THE STATE OF CALIFORNIA AND NO OTHER PLACE AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS RELATING TO THIS SUBSCRIPTION AGREEMENT MAY BE LITIGATED IN SUCH COURTS. EACH OF SUBSCRIBER AND THE COMPANY ACCEPTS FOR ITSELF AND HIMSELF AND IN CONNECTION WITH ITS AND HIS RESPECTIVE PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS SUBSCRIPTION AGREEMENT. EACH OF SUBSCRIBER AND THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN THE MANNER AND IN THE ADDRESS SPECIFIED IN SECTION 9 AND THE SIGNATURE PAGE OF THIS SUBSCRIPTION AGREEMENT. HOWEVER, NOTHING IN THIS PARAGRAPH SHALL BE CONSTRUED TO BE APPLICABLE TO ANY ACTION ARISING UNDER THE FEDERAL SECURITIES LAWS.

 

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS SUBSCRIPTION AGREEMENT OR THE ACTIONS OF EITHER PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF, EACH OF THE PARTIES HERETO ALSO WAIVES ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF SUCH PARTY. EACH OF THE PARTIES HERETO FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS SUBSCRIPTION AGREEMENT. IN THE EVENT OF LITIGATION, THIS SUBSCRIPTION AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. BY AGREEING TO THIS PROVISION, EACH SUBSCRIBER WILL NOT BE DEEMED TO HAVE WAIVED THE COMPANY’S COMPLIANCE WITH U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER

 

9

 

 

9. Notices. Notice, requests, demands and other communications relating to this Subscription Agreement and the transactions contemplated herein shall be in writing and shall be deemed to have been duly given if and when (a) delivered personally, on the date of such delivery; or (b) mailed by registered or certified mail, postage prepaid, return receipt requested, in the third day after the posting thereof; or (c) emailed, telecopied or cabled, on the date of such delivery to the address of the respective parties as follows:

 

  If to the Company, to: with a required copy to:
     
  StartEngine Crowdfunding Inc.  
  8687 Melrose Ave, 7th Floor (Green Building)  
  West Hollywood, California 90069  
     
  If to a Subscriber, to Subscriber’s address as shown on the signature page hereto

 

or to such other address as may be specified by written notice from time to time by the party entitled to receive such notice. Any notices, requests, demands or other communications by telecopy or cable shall be confirmed by letter given in accordance with (a) or (b) above.

 

10. Miscellaneous.

  

(a) All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the person or persons or entity or entities may require.

 

(b) This Subscription Agreement is not transferable or assignable by Subscriber.

 

(c) The representations, warranties and agreements contained herein shall be deemed to be made by and be binding upon Subscriber and its heirs, executors, administrators and successors and shall inure to the benefit of the Company and its successors and assigns.

 

(d) None of the provisions of this Subscription Agreement may be waived, changed or terminated orally or otherwise, except as specifically set forth herein or except by a writing signed by the Company and Subscriber.

 

(e) In the event any part of this Subscription Agreement is found to be void or unenforceable, the remaining provisions are intended to be separable and binding with the same effect as if the void or unenforceable part were never the subject of agreement.

 

(f) The invalidity, illegality or unenforceability of one or more of the provisions of this Subscription Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Subscription Agreement in such jurisdiction or the validity, legality or enforceability of this Subscription Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law.

 

10

 

 

(g) This Subscription Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof and contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof.

 

(h) The terms and provisions of this Subscription Agreement are intended solely for the benefit of each party hereto and their respective successors and assigns, and it is not the intention of the parties to confer, and no provision hereof shall confer, third-party beneficiary rights upon any other person.

 

(i) The headings used in this Subscription Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof.

 

(j) This Subscription Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

 

(k) If any recapitalization or other transaction affecting the stock of the Company is effected, then any new, substituted or additional securities or other property which is distributed with respect to the Securities shall be immediately subject to this Subscription Agreement, to the same extent that the Securities, immediately prior thereto, shall have been covered by this Subscription Agreement.

 

(l) No failure or delay by any party in exercising any right, power or privilege under this Subscription Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

 

[SIGNATURE PAGE FOLLOWS]

 

11

 

 

Exhibit 6.1

 

STARTENGINE CROWDFUNDING, INC.
2015 EQUITY INCENTIVE PLAN

 

SECTION 1. PURPOSE

 

The purpose of the StartEngine Crowdfunding, Inc. 2015 Equity Incentive Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its Related Companies by providing them the opportunity to acquire a proprietary interest in the Company and to align their interests and efforts to the long-term interests of the Company's stockholders.

 

SECTION 2. DEFINITIONS

 

Certain capitalized terms used in the Plan have the meanings set forth in Appendix A.

 

SECTION 3. ADMINISTRATION

 

3.1         Administration of the Plan

 

The Plan shall be administered by the Board. All references in the Plan to the "Plan Administrator" shall be to the Board.

 

3.2         Administration and Interpretation by Plan Administrator

 

(a)          Except for the terms and conditions explicitly set forth in the Plan, and to the extent permitted by applicable law, the Plan Administrator shall have full power and exclusive authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board to (i) select the Eligible Persons to whom Awards may from time to time be granted under the Plan; (ii) determine the type or types of Award to be granted to each Participant under the Plan; (iii) determine the number of shares of Common Stock to be covered by each Award granted under the Plan; (iv) determine the terms and conditions of any Award granted under the Plan; (v) approve the forms of notice or agreement for use under the Plan; (vi) determine whether, to what extent and under what circumstances Awards may be settled in cash, shares of Common Stock or other property or canceled or suspended; (vii)  interpret and administer the Plan and any instrument evidencing an Award, notice or agreement executed or entered into under the Plan; (viii) establish such rules and regulations as it shall deem appropriate for the proper administration of the Plan; (ix) delegate ministerial duties to such of the Company's employees as it so determines; and (x) make any other determination and take any other action that the Plan Administrator deems necessary or desirable for administration of the Plan.

 

(b)          The effect on the vesting of an Award of a Company-approved leave of absence or a Participant's reduction in hours of employment or service shall be determined by the Company's chief human resources officer or other person performing that function or, with respect to directors or executive officers, by the Board, whose determination shall be final.

 

 

 

 

(c)          Decisions of the Plan Administrator shall be final, conclusive and binding on all persons, including the Company, any Participant, any stockholder and any Eligible Person. A majority of the members of the Plan Administrator may determine its actions.

 

SECTION 4. SHARES SUBJECT TO THE PLAN

 

4.1         Authorized Number of Shares

 

Subject to adjustment from time to time as provided in Section 14.1, a maximum of 1,000,000 shares of Common Stock shall be available for issuance under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares.

 

4.2         Share Usage

 

(a)          Shares of Common Stock covered by an Award shall not be counted as used unless and until they are actually issued and delivered to a Participant. If any Award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if shares of Common Stock are issued under the Plan to a Participant and thereafter are forfeited to or otherwise reacquired by the Company, the shares subject to such Awards and the forfeited or reacquired shares shall again be available for issuance under the Plan. Any shares of Common Stock (i) tendered by a Participant or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to satisfy tax withholding obligations in connection with an Award, or (ii) covered by an Award that is settled in cash or in a manner such that some or all of the shares covered by the Award are not issued, shall be available for Awards under the Plan. The number of shares of Common Stock available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into additional shares of Common Stock or credited as additional shares of Common Stock subject or paid with respect to an Award.

 

(b)          The Plan Administrator shall also, without limitation, have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company.

 

(c)          Notwithstanding any other provision of the Plan to the contrary, the Plan Administrator may grant Substitute Awards under the Plan. In the event that a written agreement between the Company and an Acquired Entity pursuant to which merger or consolidation is completed is approved by the Board and that agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, those terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, and the persons holding such awards shall be deemed to be Participants.

 

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(d)          Notwithstanding any other provisions in this Section 4.2 to the contrary, the maximum number of shares that may be issued upon the exercise of Incentive Stock Options shall equal the aggregate share number stated in Section 4.1, subject to adjustment as provided in Section 14.1.

 

SECTION 5. ELIGIBILITY

 

An Award may be granted to any employee, officer or director of the Company or a Related Company whom the Plan Administrator from time to time selects. An Award may also be granted to any consultant, agent, advisor or independent contractor for bona fide services rendered to the Company or any Related Company that (a) are not in connection with the offer and sale of the Company's securities in a capital-raising transaction and (b) do not directly or indirectly promote or maintain a market for the Company's securities.

 

SECTION 6. AWARDS

 

6.1         Form, Grant and Settlement of Awards

 

The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of Awards to be granted under the Plan. Such Awards may be granted either alone or in addition to or in tandem with any other type of Award. Any Award settlement may be subject to such conditions, restrictions and contingencies as the Plan Administrator shall determine.

 

6.2         Evidence of Awards

 

Awards granted under the Plan shall be evidenced by a written, including an electronic, instrument that shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan.

 

6.3         Dividends and Distributions

 

Participants may, if the Plan Administrator so determines, be credited with dividends or dividend equivalents paid with respect to shares of Common Stock underlying an Award in a manner determined by the Plan Administrator in its sole discretion. The Plan Administrator may apply any restrictions to the dividends or dividend equivalents that the Plan Administrator deems appropriate. The Plan Administrator, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including cash, shares of Common Stock, Restricted Stock or Stock Units. Notwithstanding the foregoing, the right to any dividends or dividend equivalents declared and paid on the number of shares underlying an Option or Stock Appreciation Right may not be contingent, directly or indirectly, on the exercise of the Option or Stock Appreciation Right, and must comply with or qualify for an exemption under Section 409A. Also notwithstanding the foregoing, the right to any dividends or dividend equivalents declared and paid on Restricted Stock must (a) be paid at the same time they are paid to other stockholders and (b) comply with or qualify for an exemption under Section 409A.

 

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SECTION 7. OPTIONS

 

7.1         Grant of Options

 

The Plan Administrator may grant Options designated as Incentive Stock Options or Nonqualified Stock Options.

 

7.2         Option Exercise Price

 

Options shall be granted with an exercise price per share not less than 100% of the Fair Market Value of the Common Stock on the Grant Date (and not less than the minimum exercise price required by Section 422 of the Code with respect to Incentive Stock Options), except in the case of Substitute Awards.

 

7.3         Term of Options

 

Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Option (the "Option Term") shall be ten years from the Grant Date. For Incentive Stock Options, the Option Term shall be as specified in Section 8.4.

 

7.4         Exercise of Options

 

The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which, or the installments in which, the Option shall vest and become exercisable, any of which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option shall vest and become exercisable according to the following schedule, which may be waived or modified by the Plan Administrator at any time:

 

Period of Participant's Continuous
Employment or Service With the
Company or Its Related Companies
From the Vesting Commencement Date

 



Portion of Total Option That
Is Vested and Exercisable

     
After 1 year   1/4th
     
After each additional one-month period of continuous service completed thereafter   An additional 1/48 th
     
After 4 years   100%

 

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To the extent an Option has vested and become exercisable, the Option may be exercised in whole or from time to time in part by delivery to or as directed or approved by the Company of a properly executed stock option exercise agreement or notice, in a form and in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised, the restrictions imposed on the shares purchased under such exercise agreement or notice, if any, and such representations and agreements as may be required by the Plan Administrator, accompanied by payment in full as described in Section 7.5. An Option may be exercised only for whole shares and may not be exercised for less than a reasonable number of shares at any one time, as determined by the Plan Administrator.

 

7.5         Payment of Exercise Price

 

The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid before the Company will issue the shares being purchased and must be in a form or a combination of forms acceptable to the Plan Administrator for that purchase, which forms may include:

 

(a)          cash;

 

(b)          check or wire transfer;

 

(c)          having the Company withhold shares of Common Stock that would otherwise be issued on exercise of the Option that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;

 

(d)          tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) shares of Common Stock owned by the Participant that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;

 

(e)          if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, and to the extent permitted by law, delivery of a properly executed exercise agreement or notice, together with irrevocable instructions to a brokerage firm designated or approved by the Company to deliver promptly to the Company the aggregate amount of proceeds to pay the Option exercise price and any tax withholding obligations that may arise in connection with the exercise, all in accordance with the regulations of the Federal Reserve Board; or

 

(f)          such other consideration as the Plan Administrator may permit.

 

In addition, to assist a Participant (including directors and executive officers) in acquiring shares of Common Stock pursuant to an Option granted under the Plan, the Plan Administrator, in its sole discretion and to the extent permitted by applicable law, may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Option, (i) the payment by a Participant of the purchase price of the Common Stock by a promissory note or (ii) the guarantee by the Company of a loan obtained by the Participant from a third party. Such notes or loans must be full recourse to the extent necessary to avoid adverse accounting charges to the Company's earnings for financial reporting purposes. Subject to the foregoing, the Plan Administrator shall in its sole discretion specify the terms of any loans or loan guarantees, including the interest rate and terms of and security for repayment.

 

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7.6         Effect of Termination of Service

 

The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option shall be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time:

 

(a)          Any portion of an Option that is not vested and exercisable on the date of a Participant's Termination of Service shall expire on such date.

 

(b)          Any portion of an Option that is vested and exercisable on the date of a Participant's Termination of Service shall expire on the earliest to occur of:

 

(i)          if the Participant's Termination of Service occurs for reasons other than Cause, Retirement, Disability or death, the date that is three months after such Termination of Service;

 

(ii)         if the Participant's Termination of Service occurs by reason of Retirement, Disability or death, the one-year anniversary of such Termination of Service; and

 

(iii)        the Option Expiration Date.

 

Notwithstanding the foregoing, if a Participant dies after the Participant's Termination of Service but while an Option is otherwise exercisable, the portion of the Option that is vested and exercisable on the date of such Termination of Service shall expire upon the earlier to occur of (y) the Option Expiration Date and (z) the one-year anniversary of the date of death, unless the Plan Administrator determines otherwise.

 

Notwithstanding the foregoing, to the extent required by applicable law, unless employment or services are terminated for Cause, the right to exercise an Option in the event of Termination of Service, to the extent that the Participant is otherwise entitled to exercise an Option on the date of Termination of Service, shall be

 

a.           at least six months from the date of a Participant's Termination of Service if termination was caused by death or Disability; and

 

b.           at least 30 days from the date of a Participant's Termination of Service if termination was caused by other than death or Disability;

 

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c.           but in no event later than the Option Expiration Date.

 

Also notwithstanding the foregoing, in case a Participant's Termination of Service occurs for Cause, all Options granted to the Participant shall automatically expire upon first notification to the Participant of such termination, unless the Plan Administrator determines otherwise. If a Participant's employment or service relationship with the Company is suspended pending an investigation of whether the Participant shall be terminated for Cause, all the Participant's rights under any Option shall likewise be suspended during the period of investigation. If any facts that would constitute termination for Cause are discovered after a Participant's Termination of Service, any Option then held by the Participant may be immediately terminated by the Plan Administrator, in its sole discretion.

 

SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS

 

Notwithstanding any other provisions of the Plan to the contrary, the terms and conditions of any Incentive Stock Options shall in addition comply in all respects with Section 422 of the Code or any successor provision, and any applicable regulations thereunder, including, to the extent required thereunder, the following:

 

8.1         Dollar Limitation

 

To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which a Participant's Incentive Stock Options become exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company and its parent and subsidiary corporations) exceeds $100,000, such portion in excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event the Participant holds two or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options are granted.

 

8.2         Eligible Employees

 

Individuals who are not employees of the Company or one of its parent or subsidiary corporations may not be granted Incentive Stock Options.

