Whitepaper III, Version 1 (Aug 2012)

Crowdfunding Rules

A Conservative Approach: Crowdfunding for Professionals

Even though the legislation that allows equity-based Crowdfunding was signed into law on April 5, 2012, the rules have not yet been nalized. However, the preliminary release of these rules by the governing agenciesthe Securities and Exchange Commission (SEC) and FINRAare just over the horizon. We believe based on the underlying intent of the legislation these rules most likely will be framed around existing code with specic modications or exemptions for Crowdfunding. This will allow for the fastest ramp-up and yet still minimize the potential for securities fraudprotecting both the businesses seeking capital and the unaccredited Crowdfunding investors. In the aforementioned context the Crowdfunding rules and regulations need to be clear and simple so they are adopted quickly by both the businesses seeking capital and the companies servicing them. So, instead of sitting on the sidelines with a wait and lets see what happens approach, CommunityLeader submitted its comments concerning these rules and regulations in a form of a letter to both the SEC and FINRA on August 17, 2012. This letter can be downloaded at: http://communityleader.com/nra-sec

2012 CommunityLeader, Inc. This publication, including all images and the following proprietary product names CommunityFunding, CampaignLeader, CommunityInvestor and Apicista are protected under international copyright laws, with all rights reserved. Neither this white paper, nor any of the material contained herein, may be reproduced without written consent of the authors.

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CommunityLeaders Realistic Approach

In preparation of the launch of Crowdfunding as a funding portal and qualied intermediary, CommunityLeader has built a team of experienced professionals, including a Chief Compliance Ofcer, who are currently deeply engaged in building a compliant, yet user-friendly, platform for both businesses and the individual investors in this emerging market. Our goal from the beginning has been to ensure that CommunityLeader can effectively deal with all requirements and challenges pertaining to regulatory compliance. Many Crowdfunding companies and trade associations are taking aggressive positions challenging the existing securities and regulatory framework to realize instant business opportunities for the intermediary and their vendors rather than the impact on businesses, business owners and investors. CommunityLeader is an exception. CommunityLeaders position is conservative in nature. We believe that it is in the best interest of the businesses, the investors and the emerging equity crowdfunding market to introduce crowdfunding within the existing regulatory environment to the greatest extent possible. We believe that introducing equity Crowdfunding to the market will be most successfully if existing case law, regulations, and licensing are maintained and respected. The majority of the following content is a synopsis of the comments we submitted to the SEC and FINRA. Most of which relates to the intent of the JOBS Act legislation as it relates to specic code sections of the Securities Act of 1933, as amended (the 1933 Act) and the Securities Exchange Act of 1934 (the 1934 Act). However, as a legal, accounting or nancial professional or consultant, we hope you start to visualize that even though Crowdfunding will be a great way to capitalize small businesses and create jobs, that who is the crowd? is an unknown and needs to be managed. At CommunityLeader, we believe the best way to manage the crowd is through knowledge, technology and professional service support. Below is an overview of the 10 comments we made in our August 17th letter. We believe that these address many of the critical issues which should be claried to support the safe and effective deployment of Crowdfunding. In order to remain in context with these various legislative Acts, we have maintained the use of certain descriptive words from the code such as issuer or intermediary. The issuer being the business executing a Crowdfunding capital raise or transaction; and the intermediary referred to as the funding portal pursuant to Section 3(a)(80) of the Securities Exchange Act of 1934.