 

8.3         Exercise Price

 

Incentive Stock Options shall be granted with an exercise price per share not less than 100% of the Fair Market Value of the Common Stock on the Grant Date and, in the case of an Incentive Stock Option granted to a Participant who owns more than 10% of the total combined voting power of all classes of the stock of the Company or of its parent or subsidiary corporations (a "Ten Percent Stockholder"), shall be granted with an exercise price per share not less than 110% of the Fair Market Value of the Common Stock on the Grant Date. The determination of more than 10% ownership shall be made in accordance with Section 422 of the Code.

 

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8.4         Option Term

 

Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Incentive Stock Option shall not exceed ten years, and in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, shall not exceed five years.

 

8.5         Exercisability

 

An Option designated as an Incentive Stock Option shall cease to qualify for favorable tax treatment as an Incentive Stock Option to the extent it is exercised (if permitted by the terms of the Option) (a) more than three months after the date of a Participant's termination of employment if termination was for reasons other than death or disability, (b) more than one year after the date of a Participant's termination of employment if termination was by reason of disability, or (c) more than six months following the first day of a Participant's leave of absence that exceeds three months, unless the Participant's reemployment rights are guaranteed by statute or contract.

 

8.6         Taxation of Incentive Stock Options

 

In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Participant must hold the shares acquired upon the exercise of an Incentive Stock Option for two years after the Grant Date and one year after the date of exercise. A Participant may be subject to the alternative minimum tax at the time of exercise of an Incentive Stock Option. The Participant shall give the Company prompt notice of any disposition of shares acquired on the exercise of an Incentive Stock Option prior to the expiration of such holding periods.

 

8.7         Code Definitions

 

For the purposes of this Section 8, "disability," "parent corporation" and "subsidiary corporation" shall have the meanings attributed to those terms for purposes of Section 422 of the Code.

 

8.8         Promissory Notes

 

The amount of any promissory note delivered pursuant to Section 7.5 in connection with an Incentive Stock Option shall bear interest at a rate specified by the Plan Administrator, but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to the imputed interest rules) for federal income tax purposes.

 

  -8-  

 

 

SECTION 9. STOCK APPRECIATION RIGHTS

 

9.1         Grant of Stock Appreciation Rights

 

The Plan Administrator may grant Stock Appreciation Rights to Participants at any time on such terms and conditions as the Plan Administrator shall determine in its sole discretion. An SAR may be granted in tandem with an Option or alone ("freestanding"). The grant price of a tandem SAR shall be equal to the exercise price of the related Option. The grant price of a freestanding SAR shall be established in accordance with procedures for Options set forth in Section 7.2. An SAR may be exercised upon such terms and conditions and for the term as the Plan Administrator determines in its sole discretion; provided, however, that, subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the SAR, the maximum term of a freestanding SAR shall be ten years, and in the case of a tandem SAR, (a) the term shall not exceed the term of the related Option and (b) the tandem SAR may be exercised for all or part of the shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option, except that the tandem SAR may be exercised only with respect to the shares for which its related Option is then exercisable.

 

9.2         Payment of SAR Amount

 

Upon the exercise of an SAR, a Participant shall be entitled to receive payment in an amount determined by multiplying: (a) the difference between the Fair Market Value of the Common Stock on the date of exercise over the grant price of the SAR by (b) the number of shares with respect to which the SAR is exercised. At the discretion of the Plan Administrator as set forth in the instrument evidencing the Award, the payment upon exercise of an SAR may be in cash, in shares, in some combination thereof or in any other manner approved by the Plan Administrator in its sole discretion.

 

9.3         Waiver of Restrictions

 

The Plan Administrator, in its sole discretion, may waive any other terms, conditions or restrictions on any SAR under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate.

 

SECTION 10. STOCK AWARDS, RESTRICTED STOCK AND STOCK UNITS

 

10.1       Grant of Stock Awards, Restricted Stock and Stock Units

 

The Plan Administrator may grant Stock Awards, Restricted Stock and Stock Units on such terms and conditions and subject to such repurchase or forfeiture restrictions, if any, which may be based on continuous service with the Company or a Related Company or the achievement of any performance goals, as the Plan Administrator shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award.

 

  -9-  

 

 

10.2       Vesting of Restricted Stock and Stock Units

 

Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to Restricted Stock or Stock Units, or upon a Participant's release from any terms, conditions and restrictions of Restricted Stock or Stock Units, as determined by the Plan Administrator (a) the shares of Restricted Stock covered by each Award of Restricted Stock shall become freely transferable by the Participant subject to the terms and conditions of the Plan, the instrument evidencing the Award, and applicable securities laws, and (b) Stock Units shall be paid in shares of Common Stock or, if set forth in the instrument evidencing the Awards, in cash or a combination of cash and shares of Common Stock. Any fractional shares subject to such Awards shall be paid to the Participant in cash.

 

10.3       Waiver of Restrictions

 

The Plan Administrator, in its sole discretion, may waive the repurchase or forfeiture period and any other terms, conditions or restrictions on any Restricted Stock or Stock Unit under such circumstances and subject to such terms and conditions as the Plan Administrator shall deem appropriate.

 

SECTION 11. OTHER STOCK OR CASH-BASED AWARDS

 

Subject to the terms of the Plan and such other terms and conditions as the Plan Administrator deems appropriate, the Plan Administrator may grant other incentives payable in cash or in shares of Common Stock under the Plan.

 

SECTION 12. WITHHOLDING

 

The Company may require the Participant to pay to the Company the amount of (a) any taxes that the Company is required by applicable federal, state, local or foreign law to withhold with respect to the grant, vesting or exercise of an Award ("tax withholding obligations") and (b) any amounts due from the Participant to the Company or to any Related Company ("other obligations"). Notwithstanding any other provision of the Plan to the contrary, the Company shall not be required to issue any shares of Common Stock or otherwise settle an Award under the Plan until such tax withholding obligations and other obligations are satisfied.

 

The Plan Administrator may permit or require a Participant to satisfy all or part of the Participant's tax withholding obligations and other obligations by (a) paying cash to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the Participant, (c) having the Company withhold a number of shares of Common Stock that would otherwise be issued to the Participant (or become vested, in the case of Restricted Stock) having a Fair Market Value equal to the tax withholding obligations and other obligations, or (d) surrendering a number of shares of Common Stock the Participant already owns having a value equal to the tax withholding obligations and other obligations. The value of the shares so withheld or tendered may not exceed the employer's minimum required tax withholding rate.

 

  -10-  

 

 

SECTION 13. ASSIGNABILITY

 

No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or transferred by a Participant or made subject to attachment or similar proceedings otherwise than by will or by the applicable laws of descent and distribution, except to the extent the Participant designates one or more beneficiaries on a Company-approved form who may exercise the Award or receive payment under the Award after the Participant's death. During a Participant's lifetime, an Award may be exercised only by the Participant. Notwithstanding the foregoing and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit a Participant to assign or transfer an Award, subject to such terms and conditions as the Plan Administrator shall specify.

 

SECTION 14. ADJUSTMENTS

 

14.1       Adjustment of Shares

 

In the event, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares of Common Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or kind of securities of the Company or any other company or (b) new, different or additional securities of the Company or any other company being received by the holders of shares of Common Stock, then the Plan Administrator shall make proportional adjustments in (i) the maximum number and kind of securities available for issuance under the Plan; (ii) the maximum number and kind of securities issuable as Incentive Stock Options as set forth in Section 4.2(d); and (iii) the number and kind of securities that are subject to any outstanding Award and the per share price of such securities, without any change in the aggregate price to be paid therefor. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding.

 

Notwithstanding the foregoing, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Awards. Also notwithstanding the foregoing, a dissolution or liquidation of the Company or a Change of Control shall not be governed by this Section 14.1 but shall be governed by Sections 14.2 and 14.3, respectively.

 

14.2       Dissolution or Liquidation

 

To the extent not previously exercised or settled, and unless otherwise determined by the Plan Administrator in its sole discretion, Awards shall terminate immediately prior to the dissolution or liquidation of the Company. To the extent a vesting condition, forfeiture provision or repurchase right applicable to an Award has not been waived by the Plan Administrator, the Award shall be forfeited immediately prior to the consummation of the dissolution or liquidation.

 

  -11-  

 

 

14.3       Change of Control

 

(a)          Notwithstanding any other provision of the Plan to the contrary, unless the Plan Administrator determines otherwise with respect to a particular Award in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, in the event of a Change of Control, if and to the extent an outstanding Award is not converted, assumed, substituted for or replaced by the Successor Company, then effective immediately prior to the Change of Control such Award shall become fully vested and exercisable or payable, and all applicable restrictions or forfeiture provisions shall lapse, and then terminate upon effectiveness of the Change of Control. If and to the extent the Successor Company converts, assumes, substitutes for or replaces an outstanding Award, the vesting and/or exercisability restrictions and/or forfeiture and/or repurchase provisions applicable to such Award shall not be accelerated or lapse, and all such vesting and/or exercisability restrictions and/or forfeiture and/or repurchase provisions shall continue with respect to any shares of the Successor Company or other consideration that may be received with respect to such Award.

 

(b)          For the purposes of Section 14.3(a), an Award shall be considered converted, assumed, substituted for or replaced by the Successor Company if following the Change of Control the Award confers the right to purchase or receive, for each share of Common Stock subject to the Award immediately prior to the Change of Control, the consideration (whether stock, cash, or other securities or property) received in the Change of Control by holders of Common Stock for each share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Change of Control is not solely common stock of the Successor Company, the Plan Administrator may, with the consent of the Successor Company, provide for the consideration to be received pursuant to the Award, for each share of Common Stock subject thereto, to be solely common stock of the Successor Company substantially equal in fair market value to the per share consideration received by holders of Common Stock in the Change of Control. The determination of such substantial equality of value of consideration shall be made by the Plan Administrator, and its determination shall be conclusive and binding.

 

(c)          Notwithstanding the foregoing, the Plan Administrator, in its sole discretion, may instead provide in the event of a Change of Control that a Participant's outstanding Awards shall terminate upon or immediately prior to such Change of Control and that each such Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (i) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Awards (either to the extent then vested and exercisable, or subject to restrictions and/or forfeiture provisions, or whether or not then vested and exercisable, or subject to restrictions and/or forfeiture provisions, as determined by the Plan Administrator in its sole discretion) exceeds (ii) if applicable, the respective aggregate exercise, grant or purchase price payable with respect to shares of Common Stock subject to such Awards.

 

  -12-  

 

 

(d)          For the avoidance of doubt, nothing in this Section 14.3 requires all Awards to be treated similarly.

 

14.4       Further Adjustment of Awards

 

Subject to Sections 14.2 and 14.3, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation, dissolution or change of control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, lifting restrictions and other modifications, and the Plan Administrator may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Plan Administrator may take such action before or after granting Awards to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation, dissolution or change of control that is the reason for such action.

 

14.5       No Limitations

 

The grant of Awards shall in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

 

14.6       Fractional Shares

 

In the event of any adjustment in the number of shares covered by any Award, each such Award shall cover only the number of full shares resulting from such adjustment.

 

14.7       Section 409A

 

Subject to Section 18.5, but notwithstanding any other provision of the Plan to the contrary, (a) any adjustments made pursuant to this Section 14 to Awards that are considered "deferred compensation" within the meaning of Section 409A shall be made in compliance with the requirements of Section 409A and (b) any adjustments made pursuant to this Section 14 to Awards that are not considered "deferred compensation" subject to Section 409A shall be made in such a manner as to ensure that after such adjustment the Awards either (i) continue not to be subject to Section 409A or (ii) comply with the requirements of Section 409A.

 

  -13-  

 

 

SECTION 15. FIRST REFUSAL; VOTING RESTRICTIONS

 

15.1       First Refusal Rights

 

Until the date on which the initial registration of the Common Stock under Section 12(b) or 12(g) of the Exchange Act first becomes effective, the Company shall have the right of first refusal with respect to any proposed sale or other disposition by a Participant of any shares of Common Stock issued pursuant to an Award. Such right of first refusal shall be exercisable in accordance with the terms and conditions established by the Plan Administrator and set forth in the agreement evidencing the Participant's receipt of the shares or, if applicable, in a shareholders agreement or other similar agreement.

 

15.2       Other Rights and Voting Restrictions

 

Until the date on which the initial registration of the Common Stock under Section 12(b) or 12(g) of the Exchange Act first becomes effective, the Plan Administrator may require a Participant, as a condition to receiving shares under the Plan, to become a party to a stock purchase agreement and/or a shareholders agreement or other similar agreement, in the form designated by the Plan Administrator, pursuant to which Participant grants to the Company and/or its other shareholders certain rights, including but not limited to co-sale rights, and agrees to certain voting restrictions with respect to the Shares acquired by Participant under the Plan.

 

15.3       General

 

The Company's rights under this Section 15 are assignable by the Company at any time.

 

SECTION 16. MARKET STANDOFF

 

In the event of an underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, no person may sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose of or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any shares issued pursuant to an Award granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time as may be requested by the Company or such underwriters; provided, however, that in no event shall such period exceed (a) 180 days after the effective date of the registration statement for such public offering or (b) such longer period requested by the underwriters as is necessary to comply with regulatory restrictions on the publication of research reports (including, but not limited to, NYSE Rule 472 or NASD Conduct Rule 2711, or any successor rules). The limitations of this Section 16 shall in all events terminate two years after the effective date of the Company's initial public offering.

 

  -14-  

 

 

In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, any new, substituted or additional securities distributed with respect to the shares issued under the Plan shall be immediately subject to the provisions of this Section 16, to the same extent the shares issued under the Plan are at such time covered by such provisions.

 

In order to enforce the limitations of this Section 16, the Company may impose stop-transfer instructions with respect to the shares until the end of the applicable standoff period.

 

SECTION 17. AMENDMENT AND TERMINATION

 

17.1       Amendment, Suspension or Termination

 

The Board may amend, suspend or terminate the Plan or any portion of the Plan at any time and in such respects as it shall deem advisable; provided, however, that, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the Plan. Subject to Section 17.3, the Board may amend the terms of any outstanding Award, prospectively or retroactively.

 

17.2       Term of the Plan

 

The Plan shall have no fixed expiration date. After the Plan is terminated, no future Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plan's terms and conditions. Notwithstanding the foregoing, no Incentive Stock Options may be granted more than ten years after the later of (a) the adoption of the Plan by the Board and (b) the adoption by the Board of any amendment to the Plan that constitutes the adoption of a new plan for purposes of Section 422 of the Code. Also notwithstanding the foregoing, no Award may be granted to a resident of California more than ten years after the earlier of the date of adoption of the Plan and the date the Plan is approved by the stockholders.

 

17.3       Consent of Participant

 

The amendment, suspension or termination of the Plan or a portion thereof or the amendment of an outstanding Award shall not, without the Participant's consent, materially adversely affect any rights under any Award theretofore granted to the Participant under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Participant, be made in a manner so as to constitute a "modification" that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. Notwithstanding the foregoing, any adjustments made pursuant to Section 14 shall not be subject to these restrictions.

 

Subject to Section 18.5, but notwithstanding any other provision of the Plan to the contrary, the Board shall have broad authority to amend the Plan or any outstanding Award without the consent of the Participant to the extent the Board deems necessary or advisable to comply with, or take into account, changes in applicable tax laws, securities laws, accounting rules or other applicable law, rule or regulation.

 

  -15-  

 

 

SECTION 18. GENERAL

 

18.1       No Individual Rights

 

No individual or Participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of treatment of Participants under the Plan.

 

Furthermore, nothing in the Plan or any Award granted under the Plan shall be deemed to constitute an employment contract or confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate a Participant's employment or other relationship at any time, with or without cause.

 

18.2       Issuance of Shares

 

Notwithstanding any other provision of the Plan to the contrary, the Company shall have no obligation to issue or deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Company's counsel, such issuance, delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.

 

The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under the laws of any state or foreign jurisdiction, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made.

 

As a condition to the exercise of an Option or any other receipt of Common Stock pursuant to an Award under the Plan, the Company may require (a) the Participant to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Participant's own account and without any present intention to sell or distribute such shares and (b) such other action or agreement by the Participant as may from time to time be necessary to comply with the federal, state and foreign securities laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Plan Administrator may also require the Participant to execute and deliver to the Company a purchase agreement or such other agreement as may be in use by the Company at such time that describes certain terms and conditions applicable to the shares.

 

  -16-  

 

 

To the extent the Plan or any instrument evidencing an Award provides for issuance of stock certificates to reflect the issuance of shares of Common Stock, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.

 

18.3       Indemnification

 

Each person who is or shall have been a member of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by such person in settlement thereof, with the Company's approval, or paid by such person in satisfaction of any judgment in any such claim, action, suit or proceeding against such person, unless such loss, cost, liability or expense is a result of such person's own willful misconduct or except as expressly provided by statute; provided, however, that such person shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf.

 

The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company's certificate of incorporation or bylaws, as a matter of law, or otherwise, or of any power that the Company may have to indemnify or hold harmless.

 

18.4       No Rights as a Stockholder

 

Unless otherwise provided by the Plan Administrator or in the instrument evidencing the Award or in a written employment, services or other agreement, no Award, other than a Stock Award, shall entitle the Participant to any cash dividend, voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award.

 

18.5       Compliance with Laws and Regulations

 

In interpreting and applying the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an "incentive stock option" within the meaning of Section 422 of the Code.

 

  -17-  

 

 

The Plan and Awards granted under the Plan are intended to be exempt from the requirements of Section 409A to the maximum extent possible, whether pursuant to the short-term deferral exception described in Treasury Regulation Section 1.409A-1(b)(4), the exclusion applicable to stock options, stock appreciation rights and certain other equity-based compensation under Treasury Regulation Section 1.409A-1(b)(5), or otherwise. To the extent Section 409A is applicable to the Plan or any Award granted under the Plan, it is intended that the Plan and any Awards granted under the Plan comply with the deferral, payout, plan termination and other limitations and restrictions imposed under Section 409A. Notwithstanding any other provision of the Plan or any Award granted under the Plan to the contrary, the Plan and any Award granted under the Plan shall be interpreted, operated and administered in a manner consistent with such intentions; provided, however, that the Plan Administrator makes no representations that Awards granted under the Plan shall be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to Awards granted under the Plan. Without limiting the generality of the foregoing, and notwithstanding any other provision of the Plan or any Award granted under the Plan to the contrary, with respect to any payments and benefits under the Plan or any Award granted under the Plan to which Section 409A applies, all references in the Plan or any Award granted under the Plan to the termination of the Participant's employment or service are intended to mean the Participant's "separation from service," within the meaning of Section 409A(a)(2)(A)(i) to the extent necessary to avoid subjecting the Participant to the imposition of any additional tax under Section 409A. In addition, if the Participant is a "specified employee," within the meaning of Section 409A, then to the extent necessary to avoid subjecting the Participant to the imposition of any additional tax under Section 409A, amounts that would otherwise be payable under the Plan or any Award granted under the Plan during the six-month period immediately following the Participant's "separation from service," within the meaning of Section 409A(a)(2)(A)(i), shall not be paid to the Participant during such period, but shall instead be accumulated and paid to the Participant (or, in the event of the Participant's death, the Participant's estate) in a lump sum on the first business day after the earlier of the date that is six months following the Participant's separation from service or the Participant's death. Notwithstanding any other provision of the Plan to the contrary, the Plan Administrator, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from or complies with Section 409A.

 

  -18-  

 

 

18.6       Participants in Other Countries or Jurisdictions

 

Without amending the Plan, the Plan Administrator may grant Awards to Eligible Persons who are foreign nationals on such terms and conditions different from those specified in the Plan, as may, in the judgment of the Plan Administrator, be necessary or desirable to foster and promote achievement of the purposes of the Plan and shall have the authority to adopt such modifications, procedures, subplans and the like as may be necessary or desirable to comply with provisions of the laws or regulations of other countries or jurisdictions in which the Company or any Related Company may operate or have employees to ensure the viability of the benefits from Awards granted to Participants employed in such countries or jurisdictions, meet the requirements that permit the Plan to operate in a qualified or tax efficient manner, comply with applicable foreign laws or regulations and meet the objectives of the Plan.

 

18.7       No Trust or Fund

 

The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

 

18.8       Successors

 

All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all the business and/or assets of the Company.

 

18.9       Severability

 

If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator's determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.

 

18.10     Choice of Law and Venue

 

The Plan, all Awards granted thereunder and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of California without giving effect to principles of conflicts of law. Participants irrevocably consent to the nonexclusive jurisdiction and venue of the state and federal courts located in the State of California.

 

  -19-  

 

 

18.11     Financial Reports

 

To the extent required by applicable law, the Company shall provide annual financial statements of the Company to each Participant. Such financial statements need not be audited and need not be issued to key persons whose duties within the Company assure them access to equivalent information.

 

18.12     Legal Requirements

 

The granting of Awards and the issuance of shares of Common Stock under the Plan is subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

 

SECTION 19. EFFECTIVE DATE

 

The effective date (the "Effective Date") is the date on which the Plan is adopted by the Board. If the stockholders of the Company do not approve the Plan within 12 months after the Board's adoption of the Plan, any Incentive Stock Options granted under the Plan will be treated as Nonqualified Stock Options. To the extent required under applicable law, any Award exercised before the stockholders of the Company approve the Plan shall be rescinded if the stockholders of the Company do not approve the Plan by the later of (a) within 12 months before or after the date on which the Board adopts the Plan and (b) prior to or within 12 months of the date on which any Award under the Plan is granted in California.

 

  -20-  

 

 

PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
SUMMARY PAGE

 

Date of
Board Action

 


Action

 

Section/Effect of
Amendment

 

Date of Stockholder
Approval

             
May __, 2015   Initial Plan Adoption   N/A   TBD

 

 

 

 

APPENDIX A

 

DEFINITIONS

 

As used in the Plan:

 

"Acquired Entity" means any entity acquired by the Company or a Related Company or with which the Company or a Related Company merges or combines.

 

"Acquisition Price" means the fair market value of the securities, cash or other property, or any combination thereof, receivable or deemed receivable upon a Change of Control in respect of a share of Common Stock, as determined by the Plan Administrator in its sole discretion.

 

"Award" means any Option, Stock Appreciation Right, Stock Award, Restricted Stock, Stock Unit or cash-based award or other incentive payable in cash or in shares of Common Stock, as may be designated by the Plan Administrator from time to time.

 

"Board" means the Board of Directors of the Company.

 

"Cause," unless otherwise defined in the instrument evidencing an Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means dishonesty, fraud, serious or willful misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conduct prohibited by law (except minor violations), in each case as determined by the Company's chief human resources officer or other person performing that function or, in the case of directors and executive officers, the Board, whose determination shall be conclusive and binding.

 

"Change of Control," unless the Plan Administrator determines otherwise with respect to an Award at the time the Award is granted or unless otherwise defined for purposes of an Award in a written employment, services or other agreement between the Participant and the Company or a Related Company, means consummation of:

 

(a)          a merger or consolidation of the Company with or into any other company or other entity;

 

(b)          a sale, in one transaction or a series of transactions undertaken with a common purpose, of all of the Company's outstanding voting securities; or

 

(c)          a sale, lease, exchange or other transfer, in one transaction or a series of related transactions, undertaken with a common purpose of all or substantially all of the Company's assets.

 

  R-B  

 

 

Notwithstanding the foregoing, a Change of Control shall not include (i) a merger or consolidation of the Company in which the holders of the outstanding voting securities of the Company immediately prior to the merger or consolidation hold at least a majority of the outstanding voting securities of the Successor Company immediately after the merger or consolidation; (ii) a sale, lease, exchange or other transfer of all or substantially all of the Company's assets to a majority-owned subsidiary company; (iii) a transaction undertaken for the principal purpose of restructuring the capital of the Company, including, but not limited to, reincorporating the Company in a different jurisdiction, converting the Company to a limited liability company or creating a holding company; or (iv) any transaction that the Board determines is not a Change of Control for purposes of the Plan.

 

Where a series of transactions undertaken with a common purpose is deemed to be a Change of Control, the date of such Change of Control shall be the date on which the last of such transactions is consummated.

 

"Code" means the Internal Revenue Code of 1986, as amended from time to time.

 

"Common Stock" means the common stock, par value $0.0001 per share, of the Company.

 

"Company" means StartEngine Crowdfunding, Inc., a Delaware corporation.

 

"Disability," unless otherwise defined by the Plan Administrator for purposes of the Plan or in the instrument evidencing an Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means a mental or physical impairment of the Participant that is expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Participant to be unable to perform his or her material duties for the Company or a Related Company and to be engaged in any substantial gainful activity, in each case as determined by the Company's chief human resources officer or other person performing that function or, in the case of directors and executive officers, the Board, each of whose determination shall be conclusive and binding.

 

"Effective Date" has the meaning set forth in Section 19.

 

"Eligible Person" means any person eligible to receive an Award as set forth in Section 5.

 

"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time.

 

"Fair Market Value" means the per share fair market value of the Common Stock as established in good faith by the Plan Administrator or, if the Common Stock is publicly traded, the closing price for the Common Stock on any given date during regular trading, or if not trading on that date, such price on the last preceding date on which the Common Stock was traded, unless determined otherwise by the Plan Administrator using such methods or procedures as it may establish.

 

"Grant Date" means the later of (a) the date on which the Plan Administrator completes the corporate action authorizing the grant of an Award or such later date specified by the Plan Administrator and (b) the date on which all conditions precedent to an Award have been satisfied, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date.

 

  R-B  

 

 

"Incentive Stock Option" means an Option granted with the intention that it qualify as an "incentive stock option" as that term is defined for purposes of Section 422 of the Code or any successor provision.

 

"Nonqualified Stock Option" means an Option other than an Incentive Stock Option.

 

"Option" means a right to purchase Common Stock granted under Section 7.

 

"Option Expiration Date" means the last day of the maximum term of an Option.

 

"Option Term" means the maximum term of an Option as set forth in Section 7.3.

 

"Participant" means any Eligible Person to whom an Award is granted.

 

"Plan" means the StartEngine Crowdfunding, Inc. 2015 Equity Incentive Plan.

 

"Plan Administrator" has the meaning set forth in Section 3.1.

 

"Related Company" means any entity that, directly or indirectly, is in control of, is controlled by or is under common control with the Company.

 

"Restricted Stock" means an Award of shares of Common Stock granted under Section 10, the rights of ownership of which are subject to restrictions prescribed by the Plan Administrator.

 

"Retirement," unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means "Retirement" as defined for purposes of the Plan by the Plan Administrator or the Company's chief human resources officer or other person performing that function or, if not so defined, means Termination of Service on or after the date the Participant reaches "normal retirement age," as that term is defined in Section 411(a)(8) of the Code.

 

"Section 409A" means Section 409A of the Code.

 

"Securities Act" means the Securities Act of 1933, as amended from time to time.

 

"Stock Appreciation Right" or "SAR" means a right granted under Section 9.1 to receive the excess of the Fair Market Value of a specified number of shares of Common Stock over the grant price.

 

"Stock Award" means an Award of shares of Common Stock granted under Section 10, the rights of ownership of which are not subject to restrictions prescribed by the Plan Administrator.

 

  R-B  

 

 

"Stock Unit" means an Award denominated in units of Common Stock granted under Section 10.

 

"Substitute Awards" means Awards granted or shares of Common Stock issued by the Company in substitution or exchange for awards previously granted by an Acquired Entity.

 

"Successor Company" means the surviving company, the successor company, the acquiring company or its parent, as applicable, in connection with a Change of Control.

 

"Termination of Service" means a termination of employment or service relationship with the Company or a Related Company for any reason, whether voluntary or involuntary, including by reason of death, Disability or Retirement. Any question as to whether and when there has been a Termination of Service for the purposes of an Award and the cause of such Termination of Service shall be determined by the Company's chief human resources officer or other person performing that function or, with respect to directors and executive officers, by the Board, whose determination shall be conclusive and binding. Transfer of a Participant's employment or service relationship between the Company and any Related Company shall not be considered a Termination of Service for purposes of an Award. Unless the Board determines otherwise, a Termination of Service shall be deemed to occur if the Participant's employment or service relationship is with an entity that has ceased to be a Related Company. A Participant's change in status from an employee of the Company or a Related Company to a nonemployee director, consultant, advisor or independent contractor of the Company or a Related Company, or a change in status from a nonemployee director, consultant, advisor or independent contractor of the Company or a Related Company to an employee of the Company or a Related Company, shall not be considered a Termination of Service.

 

"Vesting Commencement Date" means the Grant Date or such other date selected by the Plan Administrator as the date from which an Award begins to vest.

 

  R-B  

 

Exhibit 6.2

 

STARTENGINE​ ​CROWDFUNDING,​ ​INC.

EMPLOYMENT​ ​AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (“​Agreement​”) is entered into effective January 1, 2020. (“​Effective Date​”), by and between StartEngine Crowdfunding, Inc., a Delaware corporation​ ​(the​ ​“​Company​”),​ ​and​ ​Howard​ ​Marks​ ​(“​Employee​”).

 

ARTICLE 1

EMPLOYMENT

 

1.1  Employment​. Company hereby employs Employee, and Employee accepts such employment and agrees to perform services for Company, for the period and upon the other terms​ ​and​ ​conditions​ ​set​ ​forth​ ​in​ ​this​ ​Agreement.

 

1.2  Term​. Company and Employee each acknowledge that Employee has worked for Company prior to the Term (as defined below) and this Agreement replaces and supersedes any prior employment agreement that may have existed between the parties hereto. Unless terminated at an earlier date in accordance with ​ARTICLE 3 of this Agreement, the term of Employee’s employment shall be for a period of two (2) years, commencing on January 1, 2020 (the “​Initial Term​”). After the Initial Term, this Agreement shall automatically renew for additional one (1) year periods (each a “​Renewal Term​” and, together with the Initial Term, the “​Term​”), unless either party hereto gives notice to the other party of its intent to not renew at least sixty (60) days prior to the end of the Initial Term or Renewal Term. For the avoidance of doubt,​ ​the​ ​non-renewal​ ​of​ ​the​ ​Term​ ​shall​ ​not​ ​constitute​ ​a​ ​termination​ ​under​ ​ARTICLE​ ​3​.

 

1.3  Position​ ​and​ ​Duties​.

 

1.3.1  Service with Company​. Employee’s position with Company is CEO, and during the Term, Employee agrees to perform such reasonable employment duties as Company’s Board of Directors (the “​Board​”) assigns to Employee from time to time and are customary​ ​for​ ​Employee’s​ ​position​ ​with​ ​the​ ​Company.

 

1.3.2  Performance​. Employee agrees to serve Company faithfully and to the best of Employee’s ability and to devote Employee’s full productive time, attention, and efforts to the business and affairs of Company. Employee hereby confirms that Employee is under no contractual commitments inconsistent with Employee’s ​obligations set forth in this Agreement and that, during the Term, Employee will not render or perform services for any other corporation, firm, entity, or person which are inconsistent with the provisions of this Agreement. While Employee remains employed by Company, Employee may participate in reasonable charitable activities and personal investment activities so long as such activities do not interfere with​ ​the​ ​performance​ ​of​ ​Employee’s​ ​obligations​ ​under​ ​this​ ​Agreement.

 

 

 

1.4  Compensation​.

 

1.4.1  Base Salary​. As compensation in full for all services to be rendered by Employee under this Agreement, Company shall pay to Employee $432,000 as an annual base salary, less deductions and withholdings, which salary shall be paid in accordance with Company’s normal payroll procedures and policies (“​Base Salary​”). The Base Salary shall increase​ ​to​ ​$518,000​ ​beginning​ ​on​ ​January​ ​1,​ ​2021. Thereafter, the salary shall increase by 20% if this agreement renews in subsequent years.

 

1.4.2  Bonuses​. While employed by Company, Employee shall also be eligible to participate in all employee bonus plans of Company, if any. Employee shall also be eligible to receive bonuses (a) in an amount up to 60% of Employee’s then existing Base Salary if the Company achieves its revenue goals; and (b) in an amount up to 100% of Employee’s then existing Base Salary exceeds its revenue goals by 120%. Any bonuses earned pursuant to subsections (a) and (b) of this Section 1.4.2 shall be payable to the Employee within thirty (30) days​ ​of​ ​the​ ​end​ ​of​ ​the​ ​applicable​ ​calendar​ ​year.

 

1.4.3  Option Plan. ​No options.

 

1.4.4  Vacation and Sick Leave. Employee shall be entitled to take vacation days​ ​and​ ​sick​ ​leave​ ​days​ ​in​ ​accordance​ ​with​ ​Company’s​ ​policies.

 

1.4.5  Participation in Benefit Plans​. While Employee is employed by Company, Employee shall also be eligible to participate in all employee benefit plans or programs (including life, health, and disability insurance, and any 401(k) plan) of Company to the​ ​extent​ ​Company​ ​has​ ​such​ ​a​ ​plan​ ​and​ ​Employee​ ​meets​ ​the​ ​requirements​ ​for​ ​the​ ​plan.

 

1.4.6  Other Expenses​. Company will pay or reimburse Employee for all reasonable and necessary out-of-pocket expenses incurred by Employee in the performance of Employee’s duties under this Agreement, subject to Company’s normal policies for expense verification.

 

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ARTICLE 2

FAIR​ ​DEALING​ ​COVENANTS​ ​AND​ ​REMEDIES

 

2.1  Non Competition Covenant​. In consideration of this Agreement and in exchange for the promises made to Employee by Company in this Agreement, and in order to protect the legitimate business interests of Company and the goodwill of Company generated by Employee during the Term, and given Employee’s access to Proprietary Information that, if disclosed, would assist a business in competition with Company, Employee covenants and agrees that during the Term, Employee shall not, subject to this ​ARTICLE 2​, without the express written approval of the Board, directly or indirectly, in one or a series of transactions, own, manage, operate, control, invest or acquire an interest in, or otherwise engage in or participate in, whether as a proprietor, partner, stockholder, member, lender, director, officer, employee, joint venturer, investor, lessor, supplier, customer, agent, representative or other participant, any Competitive Business anywhere in the Market, without regard to (A) whether the Competitive Business has its principal place of business, office or other business facilities within or without the Market, (B) whether any of the activities of Employee occur or are performed within or without the Market, or (C) whether Employee resides, or reports to an office, within or without the Market; provided, however, that (x) Employee may, anywhere in the Market, directly or indirectly, in one or a series of transactions, own, invest or acquire an interest in up to five percent (5%) of the outstanding shares of capital stock of any corporation listed on a national securities exchange or publicly traded on NASDAQ, or that (y) Employee may accept employment with a successor company to Company. The term “​Competitive Business​” as used in this ​Section 2.1 shall mean any business whose products or services are substantially similar to those designed, developed, marketed, offered, sold or distributed by the Company in connection with Company’s business, or proposed in the then-current written business plan of Company to be designed, developed, marketed, offered, sold or distributed by Company in connection with Company’s business, as of the date of termination of Employee’s employment with Company. The term “​Market​” as used in this ​Section 2.1 shall mean anywhere within the United States, or any other geographical locations that Company conducts business, or Company contemplates conducting business in the then-current written business plan of Company, as of the later of (i) the date of termination of this Agreement, (ii) the date of expiration of the Term, or (iii) Employee’s last date of employment with Company. Notwithstanding the foregoing, nothing in this Agreement shall prohibit Employee from serving as a director, manager or officer of (i) a business that is not in competition with the Company, [or] (ii) StartEngine LLC, StartEngine Fund1 and StartEngine Partners or any of their respective affiliates.

 

2.2  Non solicitation Covenant​. In consideration of this Agreement and in exchange for the promises made to Employee by Company in this Agreement, and in order to protect the legitimate business interests of Company and the goodwill of Company generated by Employee and others during the Term, Employee covenants and agrees that during the Term and for a period of one (1) year from the later of (i) date of termination of this Agreement or (ii) the date of expiration of the Term, Employee will not, directly or indirectly, solicit anyone connected with Company. Solicitation includes any employee, independent contractor, medical professional, referral source, and supplier for which the relationship was developed while working for Company, or calling on or otherwise soliciting business from any of the customers of Company which, as of the date of termination of Employee’s employment with Company, were listed (or ought to have been listed) in Company’s records, regarding any service or product that competes directly or indirectly with any service or product provided or marketed by or actually under development or active consideration by Company as of the date of termination of Employee’s​ ​employment​ ​with​ ​Company.

 

2.3  Non disparagement Covenant​. During the Term and at all times thereafter, (a) Employee will not make, any false, defamatory, or disparaging statements regarding Company, its business, its members or their respective officers, directors, managers, shareholders, employees, partners or members whether written, oral or via any medium, or encourage or solicit any other person to do so, and (b) Company will not make, any false, defamatory, or disparaging statements regarding Employee whether written, oral or via any medium, or encourage or solicit any​ ​other​ ​Person​ ​to​ ​do​ ​so.

 

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2.4  Confidentiality Covenant. ​Except Employee’s right to access and use of (and that of its agents and representatives) the Proprietary Information in the event that any legal proceedings are brought or threatened against Employee by any person, including without limitation a third party, or a governmental entity, or to enforce Employee’s rights under this Agreement, Employee shall not, without the Board’s prior written consent, disclose to any person, firm or corporation, any trade secrets, financial information, marketing strategies, business plans, existing or potential customer lists and addresses or Proprietary Information of Company or its affiliates, which Employee may have acquired in the course of Employee’s employment relationship with Company. The term “​Proprietary Information​” shall mean all confidential, proprietary, or other knowledge, data or information of Company or its affiliates. Proprietary Information includes, but is not limited to, (i) trade secrets and other information of or about Company or its affiliates that is commercially valuable, (ii) information of or about Company or its affiliates regarding plans for research, development, new products, marketing and selling, business plans, budgets and unpublished financial statements, licenses, process and costs, suppliers and customers; and (iii) information regarding the skills and compensation of other Employees of Company or its affiliates. This Agreement does not cover, and the term Proprietary Information does not include, Employee’s exercise and use of Employee’s own skill, knowledge, know-how, and experience to whatever extent and in whichever way Employee may wish. Proprietary Information does not include information that is generally known in the trade or industry and which is not gained because of a breach of this Agreement. This Agreement also does not cover any disclosure of Proprietary Information by Employee required by law or in connection with applicable legal process (by deposition, interrogatory, request for documents, subpoena,​ ​or​ ​similar​ ​process).

 

2.5  Remedies​. In the event of a breach of any provisions of this ​ARTICLE 2 or Section 3.5​, the non-breaching party shall be entitled to recover any damages caused by reason of such breach, together with any and all proceeds, funds, payments and proprietary interests, of every kind and description, arising from, or attributable to, such breach, and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any such breach or threatened breach of such provisions, and because such breach or threatened breach will constitute an irreparable harm to Company, Company may, in its sole discretion, in addition to any other available remedies, apply to any court of law or equity of competent jurisdiction for and be entitled to specific performance and/or injunctive relief in order to enforce or prevent any violation of such provisions, without the necessity of posting any bond or other surety as a condition to the issuance or granting of such relief. Nothing herein shall be construed as prohibiting either party from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages from such party. If it is finally determined by a court of competent jurisdiction that Company is entitled to an injunction against Employee as a result of Employee’s breach of such provisions, then Company shall be entitled to recover from Employee its reasonable attorneys’ fees and costs in enforcing such provisions. If it is finally determined that the Company is not entitled to an injunction against Employee as a result of Employee’s alleged breach of such provisions, than Employee shall be entitled to recover from Company his reasonable attorneys’ fees and costs in defending​ ​against​ ​Company’s​ ​allegations​ ​that​ ​Employee​ ​breached​ ​such​ ​provisions.

 

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ARTICLE 3

TERMINATION​ ​OF​ ​EMPLOYMENT

 

3.1  Grounds for Termination​. Employee’s employment shall terminate prior to the expiration​ ​of​ ​the​ ​Term​ ​set​ ​forth​ ​in​ ​Section​ ​1.2​,​ ​at​ ​any​ ​time:

 

(a) Employee​ ​dies;

 

(b) Employee develops or is otherwise discovered to have any mental or physical condition that renders Employee unable to perform the essential functions of Employee’s​ ​position​ ​with​ ​reasonable​ ​accommodation​ ​for​ ​a​ ​period​ ​of​ ​180​ ​consecutive​ ​days;

 

(c) The Board elects to terminate this Agreement for Cause and notify Employee​ ​in​ ​writing​ ​of​ ​such​ ​election;

 

(d) The Board elects to terminate this Agreement without Cause and notify Employee​ ​in​ ​writing​ ​of​ ​such​ ​election;

 

(e) Employee elects to terminate this Agreement for Good Reason and notifies​ ​Company​ ​in​ ​writing​ ​of​ ​such​ ​election;​ ​or

 

(f) Employee elects to terminate this Agreement without Good Reason and notifies​ ​Company​ ​of​ ​such​ ​election.

 

If this Agreement is terminated pursuant to clause (a), (b), (c), or (e) of this ​Section 3.1​, such termination shall be effective immediately. If this Agreement is terminated pursuant to clause (d) or (f) of this ​Section 3.1​, such termination shall be effective thirty (30) days after delivery of the notice of termination; ​provided​, that for a termination pursuant to clause (f) only, Company may at its discretion elect to have Employee cease to provide services to Company immediately, ​provided further ​that in any case during such 30-day notice period Employee shall be​ ​entitled​ ​to​ ​receive​ ​Employee’s​ ​Base​ ​Salary.

 

3.2  Cause Defined​. “​Cause​” means any of: (i) any act of personal dishonesty taken by Employee in connection with his responsibilities as an employee which is intended to result in substantial personal enrichment of Employee; (ii) Employee’s conviction of a felony; (iii) a willful act by Employee which constitutes misconduct and is injurious to the Company; or (iv) continued willful violations by Employee of Employee’s obligations to the Company after there has been delivered to Employee a written demand for performance from the Company which describes the basis for the Company’s belief that Employee has not substantially performed his duties.

 

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3.3  Good Reason Defined​. “​Good Reason​” means: shall be deemed to occur if any of the following occurs without the Employee’s written consent: (A) a material change in the Employee’s authority or operating responsibilities, provided that neither a mere change in title following a Change in Control to a position that is substantially similar to the position held prior to the Change in Control with respect to the operations of the Company nor an immaterial change in responsibilities shall, by itself, constitute a material change in authority or operating responsibilities; (B) a failure to pay, or a reduction in, Employee’s base salary or minimum bonus (if applicable), other than a reduction as a result of an across-the-board reduction in base salaries or minimum bonuses for all management-level employees of the Company by an average percentage not less than the percentage reduction of Employee’s base salary or minimum bonus; or (C) relocation of Employee’s principal place of employment to a facility or location more than thirty (30) miles from the Employee’s current location, which for Employee shall be Santa Monica, California. A “​Change in Control​” shall mean either: (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation or stock transfer, but excluding any equity financing or such transaction effected primarily for the purpose of changing the domicile of the Company), unless the Company’s stockholders of record immediately prior to such transaction or series of related transactions hold, immediately after such transaction or series of related transactions, at least 50% of the voting power of the surviving or acquiring entity (provided that the sale by the Company of their securities for the purposes of raising additional funds shall not constitute a Change in Control hereunder); or (ii) a sale of all or substantially​ ​all​ ​of​ ​the​ ​assets​ ​of​ ​the​ ​Company.

 

In the event that Employee terminates Employee’s employment for Good Reason pursuant to clause (e) of ​Section 3.1 and Company objects in writing to Employee’s determination that there was proper Good Reason for such termination within twenty (20) days after Company is notified of such termination, the matter shall be resolved by arbitration in accordance with the provisions of ​Section 4.1​. If Company fails to object to any such determination of Good Reason in writing within such 20-day period, it shall be deemed to have waived its right to object to that determination. If such arbitration determines that there was not proper Good Reason for termination, such termination shall be deemed to be a termination pursuant to clause (f) of ​Section 3.1 and Employee shall not be entitled to receive the Continued Benefits​ ​contemplated​ ​by​ ​Section​ ​3.6​.

 

3.4  Effect of Termination​. Notwithstanding any termination of this Agreement, Employee, in consideration of Employee’s employment hereunder to the date of such termination, shall remain bound by the provisions of this Agreement which specifically relate to periods, activities, or obligations upon or subsequent to the termination of Employee’s employment.  

 

3.5  Surrender of Records and Property​. Upon termination of Employee’s employment with Company, Employee shall deliver promptly to Company all records, manuals, books, blank forms, documents, letters, memoranda, notes, notebooks, reports, data, tables, calculations, or copies thereof that relate in any way to the business, products, practices, or techniques of Company, and all other property, trade secrets, and Proprietary Information of Company, including, but not limited to, all documents that in whole or in part contain any trade secrets or Proprietary Information of Company, which in any of these cases are in Employee’s possession​ ​or​ ​under​ ​Employee’s​ ​control.

 

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3.6  Salary and Benefit Continuation​. If Employee’s employment by Company is terminated pursuant to clause (a), (b), (d) or (e) of ​Section 3.1​, Company shall continue to pay to Employee the Base Salary (less any payments received by Employee from any disability income insurance policy provided to Employee by Company) and shall continue to provide health insurance benefits for Employee (such continued Base Salary and health insurance benefits, together, the “​Continued Benefits​”) for three (3) months from the date of the termination. If this Agreement is terminated pursuant to clauses (c) or (f) of ​Section 3.1​, Employee’s right to Base Salary and any benefits shall immediately terminate, except as may otherwise be required by applicable​ ​law.

 

Notwithstanding the foregoing provisions of this ​Section 3.6​, Employee shall only be entitled to receive the Continued Benefits if Employee signs a release of all other claims arising out of this Agreement in a form reasonably acceptable to both Company and Employee (the “​Release​”). If Employee does not sign the Release, or Employee signs the Release and then revokes or rescinds, Employee shall not be entitled to receive any Continued Benefits under the provisions of this ​Section 3.6 from the date of termination of Employee’s employment with Company. If, after termination and while any Continued Benefits are being paid, Employee violates any of the provisions of ​ARTICLE 2 or ​Section 3.5​, any obligation of Company under this ​Section 3.6 (which can only arise if Employee signs, and does not revoke or rescind, an effective​ ​Release)​ ​shall​ ​cease​ ​on​ ​the​ ​date​ ​of​ ​such​ ​violation.  

 

ARTICLE 4

SETTLEMENT​ ​OF​ ​DISPUTES

 

4.1  Arbitration. ​The parties shall cooperate in good faith to resolve any dispute that may arise under or with respect to this Agreement after the date hereof (each, a “​Dispute​”); provided, however, that the parties shall work in good faith to resolve any such Dispute for a reasonable period of time (not to exceed fifteen (15) business days, unless otherwise agreed by the parties) and any Dispute that cannot be resolved by mutual agreement shall be resolved by arbitration in accordance with the rules of JAMS (using the Streamlined Arbitration Rules and Procedures of JAMS, if available). Any such arbitration shall be conducted in Los Angeles, California by a panel of one arbitrator mutually acceptable to the parties or, if the parties are unable to agree on an arbitrator, the arbitrator shall be appointed in accordance with the rules of JAMS. The parties agree that the existence, conduct and content of any arbitration pursuant to this Section 4.1 shall be kept confidential and no party shall disclose to any Person any information about such arbitration, except in connection with such arbitration or as may be required by law. The decision and award of any such arbitrator shall be final, non-appealable and binding upon the parties involved in such Dispute, and enforceable by any such party in any court of competent jurisdiction. Notwithstanding the foregoing, (A) any party may elect to seek equitable relief from a court of competent jurisdiction with respect a Dispute, and (B) if a party is seeking equitable relief in connection with any Dispute, such party may elect to seek such remedy from a court of competent jurisdiction pursuant to Section 2.5, Section 4.2, and Section 4.3 without submitting such Dispute to arbitration pursuant to this Section 4.1. The parties acknowledge that monetary damages may be an inadequate remedy for any breach of this Agreement by any party and, therefore, any party to whom performance is owed under any provision of this Agreement shall be entitled to an injunction to be issued, or specific enforcement to be required, to require any other party to this Agreement to perform its obligations under this Agreement and prevent any other party from breaching, or continuing to breach,​ ​any​ ​provision​ ​of​ ​this​ ​Agreement.

 

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4.2  JURISDICTION AND VENUE​. SUBJECT TO THE FOREGOING, THE PARTIES AGREE THAT JURISDICTION AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS AGREEMENT SHALL PROPERLY (BUT NOT EXCLUSIVELY) LIE IN ANY FEDERAL OR STATE COURT LOCATED IN LOS ANGELES, CALIFORNIA. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT SUCH COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION. THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY FOR SERVICE BY ANY OTHER MEANS​ ​PROVIDED​ ​BY​ ​STATUTE​ ​OR​ ​RULE​ ​OF​ ​COURT.

 

4.3  WAIVER OF JURY TRIAL. ​THE PARTIES HERETO WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING UNDER THIS AGREEMENT OR ANY ACTION OR PROCEEDING ARISING OUT OF THE TRANSACTIONS CONTEMPLATED HEREBY, REGARDLESS OF WHICH PARTY INITIATES SUCH ACTION​ ​OR​ ​PROCEEDING  

 

ARTICLE 5

INTERPRETATION

 

5.1  Governing Law. The Agreement shall be governed by Delaware law, without regard to conflict of laws principles that would result in the application of any law other than the laws​ ​of​ ​the​ ​State​ ​of​ ​Delaware.

 

5.2  Notices​. All notices and other communications (“​Notices​”) shall be in writing and may be delivered (i) in person, with the date of notice being the date of personal delivery, (ii) by United States Mail, postage prepaid for certified or registered mail, return receipt requested, with the date of notice being the date of the postmark on the return receipt, or (iii) by nationally recognized delivery service such as Federal Express, with the date of notice being the date of delivery as shown on the confirmation provided by the delivery service. Notices shall be addressed to the following addresses, or such other address as one party shall provide the other parties:

 

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If​ ​to​ ​Company:

 

StartEngine​ ​Crowdfunding,​ ​Inc.

Attn:​ ​Secretary

8687 Melrose Ave 7th Floor - Green Building, Los Angeles, CA 90069

 

If​ ​to​ ​Employee:

 

Howard Marks

615 Arden Drive, Beverly Hills, CA 90210

 

5.3  Successors and Assigns. ​The Agreement shall inure to the benefit of and be binding upon Company and its successors and assigns. In view of the personal nature of the services to be performed under the Agreement by Employee, Employee shall not have the right to assign or transfer any of Employee’s rights, obligations or benefits under the Agreement, except as otherwise noted in the Agreement; ​provided, however​, in the event of Employee’s death or disability, Employee’s estate, heirs and personal representatives shall be entitled to receive any amounts due and owing to Employee hereunder and enforce the terms and conditions of​ ​this​ ​Agreement.

 

5.4  Waiver. A waiver by Company or Employee of a breach of any provision of the Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach​ ​by​ ​the​ ​other​ ​party.

 

5.5  Entire Agreement​. The Agreement constitutes the entire agreement between Employee and Company regarding the terms and conditions of Employee’s employment relationship with Company. The Agreement supersedes all prior negotiations, representations or agreements between Employee and Company, whether written or oral, concerning Employee’s employment​ ​relationship​ ​with​ ​Company.

 

5.6  Attorney’s Fees. If any action is instituted hereafter to enforce any terms of this Agreement or if this Agreement is asserted as a defense in any action, the prevailing party in such action shall be entitled to recover from the other party a reasonable sum for costs, expenses, and​ ​attorneys’​ ​fees​ ​incurred​ ​in​ ​prosecuting​ ​or​ ​defending​ ​the​ ​action.

 

5.7  Severability. If any one or more of the provisions (or any part thereof) of the Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions (or any part thereof) shall not in any way be affected or​ ​impaired​ ​thereby.

 

9

 

 

5.8  Amendments​. The Agreement may only be modified or amended by a supplemental​ ​written​ ​agreement​ ​signed​ ​by​ ​Employee​ ​and​ ​Company.

 

5.9  Computation of time. ​When in this Agreement action is required within a certain​ ​number​ ​of​ ​days​ ​after​ ​the​ ​occurrence​ ​of​ ​an​ ​event,​ ​the​ ​day​ ​of​ ​the​ ​event​ ​shall​ ​not​ ​be​ ​counted.

 

IN WITNESS WHEREOF, each of the undersigned parties has executed and delivered this​ ​Agreement​ ​as​ ​of​ ​the​ ​Effective​ ​Date.

 

COMPANY:

 

  STARTENGINE​ ​CROWDFUNDING,​ ​INC. a​ ​Delaware​ ​corporation  
     
  By: /s/ Ron Miller  
                                                 
  Name: Ron Miller  
  Title: Chairman of the board  

 

EMPLOYEE:

 

  By: /s/ Howard Marks  
       
  ​Name:   Howard Marks  
  Title: CEO  

 

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Exhibit 6.3

 

TECHNOLOGY AGREEMENT

ACCOUNT FORM

 

This TECHNOLOGY AGREEMENT, which consists of this account form (the “Account Form”) and the associated Terms and Conditions (the “Terms and Conditions”) attached hereto as Exhibit A, is made and entered into as of October 30, 2018 (the “Effective Date”) between StartEngine Crowdfunding Inc (collectively referred to as “Issuer,” “you,” “your”) for its offering of securities entitled StartEngine STO (“Offering”), and FundAmerica, LLC (“FundAmerica”, “Technology Provider,” “we,” “our,” or “us”).

 

RECITALS

 

WHEREAS, FundAmerica is a technology firm providing engineering and technology services;

 

WHEREAS, FundAmerica has created, owns and maintains proprietary tools and technology, negotiated third-party integrations, and has operational processes to provide certain back-end tools, and technology, to persons conducting, managing and/or enabling technology-driven capital raises via offerings of debt and/or equity securities, and for maintaining and managing investor data, reporting and communications (the “Technology”); and,

 

WHEREAS, Issuer intends to use technology to engage in and manage one or more equity and/or debt securities offerings;

 

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties have agreed to execute this Technology Agreement (the “Agreement”) to memorialize the terms and conditions for which FundAmerica will provide Technology to Issuer.

 

The parties hereby agree as follows:

 

1. Financial Technology

FundAmerica will provide the Technology to Issuer, subject to the Terms and Conditions contained in the attached Exhibit A. Such Technology include and are accessible via our Application Programming Interface (the “API”) and our Invest Now technology (“Invest Now”).

 

2. Fees

Issuer shall pay fees as indicated in Schedule A included by reference herin.

 

Agreed as of the date first written above, by and between:

 

 

 

 

STARTENGINE CROWDFUNDING INC, AS ISSUER

 

By /s/ Howard Marks
Name Howard Marks
Title CEO.

 

FUNDAMERICA, LLC

 

By /s/ Scott Purcell
Name Scott Purcell
Title CEO

 

EXHIBIT A

TECHNOLOGY AGREEMENT

TERMS AND CONDITIONS

 

1. DEFINITIONS. For purposes of this Agreement:

 

1. “Agreement” means this Technology Agreement, which consists of the Account Form and this Exhibit A Terms and Conditions.

 

2. “Issuer” means the company and any related party, subsidiary, agent, representative, administrator, successor in interest, or other person or entity acting on behalf of or in place of the person or entity who is using (or enabling the use of) FundAmerica Technology to aid in managing a raise or capital and who is identified on the Account Form as the Issuer.

 

3. “Materials” means all Issuer data, information, disclosures, advertising, works of authorship, inventions, drawings, logos, software code or other communications related to the Offering.

 

4. “Account Form” means the Technology Agreement Account Form.

 

5. “Investor” or “Subscriber” means a person that commits to purchase equity or debt securities of an Issuer in an Offering.

 

6. “Offering” means Issuer’s offering of debt or equity securities as it raises capital pursuant to SEC and/or state regulations.

 

7. “Person” means any individual, company, limited liability company, corporation, trust, estate, association, nominee or other entity.

 

8. “Technology” has the meaning set forth in the Account Form.

 

9. “Term” has the meaning set forth in Section 8.

 

10. “User” means Issuer, its customers and any other person using the Technology in any way.

 

11. “Information” means any data or information, including personally identifiable information, provided by or relating to Users in connection with any Offering, whether provided directly by User or Funding Platform in connection with the Technology.

 

 

 

 

12. “Invest Now” means FundAmerica’s proprietary transaction engine to simplify engaging with the Technology, generally with “plug & play” access, both for posting data associated with an offering into our system (the “Wizard”) and for investors to commit to an offering (the “Button”).

 

13. “API” means FundAmerica’s Application Programming Interface, which is a set of code and programming rules which enable people to connect their software to our systems. The API is secured with a “key” which triggers access, for that specific account, to services and data access.

 

2. TECHNOLOGY AND HOSTING

 

1. API, Invest Now.

 

2. API and Invest Now provide access to various Technology, which may be selectively used at Issuer’s option pursuant to FundAmerica policies in effect at the time of each desired use. Technology may also be selectively enabled or disabled by FundAmerica, in our sole discretion, limiting which Technology, features and tools Issuer has access to use, and at what fees.

 

3. Investor & Cap Table Management Technology, Data Access.

 

4. FundAmerica will provide Issuer with tools to manage its investors (including changes and updates), communicate with investors, view its capitalization table, and access historical data. FundAmerica provides these tools and access on a Software-as-a-service (“SaaS”) basis for an Issuer to manage its own Cap Table and shareholder records. The Issuer agrees that is solely responsible for managing its Cap Table and shareholder records, and agrees that FundAmerica SaaS technology that is being provided is only a tool to aid the Issuer to manage its shareholder records. The Issuer acknowledges that the SaaS technology provided are not the services of a registered stock transfer agent, and that the Issuer has the sole responsibility for determining whether a registered stock transfer agent is required for its securities offering(s). The SaaS system can be used to access historical data on investors, the offering, and events. Issuers authorized administrators will have access to the SaaS system, at Issuers sole discretion and responsibility. FundAmerica does not directly make changes to investor data, nor does it issue certificates, enforce transfer restrictions or handle cash. SaaS services are provided for the monthly and other fees detailed in Schedule A of this Agreement.

 

5. Hosting & Management.

 

6. At all times, the Technology shall be hosted, managed and maintained by FundAmerica and our appointed third-party service providers. Our Technology are accessible via our API, and not by any separate software installation. FundAmerica provides Technology to numerous other customers, including other issuers and funding platforms. The Technology that FundAmerica provides are evolving and the Technology that we provide may change from time to time without prior notice to you. FundAmerica may update, modify, change or otherwise alter the hosting location(s) and/or methodology, as well as any or all features, functionality, user interface(s) located in Issuer’s account on apps.fundamerica.com (the “Control Panel”), business logic, policies, procedures, and/or the API and/or Invest Now from time to time at its sole discretion and without notice. In addition, FundAmerica may stop (permanently or temporarily) providing the Technology (or any specific component(s) or feature(s) of the Technology) to you or to users generally and may not provide you with prior notice. It is Issuer’s express will and consent that all data shall be stored in the United States of America.

 

 

 

 

3. SERVICES

 

1. Access.

FundAmerica will make the Technology available to Issuer and Issuer’s investors and other users (“Users”) in accordance with this Agreement and FundAmerica’s rules, policies, and Terms of Use then in effect. Issuer acknowledges that its use of the Technology are subject to this Agreement, including all applicable terms of service, privacy policies and other policies that are then in effect. Issuer acknowledges that some of the Technology, even though a la carte in the system, may be interdependent and not available except and unless combined with other Technology, as determined in the sole and arbitrary discretion of FundAmerica, and that your terms, access to specific Technology, and/or fees may be different than those of other FundAmerica customers, and even different than those of other offerings you have conducted using our Technology, if any.

 

2. Technology Restrictions.

Issuer will not directly itself, and will not permit or authorize third parties, including Issuer’s Users, employees or agents to: (a) rent, lease, sublet, resell, convert, license, exploit, use, modify, or otherwise permit unauthorized third parties to access or use any aspect of the API or Invest Now; (b) reverse engineer, reverse assemble or otherwise attempt to discover the source code for the API or Invest Now; (c) circumvent or disable any security or other technological features or measures of the API or Invest Now; (d) alter, modify, convert or attempt to, modify, convert or otherwise manipulate the API or Invest Now, software or code; or (e) clone or otherwise copy, replicate or duplicate in any fashion any part of the API or Invest Now design, workflow, features or methodology, all of which Issuer acknowledges are proprietary intellectual property wholly owned by FundAmerica.

 

3. Reporting.

FundAmerica will provide Issuer with access to regular updates via various web-accessible dashboards, various plug & play web widgets, and/or via WebHooks functionality of the API, which enables Issuer to pull data from our system directly into its servers and to get on-demand updates both for its own purposes and so it can create reports and alert systems for its customers and other users with respect to all receipts of funds, deposits, disbursements and other transactions for each open Escrow Account. When the Technology are used via the API, then FundAmerica shall not be obligated to push or send reports or alerts to Issuer or any other person. When the Technology are engaged via Invest Now or via manual dashboard tools then FundAmerica will send confirmations and alerts, generally on Issuer’s behalf (meaning “from” you, which you hereby unequivocally and unconditionally instruct, direct and authorize us to do in the form and format standard in our system or as customized for you).

 

 

 

 

4. Data Privacy.

Investor data received by FundAmerica in conjunction with the Technology shall only be used for the purposes of providing said Technology and as required by the services provided.

 

5. FundAmerica Duties.

FundAmerica will at all times manage the API, Invest Now, and all related engineering functions, including application maintenance, upgrades, hosting and modifications. FundAmerica will provide the API, Invest Now, and the Technology availability on an ongoing basis in exchange for Fees, (defined below) including technology, upgrades, operating systems, databases and backups, SSL certificates, third-party service integrations, and related technology licenses.

 

6. Issuer’s Obligations.

Issuer warrants that it will operate its offering(s) in compliance with all federal and state laws.

 

7. Ethics, Reputation.

Issuer will use the Technology in compliance with all applicable laws and regulations, and refrain from any conduct, use or misuse that may damage the reputation of FundAmerica or its subsidiaries or affiliated entities.

 

8. No Warranties.

Issuer will not make or publish any representations, warranties, or guarantees on behalf of FundAmerica concerning FundAmerica’s Technology.

 

9. Content, Use, and Protection Against Unauthorized Use.

FundAmerica reserves the right to suspend or terminate any User from using the API or Invest Now for any violation of the terms or intent of this Agreement, as determined by FundAmerica in its sole discretion. Issuer is prohibited from using FundAmerica’s API or Invest Now in any unlawful or unethical manner, or in any manner that interferes with, disrupts, or disables the API or Invest Now or the networks or Technology on which the API or Invest Now operates, or that is in any way a violation of the site Terms of Use of any federal or state laws, rules or regulations. Issuer is solely responsible for the content of its postings, data and transmissions using the API or Invest Now, and any other use of the API and Invest Now. Issuer will use its best efforts to prevent any unauthorized use of the API and Invest Now and immediately notify FundAmerica in writing of any unauthorized use that comes to Issuer’s attention. Issuer will take all steps reasonably necessary to terminate the unauthorized use. Issuer hereby indemnifies and holds FundAmerica harmless for any and all violations or breaches of this Section 3.8 or any unauthorized use or any misuse as discussed above.

 

 

 

 

10. Terms of Use, Privacy Policy, Technology Level Agreement.

Except as set forth in this Agreement, the Technology shall be subject to the most current, then in effect, Terms of Use and Privacy Policy, as available via links at the bottom of the www.fundamerica.com website. Furthermore, the Technology shall be available to Issuer in accordance with the Services Level Agreement (the “SLA”) as available via a link at the bottom of the www.fundamerica.com website. In the event of any conflict between any terms or provisions of the website Terms of Use and the terms and provisions of this Agreement, the applicable terms and provisions of this Agreement shall control.

 

11. Ownership.

Except for the rights expressly granted in this Agreement, nothing shall be construed or shall grant, convey, transfer, assign, or imply the conveyance of rights, claims, ownership or other claim to any right or title to the technology, software, business processes or intellectual property of Issuer. Issuer will not acquire any right, title, or interest in or to the API, Invest Now, or other software, technology, business processes, copyrights, trademarks, or intellectual property of FundAmerica or its subsidiaries and affiliated entities by any reason, including:

 

(a) the execution and delivery of this Agreement, (b) the disclosure of any information with respect to Invest Now or the API by FundAmerica either pursuant to this Agreement or prior or subsequent to execution hereof, (c) Issuer’s discovery of confidential information in the course of the commercial relationship contemplated by this Agreement, or (d) any licensed or unlicensed use of FundAmerica’s proprietary information, software, the API, Invest Now, brand, or intellectual property and/or the creation or evolution of any derivative or new intellectual property, software, information, arising from the use or misuse of the Technology. Rather, FundAmerica retains the sole and exclusive ownership of all intellectual property and proprietary rights with respect to the API and software, Invest Now as well as business and technological processes, including the sole and exclusive ownership to any improvements and derivative works of the API developed by Issuer or any other person. Issuer hereby grants to FundAmerica a nonexclusive, worldwide, royalty free right and license to its copyrights, intellectual property and proprietary rights strictly in connection with FundAmerica’s development, integration, implementation, hosting, marketing, advertising and operation of the Technology.

 

4. FEES

 

1. Fees, Compensation.

Fees for the Technology provided under this Agreement are set forth in Schedule A.

 

 

 

 

All Fees are incurred immediately at the time Technology are ordered. Fees are generally payable via ACH debit to Issuer’s bank account, in which case the parties agree that the definition of “investments” in the “ACH Debit Authorization Form” is hereby expanded to include fees due hereunder. Fees may at times also be payable out of escrow proceeds (paid to FundAmerica by the escrow agent before escrow agent sends funds to Issuer), by credit card, or by company check or wire. No fee for any of our Technology is contingent upon the success or amount of any investment in particular or the offering in general. No Fees are to be prorated for any partial periods, nor are they refundable in whole or in part unless agreed to in writing by FundAmerica for the specific Technology for which any Fees were charged. Issuer acknowledges and agrees that FundAmerica is no way is performing any duties of an underwriter, and is not in any way to be considered a statutory underwriter as defined in the Securities Act of 1933.

 

2. Taxes.

Each party to this Agreement shall be solely responsible for their own federal and state taxes, and will pay their own taxes, duties, withholding taxes, and other governmental and/or regulatory charges (collectively, the “Taxes”) resulting from or pursuant to its performance under this Agreement and as they apply to its respective business.

 

3. Late Charges.

Any amount not paid by Issuer when due will be subject to finance charges equal to one and one-half percent (1.5%) per month or the highest rate permitted by applicable law, whichever is greater, determined and compounded daily from the date due until the date paid. Issuer will also reimburse all costs and expenses (including, but not limited to, reasonable attorneys’ fees) incurred by FundAmerica or its subsidiaries and affiliated entities to collect any amounts not paid when due. FundAmerica, may, at any time, in its sole and absolute discretion, suspend availability of the Technology on any account which is late in payment.

 

5. MUTUAL WARRANTIES

 

Mutual Warranties.

Each party to this Agreement represents and warrants to the other that it has the right and authority to enter into this Agreement and to perform all of its respective obligations and undertakings. Each party further represents and warrants that: (a) this Agreement has been duly executed and delivered and constitutes a valid and binding agreement enforceable against such party in accordance with its terms; (b) no authorization or approval from any other person is required in connection with such party’s execution, delivery, or performance of this Agreement; and (c) the execution, delivery, and performance of this Agreement does not violate the terms or conditions of any other agreement to which it is a party or by which it is otherwise bound.

 

Warranties by Issuer.

 

1. Issuer Materials.

Issuer hereby represents and warrants that the Issuer’s Offering and its Materials comply with all applicable laws, and will not infringe the copyright, trade secret, privacy, publicity, or other rights of any third party. Issuer hereby indemnifies and holds FundAmerica harmless for any and all violations or breaches of this Section 5.b.2. Issuer acknowledges that it is sharing its Issuer Materials with FundAmerica in order for us to provide the Technology and perform under this Agreement.

 

 

 

 

2. Breach of Warranties.

In the event of any breach of any of Issuer’s responsibilities or warranties herein, in addition to any other remedies available at law or in equity, FundAmerica has the right to immediately, in FundAmerica’s sole discretion, suspend any related API features and/or Technology if deemed necessary by FundAmerica to prevent or eliminate difficulties in the operation of Technology or harm to FundAmerica’s reputation, or to prevent potential litigation or other controversies.

 

3. Disclaimer.

EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, FUNDAMERICA MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND WHETHER EXPRESS, IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW). FUNDAMERICA EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, QUALITY, ACCURACY, TITLE, AND NON-INFRINGEMENT. FUNDAMERICA DOES NOT WARRANT AGAINST INTERFERENCE WITH THE USE OF THE SERVICES OR SOFTWARE OR AGAINST INFRINGEMENT. FUNDAMERICA DOES NOT WARRANT THAT THE SERVICES OR SOFTWARE ARE ERROR-FREE OR THAT OPERATION OF THE API, INVEST NOW OR THE SERVICE WILL BE SECURE OR UNINTERRUPTED. FUNDAMERICA EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY ARISING OUT OF THE FLOW OF DATA AND DELAYS ON THE INTERNET. ISSUER WILL NOT HAVE THE RIGHT TO MAKE OR PASS ON ANY REPRESENTATION OR WARRANTY ON BEHALF OF FUNDAMERICA TO ANY THIRD PARTY. ISSUER’S ACCESS TO AND USE OF THE SERVICES OR ANY API ARE AT ISSUER’S OWN RISK. ISSUER UNDERSTANDS AND AGREES THAT THE SERVICES ARE PROVIDED TO IT ON AN “AS IS” AND “AS AVAILABLE” BASIS. FUNDAMERICA EXPRESSLY DISCLAIMS LIABILITY TO ISSUER FOR ANY DAMAGES RESULTING FROM ISSUER’S RELIANCE ON OR USE OF THE SERVICES.

 

6. LIMITATION OF LIABILITY

 

1. Disclaimer of Consequential Damages.

ISSUER HEREBY ACKNOWLEDGES AND AGREES, NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, FUNDAMERICA, WILL NOT, UNDER ANY CIRCUMSTANCES, BE LIABLE TO ISSUER FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATED TO THE TRANSACTION CONTEMPLATED UNDER THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO, LOST PROFITS OR LOSS OF BUSINESS.

 

2. Cap on Liability.

ISSUER HEREBY ACKNOWLEDGES AND AGREES UNDER NO CIRCUMSTANCES WILL FUNDAMERICA‘S TOTAL LIABILITY OF ANY AND ALL KINDS ARISING OUT OF OR RELATED TO THIS AGREEMENT (INCLUDING BUT NOT LIMITED TO WARRANTY CLAIMS), REGARDLESS OF THE FORM AND REGARDLESS OF WHETHER ANY ACTION OR CLAIM IS BASED ON CONTRACT, TORT, OR OTHERWISE, EXCEED THE TOTAL AMOUNT OF FEES PAID, IF ANY, BY ISSUER TO FUNDAMERICA UNDER THIS AGREEMENT DURING THE TWELVE (12) MONTH PERIOD PRIOR TO THE OCCURRENCE OF THE EVENT GIVING RISE TO SUCH LIABILITY.

 

 

 

 

3. General Indemnification.

Issuer hereby agrees to indemnify, protect, defend and hold harmless FUNDAMERICA and its officers, directors, members, shareholders, employees, agents, partners, vendors, successors and assigns from and against any and all third party claims, demands, obligations, losses, liabilities, damages, regulatory investigations, recoveries and deficiencies (including interest, penalties and reasonable attorneys’ fees, costs and expenses), which FUNDAMERICA may suffer as a result of: (a) any breach of or material inaccuracy in the representations and warranties, or breach, non-fulfillment or default in the performance of any of the conditions, covenants and agreements, of Issuer contained in this Agreement or in any certificate or document delivered by Issuer or its agents pursuant to any of the provisions of this Agreement, or (b) any obligation which is expressly the responsibility of Issuer under this Agreement, or (c) any other cost, claim or liability arising out of or relating to operation or use of the license granted hereunder, or, (d) any breach, action or regulatory investigation arising from Issuer’s failure to comply with any state blue sky laws or other securities laws, and/or arising out of any alleged misrepresentations, misstatements or omissions of material fact in the issuers’ offering memoranda, general solicitation, advertisements and/or other offering documents. Issuer is required to immediately defend FundAmerica including the immediate payment of all attorney fees, costs and expenses, upon commencement of any regulatory investigation arising or relating to Issuer’s offering and/or items in this Section 6.3(a) through (d) above. Any amount due under the aforesaid indemnity will be due and payable by Issuer within thirty (30) days after demand thereof. Furthermore, Issuer shall protect, hold harmless and indemnify FundAmerica and our officers, directors, members, shareholders, employees, agents, partners, vendors, successors and assigns from and against any and all liability related to Issuer’s business and business related operations and affairs, and use of the API, Invest Now, the Technology or any breach of the terms of this Agreement.

 

7. MUTUAL CONFIDENTIALITY OF INFORMATION

 

1. Definition of Confidential Information.

As used herein, the “Confidential Information” means all confidential and proprietary information of a party disclosed (“Disclosing Party”) to the other party (“Receiving Party”), whether orally or in writing, that is designated as confidential or that reasonably should be understood to be confidential given the nature of the information and the circumstances of disclosure, including the terms and conditions of this Agreement (including pricing and other terms reflected in all Account forms hereunder), data, business and marketing plans, technology and technical information, product designs, API designs, Invest Now, and business processes. Confidential Information shall not include any information that: (i) is or becomes generally known to the public without breach of any obligation owed to Disclosing Party; (ii) was known to Receiving Party prior to its disclosure by Disclosing Party without breach of any obligation owed toe Disclosing Party; (iii) was independently developed by Receiving Party without breach of any obligation owed to Disclosing Party; or (iv) is received from a third party without breach of any obligation owed to Disclosing Party. All intellectual property, work product, software, code, and other proprietary information or work product of both parties to this Agreement is expressly agreed to be Confidential Information.

 

 

 

 

2. Protection.

Each party agrees to protect the confidentiality of the Confidential Information of the other party in the same manner that it protects the confidentiality of its own proprietary and confidential information of like kind, but in no event using less than reasonable care.

 

3. Remedies.

If Receiving Party discloses or uses or threatens to disclose or use any of the Confidential Information of Disclosing Party in breach of the terms hereunder, Disclosing Party shall have the right, in addition to any other remedies available in law and equity, to seek injunctive relief to enjoin such act, it being specifically acknowledged by the parties that any other available remedies are inadequate.

 

8. TERM AND TERMINATION

 

1. Term.

This Agreement shall become effective on the Effective Date and shall continue for the duration of the Offering (the “Initial Term”) and for ongoing post-sale-of-securities data access, reporting and investor & cap table technology unless terminated earlier as provided for herein.

 

2. Termination.

Either party may terminate this Agreement upon thirty (30) days written notice of a material breach to the other party of such breach. Such breaches include, but are not limited to: 1) failure to pay all amounts due when due; or (2) the filing by a party to this Agreement of any petition in bankruptcy or initiation of any other proceeding relating to insolvency, receivership, liquidation or assignment for the benefit of creditors.

 

3. Effect of Termination.

Upon expiration or termination of this Agreement, (a) Issuer will cease using the API, Invest Now and all associated Technology and FundAmerica will be relieved from any further obligation to provide the Technology; (b) each party will retain all rights and claims arising hereunder prior to the effective date of any expiration or termination; (c) the rights and obligations of the parties under Sections 3.2, 3.7, 3.8, 3.9, 3.12, 5, 6, 7, 8, and 9 will survive an expiration or termination, and (d) FundAmerica will continue to hold data and maintain records as required by securities regulations and/or good business practices.

 

 

 

 

9. MISCELLANEOUS

 

1. Notices.

All notices permitted or required by this Agreement will be via electronic mail (“email”), and will be deemed to have been delivered and received upon sending via any nationally recognized and trusted SMTP delivery service. Notices shall be delivered to the addresses on record which, if to FundAmerica shall be to support@fundamerica.com and if to Issuer shall be to the email address on file in their account on apps.fundamerica.com.

 

2. No Implied License.

Except as expressly provided in this Agreement, this Agreement is not intended and will not be construed to confer upon either party any license rights to any patent, trademark, copyright, or other intellectual property rights of either party hereto or any other rights of any kind not specifically conferred in this Agreement. All right, title, and interest in and to the Technology are and will remain the exclusive property of FundAmerica.

 

3. Severability.

If any provision of this Agreement is for any reason found to be ineffective, unenforceable, or illegal by any court having jurisdiction, such condition will not affect the validity or enforceability of any of the remaining portions hereof.

 

4. Independent Contractors.

Performance by the parties under this Agreement will be as independent contractors. This Agreement is not intended and shall not be construed as creating a joint venture or partnership, or as causing either party to be treated as the agent of the other party for any purpose or in any sense whatsoever or to create any fiduciary duty or relationship or any other obligations other than those expressly imposed by this Agreement.

 

5. Limited License of Trademarks.

During the term of this Agreement, Issuer has the option to generally use FundAmerica’s name, logo and trademarks on its website and other marketing materials so long as such use is not construed in any way to imply that any securities offering or transaction is endorsed, recommended, or vetted by FundAmerica or its subsidiaries or affiliated entities, or that Issuer is authorized to act as a securities agent or a representative of FundAmerica or its subsidiaries or affiliated entities. Furthermore, it is agreed that FundAmerica, has the option to use the name and logo of Issuer in publicly disclosing the existence of this business relationship.

 

 

 

 

6. No Legal, Tax or Accounting Advice.

Issuer agrees without reservation that FundAmerica is NOT providing any legal, tax or accounting advice in any way, nor on any matter, regardless of the tone or content of any communication (oral, written or otherwise). Issuer unconditionally agrees to rely solely on its own legal, tax and accounting professionals for any such advice and on all matters.

 

7. No Investment Advice or Recommendations.

Issuer agrees that FundAmerica is not providing any investment advice, nor do we make any recommendations to any issuer of, or investor in, any securities. Issuer agrees that it will only rely on the advice of its attorneys, accountants and other professional advisors, including any registered broker-dealers acting as an underwriter of the offering.

 

8. Electronic Signature and Communications Notice and Consent.

Digital (“electronic”) signatures, often referred to as an “e-signature”, enable paperless contracts and help speed up business transactions. The 2001 E-Sign Act was meant to ease the adoption of electronic signatures. The mechanics of this Agreements’ electronic signature include your signing this Agreement below by typing in your name, with the underlying software recording your IP address, your browser identification, the timestamp, and a securities hash within an SSL encrypted environment. This electronically signed Agreement will be emailed to Issuer and FundAmerica and will be stored on the Technology and accessible in the Control Panel. Each of Issuer and FundAmerica hereby consent and agree that electronically signing this Agreement constitutes each party’s signature, acceptance and agreement as if actually signed by that party in writing. Further, all parties agree that no certification authority or other third party verification is necessary to validate any electronic signature; and that the lack of such certification or third party verification will not in any way affect the enforceability of your signature or resulting contract between Issuer and FundAmerica. Each party understands and agrees that their e-signature executed in conjunction with the electronic submission of this Agreement shall be legally binding. Each party agrees that their electronic signature is the legal equivalent of their manual signature on this Agreement consents to be legally bound by this Agreement's terms and conditions. Furthermore, each of Issuer and FundAmerica hereby agree that all current and future notices, confirmations and other communications regarding this Agreement specifically, and future communications in general between the parties, may be made by email, sent to the email address of record as set forth in the Notices section above or as otherwise from time to time changed or updated and disclosed to the other party, without necessity of confirmation of receipt, delivery or reading, and such form of electronic communication is sufficient for all matters regarding the relationship between the parties. If any such electronically-sent communication fails to be received for any reason, including but not limited to such communications being diverted to the recipients’ spam filters by the recipients email service provider, or due to a recipients’ change of address, or due to technology issues by the recipients’ service provider, the parties agree that the burden of such failure to receive is on the recipient and not the sender, and that the sender is under no obligation to resend communications via any other means, including but not limited to postal service or overnight courier, and that such communications shall for all purposes, including legal and regulatory, be deemed to have been delivered and received. No physical, paper documents will be sent to Issuer, and if you desire physical documents then you agree to be satisfied by directly and personally printing, at your own expense, the electronically-sent communication(s) and maintaining such physical records in any manner or form that you desire. Your Consent is Hereby Given: By signing this Agreement electronically, you explicitly agree to this Agreement and to receive documents electronically, including your copy of this signed Agreement as well as ongoing disclosures, communications and notices.

 

 

 

 

9. Assignment.

No party may transfer or assign its rights and obligations under this Agreement without the prior written consent of the other parties. Notwithstanding the foregoing, without the consent of the other parties, any party may transfer or assign its rights and obligations hereunder in whole or in part (a) pursuant to any merger, consolidation or otherwise by operation of law, and (b) to the successors and assigns of all or substantially all of the assets of such assigning party, provided such entity shall be bound by the terms hereof. This Agreement will be binding upon and will inure to the benefit of the proper successors and assigns.

 

10. Non-Absolute Standards.

All of the Technology are provided under a “reasonability” standard. This means that no service may be held to an absolute or perfect standard. All services are provided "as is" and in such a manner that they are reasonable, and not perfect or flawless. Issuer acknowledges this and agrees that this is fair and acceptable Technology, and that all applicable sections of this Agreement apply to this concept, including, but not limited to, Sections 3.8, 3.9, 3.10, and Sections 5 and 6.

 

11. Binding Arbitration, Applicable Law and Venue, Attorneys Fees.

This Agreement is governed by, and will be interpreted and enforced in accordance with the laws of the State of New York without regard to principles of conflict of laws. Any claim or dispute arising under this Agreement may only be brought in arbitration, with venue in New York, New York pursuant to the rules of the American Arbitration Association. Issuer and FundAmerica each consent to this method of dispute resolution, as well as jurisdiction, and consent to this being a convenient forum for any such claim or dispute and waives any right it may have to object to either the method or jurisdiction for such claim or dispute. In the event of any dispute among the parties, the prevailing party shall be entitled to recover damages plus reasonable costs and attorney’s fees and the decision of the arbitrator shall be final, binding and enforceable in any court.

 

 

 

 

12. Counterparts; Facsimile; Email; Signatures.

This Agreement may be executed in counterparts, each of which will be deemed an original and all of which, taken together, will constitute one and the same instrument, binding on each signatory thereto. This Agreement may be executed by signatures, electronically or otherwise, delivered by facsimile or email, and a copy hereof that is properly executed and delivered by a party will be binding upon that party to the same extent as an original executed version hereof.

 

13. Force Majeure.

No party will be liable for any default or delay in performance of any of its obligations under this Agreement if such default or delay is caused, directly or indirectly, by fire, flood, earthquake or other acts of God; labor disputes, strikes or lockouts; wars, rebellions or revolutions; riots or civil disorder; accidents or unavoidable casualties; interruptions in transportation or communications facilities or delays in transit or communication; supply shortages or the failure of any person to perform any commitment to such party related to this Agreement; or any other cause, whether similar or dissimilar to those expressly enumerated in this Section, beyond such party’s reasonable control.

 

14. Interpretation.

Each party to this Agreement has been represented by or had adequate time to obtain the advice and input of independent legal counsel with respect to this Agreement and has contributed equally to the drafting of this Agreement. Therefore, this Agreement shall not be construed against either party as the drafting party. All pronouns and any variation thereof will be deemed to refer to the masculine and feminine, and to the singular or plural as the identity of the person or persons may require for proper interpretation of this Agreement. And it is the express will of all parties that this Agreement is written in English and uses the font styles and sizes contained herein.

 

15. Captions.

The section headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement.

 

16. Beneficiaries.

There are no third party beneficiaries to this Agreement.

 

17. Entire Agreement; Amendments.

This Agreement sets forth the entire understanding of the parties concerning the subject matter hereof, and supersedes all prior or contemporaneous communications, representations or agreements between the parties, whether oral or written, regarding the subject matter of this Agreement, and may not be modified or amended, except by a written instrument executed after the effective date of this Agreement by the party sought to be charged by the amendment or modification.

 

10. SUBSTITUTE FORM W-9- TAXPAYER IDENTIFICATION NUMBER CERTIFICATION

 

1. Section 6109 of the Internal Revenue Code requires us to provide you with our Taxpayer Identification Numbers (TIN).

 

 

 

Exhibit 8

 

 

 

ESCROW SERVICES AGREEMENT

 

This Escrow Services Agreement (this “Agreement”) is made and entered into as of March 11, 2020 by and between Prime Trust, LLC (“Prime Trust” or “Escrow Agent”) and StartEngine Crowdfunding Inc. (the “Issuer”).

 

RECITALS

 

WHEREAS, the Issuer proposes to offer for sale and sell securities to prospective investors (“Subscribers”), as disclosed in its offering materials, in a registered offering pursuant to the Securities Act of 1933, as amended, or exemption from registration (i.e. Regulation A+, D or S) (the “Offering”), the equity, debt or other securities of the Issuer (the “Securities”) up to the maximum amount of $41,000,000 (the “Maximum Amount of the Offering”). There is no minimum contingency or minimum offering amount in this Offering.

 

WHEREAS, Issuer desires to establish an Escrow Account in which funds received from Subscribers will be held during the Offering, subject to the terms and conditions of this Agreement.

 

WHEREAS, Prime Trust agrees to serve as third-party escrow agent for the Subscribers with respect to such Escrow Account (as defined below) in accordance with the terms and conditions set forth herein.

 

AGREEMENT

 

NOW THEREFORE, in consideration for the mutual covenants, promises, agreements, representations, and warranties contained in this Agreement and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties herby agree as follows:

 

1. Establishment of Escrow Account. Prior to the Issuer initiating the Offering, Escrow Agent shall establish an account for the Offering (the “Escrow Account”). All parties agree to maintain the Escrow Account and Escrow Amount (as defined below) in a manner that is compliant with banking and securities regulations. For purposes of communications and directives, Escrow Agent shall be the sole administrator of the Escrow Account.

 

2. Escrow Period. The escrow period (“Escrow Period”) shall begin with the commencement of the Offering and shall terminate in whole or in part upon the earlier to occur of the following:

 

a. The date upon which Escrow Agent has received the Escrow Amount cleared in the Escrow Account and the Issuer instructed a partial or full closing on those funds, provided, however, that the Escrow Amount does not exceed the Maximum Amount of the Offering.; or

 

b. The date which is three years and six months from the date of qualification of the Offering by the Securities and Exchange Commission; or

 

c. The date upon which a determination is made by Issuer and/or their authorized representatives to terminate the Offering; or

 

 

     

 

d. Escrow Agent’s exercise of the termination rights specified in Section 8.

 

During the Escrow Period, the parties agree that (i) the Escrow Account and Escrow Amount will be held for the benefit of the Subscribers, and that (ii) Issuer is not entitled to any funds received into the Escrow Account, and (iii) the Escrow Amount shall become the property of Issuer or any other third-party, or be subject to any debts, liens or encumbrances of any kind, until the contingency has been satisfied by the sale of the Minimum Amount of the Offering to such Subscribers in bona fide transactions that are fully paid and cleared.

 

3. Deposits into the Escrow Account. All Subscribers will be directed by the Issuer and its agents to transmit their data and subscription amounts via Escrow Agent’s technology systems (“Issuer Dashboard”), directly to the Escrow Account to be held for the benefit of Subscribers in accordance with the terms of this Agreement and applicable regulations. All Subscribers will transfer funds directly to the Escrow Agent (with checks, if any, made payable to “Prime Trust, LLC as Escrow Agent for Investors in StartEngine Crowdfunding Inc.”) for deposit into the Escrow Account. Escrow Agent shall process all subscription amounts for collection through the banking system (except for virtual currencies), shall hold Escrow Amounts, and shall maintain an accounting of each such subscription amount posted to its ledger, which also sets forth, among other things, each Subscriber’s name and address, the quantity of Securities purchased, and the amount paid. All subscription amounts which have cleared the banking system, or in the case of virtual currencies are confirm as received, are hereinafter referred to as the “Escrow Amount”. No interest shall be paid to Issuer or Subscribers on balances in the Escrow Account. Issuer shall promptly, concurrent with any new or modified subscription agreement (each a “Subscription Agreement”) and/or Offering materials, provide Escrow Agent with a copy of such revised documents and other information as may be reasonably requested by Escrow Agent which is necessary for the performance of its duties under this Agreement. Escrow Agent is under no duty or responsibility to enforce collection of any subscription amounts whether delivered to it or not hereunder. Issuer shall cooperate with Escrow Agent with clearing any and all AML and funds processing exceptions.

 

Funds Hold; Clearing, Settlement and Risk Management Policy: All parties agree that funds are considered “cleared” as follows:

 

* Wires — 24 hours following receipt of funds;
* Checks — 10 days following deposit of funds to the Escrow Account;
*ACH — 10 days following receipt of funds;

*Virtual currencies – upon receipt of coins/tokens or USD upon conversion, as agreed;

*Credit and Debit Cards – 24 hours (one business day) following receipt of funds.

 

For subscription amounts received through ACH transfers, Federal regulations provide Subscribers with a period of up to 60 days following the transaction to recall, cancel or otherwise dispute the transaction. Similarly, subscription amounts processed by credit or debit card transactions are subject to recall, chargeback, cancellation or other dispute for a period of up to 180 days following the transaction. As an accommodation to the Issuer and subject to the terms of this Agreement, Escrow Agent shall make subscription amounts received through ACH fund transfers available starting 10 calendar days following receipt by Escrow Agent of the subscription amounts and 24 hours following receipt of funds for credit and debit card transactions.

 

Notwithstanding the foregoing, all cleared subscription amounts remain subject to internal compliance review in accordance with internal procedures and applicable rules and regulations. Escrow Agent reserves the right to deny, suspend or terminate participation in the Escrow Account of any Subscriber to the extent Escrow Agent, in its sole and absolute discretion, deems it advisable or necessary to comply with applicable laws or to eliminate practices that are not consistent with laws, rules, regulations or best practices. Prime Trust reserves the right to limit, suspend, restrict (including increasing clearing periods) or terminate the use of ACH, credit card and/or debit card transactions at its sole discretion. Without limiting the indemnification obligations under Section 11 of this Agreement, Issuer agrees that it will immediately indemnify, hold harmless and reimburse the Escrow Agent for any fees, costs or liability whatsoever resulting or arising from funds processing failures, including without limitation chargebacks, recalls or other disputes. Issuer acknowledges and agrees that the Escrow Agent shall not be responsible for or obligated to pursue collection of any funds from Subscribers.

 

 

     

 

4. Disbursements from the Escrow Account. In the event Escrow Agent does not receive the Minimum Amount of the Offering prior to the termination of the Escrow Period, Escrow Agent shall terminate the Escrow Account and make a full and prompt return of cleared funds to each Subscriber to the Offering.

 

In the event Escrow Agent receives cleared funds for at least the Minimum Amount of the Offering prior to the termination of the Escrow Period, and for any point thereafter and Escrow Agent receives a written instruction from Issuer (generally via notification on the Issuer Dashboard), Escrow Agent shall, pursuant to those instructions, make a disbursement to the Issuer from the Escrow Account. Issuer acknowledges that there is a 24-hour (one business day) processing time once a request has been received to disburse funds from the Escrow Account. Furthermore, Issuer directs Escrow Agent to accept instructions regarding fees from registered securities brokers in the syndicate, if any, or from the API integrated platform or portal through which this Offering is being conducted, if any.

 

5. Collection Procedure. Escrow Agent is hereby authorized, upon receipt of Subscriber funds, to promptly deposit them in the Escrow Account. Any Subscriber funds which fail to clear or are subsequently reversed, including but not limited to chargebacks, wire recalls or otherwise disputed, shall be debited to the Escrow Account, with such debits reflected on the Escrow Account ledger accessible via Escrow Agent’s API or Issuer Dashboard as a non-exclusive remedy. Any and all escrow fees paid by Issuer, including those for funds processing are non-refundable, regardless of whether ultimately cleared, failed, rescinded, returned or recalled. In the event of any Subscriber refunds, returns or recalls after funds have already been remitted to Issuer, Issuer hereby irrevocably agrees to immediately and without delay or dispute send equivalent funds to Escrow Agent to cover such refunds, returns or recalls. If Issuer has any dispute or disagreement with its Subscriber then that is separate and apart from this Agreement and Issuer will address such situation directly with said Subscriber, including taking whatever actions Issuer determines appropriate, but Issuer shall regardless remit funds to Escrow Agent and not involve Escrow Agent in any such disputes.

 

6. Escrow Administration Fees, Compensation of Prime Trust. Escrow Agent is entitled to escrow administration fees from Issuer as set forth in Schedule A attached hereto as displayed on the Issuer Dashboard. All fees are charged immediately upon receipt of this Agreement and then immediately as they are incurred in Escrow Agent’s performance hereunder and are not contingent in any way on the success or failure of the Offering or transactions contemplated by this Agreement. No fees, charges or expense reimbursements of Escrow Agent are reimbursable, and are not subject to pro-rata analysis. All fees and charges, if not paid by a representative of Issuer (e.g. funding platform, lead syndicate broker, etc.), may be made via either Issuers credit/debit card or ACH information on file with Escrow Agent. Issuer shall at all times maintain appropriate funds in their account for the payment of escrow administration fees. Escrow Agent may also collect its fee(s), at its option, from any other account held by the Issuer at Prime Trust. It is acknowledged and agreed that no fees, reimbursement for costs and expenses, indemnification for any damages incurred by Issuer or Escrow Agent shall be paid out of or chargeable to the Escrow Amount.

 

 

     

 

7. Representations and Warranties. The Issuer covenants and makes the following representations and warranties to Escrow Agent:

 

a. It is duly organized, validly existing, and in good standing under the laws of the state of its incorporation or organization and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder.

 

b. This Agreement and the transactions contemplated thereby have been duly approved by all necessary actions, including any necessary shareholder or membership approval, has been executed by its duly authorized officers, and constitutes a valid and binding agreement enforceable in accordance with its terms.

 

c. The execution, delivery, and performance of this Agreement is in accordance with the agreements related to the Offering and will not violate, conflict with, or cause a default under its articles of incorporation, bylaws, management agreement or other organizational document, as applicable, any applicable law, rule or regulation, any court order or administrative ruling or decree to which it is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement, including the agreements related to the Offering, to which it is a party or any of its property is subject.

 

d. The Offering shall contain a statement that Escrow Agent has not investigated the desirability or advisability of investment in the Securities nor approved, endorsed or passed upon the merits of purchasing the Securities; and the name of Escrow Agent has not and shall not be used in any manner in connection with the Offering of the Securities other than to state that Escrow Agent has agreed to serve as escrow agent for the limited purposes set forth in this Agreement.

 

e. No party other than the parties hereto has, or shall have, any lien, claim or security interest in the Escrow Amount or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Amount or any part thereof.

 

f. It possesses such valid and current licenses, certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct its respective businesses, and it has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such license, certificate, authorization or permit.

 

g. Unless otherwise disclosed and approved by the Escrow Agent, the Issuer’s business activities are in no way related to cannabis, gambling, adult entertainment or firearms.

 

h. The Issuer and the Offering comply in all material respects with all applicable laws, rules and regulations.

 

The representations and warranties contained herein are true and complete as of the date hereof and will be true and complete at the time of each disbursement of Escrow Amount.

 

8. Term and Termination. This Agreement will remain in full force during the Escrow Period and shall terminate upon the following:

 

a. As set forth in Section 2.

 

b. Termination for Convenience. Any party may terminate this Agreement at any time for any reason by giving at least thirty (30) days’ written notice.

 

c. Escrow Agent’s Resignation. Escrow Agent may unilaterally resign at anytime without notice by giving written notice to Issuer, whereupon Issuer will immediately appoint a successor escrow agent.

 

Until a successor escrow agent accepts appointment or until another disposition of the subject matter has been agreed upon by the parties, following such resignation notice, Escrow Agent shall be discharged of all of its duties hereunder save to keep the subject matter whole.

 

9. Binding Arbitration, Applicable Law, Venue, and Attorney’s Fees. This Agreement is governed by, and will be interpreted and enforced in accordance with the laws of the State of Nevada, as applicable, without regard to principles of conflict of laws. Any claim or dispute arising under this Agreement may only be brought in arbitration, pursuant to the rules of the American Arbitration Association, with venue in Clark County, Nevada. The parties consent to this method of dispute resolution, as well as jurisdiction, and consent to this being a convenient forum for any such claim or dispute and waives any right it may have to object to either the method or jurisdiction for such claim or dispute. Furthermore, the prevailing party shall be entitled to recover damages plus reasonable attorney’s fees and costs and the decision of the arbitrator shall be final, binding and enforceable in any court.

 

10. Limited Capacity of Escrow Agent. This Agreement expressly and exclusively sets forth the duties of Escrow Agent with respect to any and all matters pertinent hereto, and no implied duties or obligations shall be read into this Agreement against Escrow Agent. Escrow Agent acts hereunder as an escrow agent only and is not associated, affiliated, or involved in the business decisions or business activities of Issuer, portal, or Subscriber. Escrow Agent is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness, or validity of the subject matter of this Agreement or any part thereof, or for the form of execution thereof, or for the identity or authority of any person executing or depositing such subject matter. Escrow Agent shall be under no duty to investigate or inquire as to the validity or accuracy of any document, agreement, instruction, or request furnished to it hereunder, including, without limitation, the authority or the identity of any signer thereof, believed by it to be genuine, and Escrow Agent may rely and act upon, and shall not be liable for acting or not acting upon, any such document, agreement, instruction, or request. Escrow Agent shall in no way be responsible for notifying, nor shall it be responsible to notify, any party thereto or any other party interested in this Agreement of any payment required or maturity occurring under this Agreement or under the terms of any instrument deposited herewith. Escrow Agent’s entire liability, and Issuer’s exclusive remedy, in any cause of action based on contract, tort, or otherwise in connection with any services furnished pursuant to this Agreement shall be limited to the total fees paid to Escrow Agent by Issuer. The Escrow Agent shall not be called upon to advise any party as to the wisdom in selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. Escrow Agent may consult legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions hereof or of any other agreement or of its duties hereunder, or relating to any dispute involving any party hereto, and shall incur no liability and shall be fully indemnified from any reasonable liability whatsoever in acting in accordance with the reasonable opinion or instruction of such counsel. Issuer shall promptly pay, upon demand, the reasonable fees and expenses of any such counsel.

 

 

     

 

11. Indemnity. Issuer agrees to defend, indemnify and hold harmless Escrow Agent and its related entities, directors, employees, service providers, advertisers, affiliates, officers, agents, and partners and third-party service providers (collectively “Escrow Agent Indemnified Parties”) from and against any loss, liability, claim, or demand, including attorney’s fees (collectively “Expenses”), made by any third party due to or arising out of (i) this Agreement or a breach of any provision in this Agreement, or (ii) any change in regulation or law, state or federal, and the enforcement or prosecution of such as such authorities may apply to or against Issuer. This indemnity shall include, but is not limited to, all Expenses incurred in conjunction with any interpleader that Escrow Agent may enter into regarding this Agreement and/or third-party subpoena or discovery process that may be directed to Escrow Agent Indemnified Parties. It shall also include any action(s) by a governmental or trade association authority seeking to impose criminal or civil sanctions on any Escrow Agent Indemnified Parties based on a connection or alleged connection between this Agreement and Issuers business and/or associated persons. These defense, indemnification and hold harmless obligations will survive termination of this Agreement. Escrow Agent reserves the right to control the defense of any such claim or action and all negotiations for settlement or compromise, and to select or approve defense counsel, and Issuer agrees to fully cooperate with Escrow Agent in the defense of any such claim, action, settlement, or compromise negotiations.

 

12. Entire Agreement, Severability and Force Majeure. This Agreement contains the entire agreement between Issuer and Escrow Agent regarding the Escrow Account. Neither party shall be responsible for any failure to perform due to acts beyond its reasonable control, including acts of God, terrorism, shortage of supply, labor difficulties (including strikes), war, civil unrest, fire, floods, electrical outages, equipment or transmission failures, internet interruptions, vendor failures (including information technology providers), or other similar causes.

 

13. Escrow Agent Compliance. Escrow Agent may, at its sole discretion, comply with any new, changed, or reinterpreted regulatory or legal rules, laws or regulations, law enforcement or prosecution policies, and any interpretations of any of the foregoing, and without necessity of notice, Escrow Agent may (i) modify either this Agreement or the Escrow Account, or both, to comply with or conform to such changes or interpretations or (ii) terminate this Agreement or the Escrow Account or both if, in the sole and absolute discretion of Escrow Agent, changes in law enforcement or prosecution policies (or enactment or issuance of new laws or regulations) applicable to the Issuer might expose Escrow Agent to a risk of criminal or civil prosecution, and/or of governmental or regulatory sanctions or forfeitures if Escrow Agent were to continue its performance under this Agreement. Furthermore, all parties agree that this Agreement shall continue in full force and be valid, unchanged and binding upon any successors of Escrow Agent. Changes to this Agreement will be sent to Issuer via email. Escrow Agent may act or refrain from acting in respect of any matter referred to in this Escrow Agreement in full reliance upon and by and with the advice of its legal counsel and shall be fully protected in so acting or in refraining from acting upon advice of counsel. In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall be entitled to (i) refrain from taking any action other than to keep safe the Escrow Amounts until directed otherwise by a court of competent jurisdiction or, (ii) interplead the Escrow Amount to a court of competent jurisdiction.

 

 

     

 

14. Waivers. No waiver by any party to this Agreement of any condition or breach of any provision of this Agreement will be effective unless in writing. No waiver by any party of any such condition or breach, in any one instance, will be deemed to be a further or continuing waiver of any such condition or breach or a waiver of any other condition or breach of any other provision contained in this Agreement.

 

15. Notices. Any notice to Escrow Agent is to be sent to escrow@primetrust.com. Any notices to Issuer to Contact@startengine.com.

 

Any party may change their notice or email address giving notice thereof in accordance with this Paragraph. All notices hereunder shall be deemed given: (1) if served in person, when served; (2) if sent by facsimile or email, on the date of transmission if before 6:00 p.m. Eastern time, provided that a hard copy of such notice is also sent by either a nationally recognized overnight courier or by U.S. Mail, first class; (3) if by overnight courier, by a nationally recognized courier which has a system of providing evidence of delivery, on the first business day after delivery to the courier; or (4) if by U.S. Mail, on the third day after deposit in the mail, postage prepaid, certified mail, return receipt requested. Furthermore, all parties hereby agree that all current and future notices, confirmations and other communications regarding this Agreement specifically, and future communications in general between the parties, may be made by email, sent to the email address of record as set forth above or as otherwise from time to time changed or updated in Issuer Dashboard, directly by the party changing such information, without necessity of confirmation of receipt, delivery or reading, and such form of electronic communication is sufficient for all matters regarding the relationship between the parties. If any such electronically-sent communication fails to be received for any reason, including but not limited to such communications being diverted to the recipients’ spam filters by the recipients email service provider or technology, or due to a recipients’ change of address, or due to technology issues by the recipients’ service provider, the parties agree that the burden of such failure to receive is on the recipient and not the sender, and that the sender is under no obligation to resend communications via any other means, including but not limited to postal service or overnight courier, and that such communications shall for all purposes, including legal and regulatory, be deemed to have been delivered and received. No physical, paper documents will be sent to Issuer, including statements, and if such documents are desired then that party agrees to directly and personally print, at their own expense, the electronically-sent communication(s) or dashboard reports and maintaining such physical records in any manner or form that they desire. By signing this Agreement electronically, Issuer explicitly agrees to this Agreement and to receive documents electronically, including your copy of this signed Agreement as well as ongoing disclosures, communications and notices.

 

 

     

 

16. Counterparts; Facsimile; Email; Signatures; Electronic Signatures. This Agreement may be executed in counterparts, each of which will be deemed an original and all of which, taken together, will constitute one and the same instrument, binding on each signatory thereto. This Agreement may be executed by signatures, electronically or otherwise, and delivered by email in .pdf format, which shall be binding upon each signing party to the same extent as an original executed version hereof.

 

17. Substitute Form W–9:  Section 6109 of the Internal Revenue Code requires Issuer to provide the correct Taxpayer Identification Number (TIN). Under penalties of Perjury, Issuer certifies that: (1) the tax identification number provided to Escrow Agent is the correct taxpayer identification number and (2) Issuer is not subject to backup withholding because: (a) Issuer is exempt from backup withholding, or, (b) Issuer has not been notified by the Internal Revenue Service that it is subject to backup withholding.  Issuer agrees to immediately inform Escrow Agent in writing if it has been, or at any time in the future is, notified by the IRS that Issuer is subject to backup withholding.

 

18. Invalidity. Any provision of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In such case, the parties shall in good faith modify or substitute such provision consistent with the original intent of the parties.
19. Survival. Even after this Agreement is terminated, certain provisions will remain in effect, including but not limited to Sections 3, 4, 5, 10, 11, 12 and 14 of this Agreement. Upon any termination, Escrow Agent shall be compensated for the services as of the date of the termination or removal.

 

[Signature Page Follows]

 

 

     

 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

 

StartEngine Crowdfunding, Inc., as Issuer

 

By:____/s/Howard Marks_________

Name:___Howard Marks _________

Title:_____CEO_________________

 

 

Prime Trust, LLC, as Escrow Agent

 

By:____/s/ Whitney J. White_____

Name:_ :__ Whitney J. White____

Title:__President, Executive Trust Officer

 

 

 

 

 

EXHIBIT 11

 

 

 

 

 

CONSENT OF INDEPENDENT AUDITOR

 

 

We consent to the use, in this Offering Statement on Form 1-A of our independent auditors’ report dated April 26, 2019 on our audits related to the consolidated financial statements of StartEngine Crowdfunding, Inc., which comprise the consolidated balance sheets as of December 31, 2018 and 2017 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

 

Very truly yours,

 

/s/ dbbmckennon

Newport Beach, California

March 12, 2020

 

 

 

 

 

Exhibit 12

 

 

 

 

 

 

 

700 12th Street, NW 

Washington, DC 20005

 

 

  

March 12, 2020

 

Board of Directors
StartEngine Crowdfunding, Inc. 

 

To the Board of Directors:

 

We are acting as counsel to StartEngine Crowdfunding, Inc. (the “Company”) with respect to the preparation and filing of an offering statement on Form 1-A. The offering statement covers the contemplated sale of up to 4,444,444 shares of the Company’s Common Stock and up to 111,111 shares of the Company’s Series T Preferred Stock, as well as the Common Stock into which the Series T Preferred Stock may convert.

 

In connection with the opinion contained herein, we have examined the offering statement, the fifth amended and restated certificate of incorporation, the amended and restated bylaws, the minutes of meetings of the Company’s board of directors, as well as all other documents necessary to render an opinion. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies.

 

We are opining herein as to the effect on the subject transactions only of the laws of the State of State of Delaware, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction, including federal law.

 

Based upon the foregoing, we are of the opinion that the shares of Common Stock and Series T Preferred Stock, and the Common Stock into which the Series T Preferred Stock may convert, being sold pursuant to the offering statement are duly authorized and will be, when issued in the manner described in the offering statement, legally and validly issued, fully paid and non-assessable. 

 

No opinion is being rendered hereby with respect to the truth and accuracy, or completeness of the offering statement or any portion thereof.

 

We further consent to the use of this opinion as an exhibit to the offering statement. 

 

Yours truly,

 

 /s/ CrowdCheck Law LLP

 

CrowdCheck Law LLP

By Jamie Ostrow, Partner

 

 

 

Exhibit 13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Video Transcript:

 

 

Matt Mills:

StartEngine had a track record. We saw the money, we saw the marketing, we saw everything. Nobody else had that and that's why we chose them.

 

Mark Hanchett:

One of the reasons that we chose StartEngine is because it was one of the easiest platforms to launch a campaign on.

 

Jesse Woolmar:

Working with StartEngine is great. They're such an easy platform to work with. I'm amazed at how accessible everyone is all the way up to and including the CEO. Howard's great.

 

Ray Phillips:

They are engaging, they're friendly. They are very understanding and knowing, hey, this may be new to you. Let us hold your hand and walk you through the process and let us explain to you some things that you otherwise wouldn't be aware of.

 

Matt Mills:

The whole team, everybody we've had any dealings with, it's like, "Let me get this done. I'll get right back to you," and they always do. So it's been perfect.

 

Ray Phillips:

Well, I'm excited about what the future has for us with us working with StartEngine.