Comment #1 - The $1 Million Limitation

One of the key limitations of the Crowdfunding legislations is that a business can raise up to a maximum of $1 million during the 12-month period preceding the date of executing a Crowdfunding transaction. It is our position that all capital raised including exempt issuer transactions under Section 4(a) of the 1933 Act, and Rules 505 and 506 of Regulation D be included in that computation. Some organizations are taking the position that issuer offerings under Section 4 to accredited investors only not be included in the computation of the $1.0 million limitation. We believe that the language of the statute is clear that the $1.0 million limitation is not limited to only Crowdfunding offerings, but to all type of capital raised in the previous 12 months. For example, if an issuer conducts a Rule 506 offering contained in Regulation D for $600,000 that closes on February 1, 2013, such issuer will only be able to conduct Crowdfunding offerings for no more than an aggregate of $400,000 for the period ending January 31, 2014. However, if an issuer were to conduct a Crowdfunding offering for $600,000 that closes on February 1, 2013, the issuer could conduct a Rule 506 offering for any amount in the 12 month period thereafter. The issuer may have to be mindful of integration rules under Rule 502(a) of Regulation D, and the safe harbor contained therein, to the extent that the SEC deems that integration is a concern. Our position is that further clarication needs to be made regarding integration rules under Rule 502(a) of Regulation D. It is the position of CommunityLeader that integration under Rule 502(a) is only applicable to Regulation D offerings and offerings under the Crowdfunding exemption is not included in the computation.

Why this is important?

Raising exempt funds from different sources without integration increases the likelihood of fraud and unnecessary investor dilution.

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Comment #2 Dene an Investor

The denition of a investor should be claried. Our position is that an investor should be limited to a natural person or the revocable living trust of a natural person. To further clarify, an investor cannot invest in an issuer who is offering a derivative security. An investment may only be made directly into an issuer and not in an issuer who will be acquiring a security in another entity.

Why this is important?

Crowdfunding is the opportunity for individual unaccredited investors. Any other interpretation violates the intent of the law and decreases the power and opportunity for the individual investor.

Specicity of Investment
Clarication should be made as to whether an issuer may be selling securities in what type of investment, including, but not limited to a start-up business, going concern, real estate, oil and gas and other passive investment vehicles. Our research shows there is a large Crowdfunding market opportunity for businesses to syndicate funds for passive investment purposes and feel that to the extent that the Crowdfunding exemption is permitted for investment entities, we believe that the SEC should comment on (i) the type of information be included for such investments pursuant to Section 4A(b)(1)(C) of the 1933 Act; and (ii) the application of the Investment Company Act of 1940 (the 1940 Act). We support this exemption with the carving out of specic compliance rules under the 1940 Act for Crowdfunding.

Why this is important?

Syndicated investments require additional education for investors, additional tasks for business, and different reporting for the intermediary. We want to be prepared to properly provide all three.

Net Worth Exclusion

When computing the net worth of an investor for the purpose of Crowdfunding, home equity should be excluded. We believe this is consistent with the amendment to Regulation D, Rule 501(a)(5) and as mandated in the Dodd-Frank Wall Street Reform and Protection Act; and will avoid confusion as it relates to the denition of an accredited investor.

Comment #3 Crowdfunding Transaction Fees

Transaction Based Compensation
Only funding portals that are registered as a broker dealer under Section 15(a) of the 1934 Act should receive any transaction based compensation. Subsections (A) and (C) of Section 3(a)(80) of the 1934 Act are explicit that a funding portal not offer investment advice or recommendations and not compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website of portal. Consistent with the legislative intent, we believe that the funding portal should not receive any transaction based compensation unless it is registered as a broker dealer under Section 15(a) of the 1934 Act and only act as an intermediary to connect a potential investor to a crowdfunding opportunity.

Why this is important?

Impacting the sale of a security in a fair and balanced way is a regulated profession. The history of case law, legislation, regulation and business product/services (like insurance) are built around this fact. Changing this for Crowdfunding is injudicious and will create both unnecessary complications and risks to business, investors and intermediaries.

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Fees for Services Rendered

Furthermore, we believe the intent of the legislation, is that the funding portal must comply with Section 4A(a) of the 1933 Act. In that regard, a funding portal should be able to collect certain fees for services rendered. The fees envisioned may be charged and collected in connection with due diligence efforts, document preparation, and education of issuers and investors as to the Crowdfunding exemption and its requirements and application of the portals matching system. Otherwise, no commissions should be charged by the funding portal.

Why this is important?

There should be reasonable fees for services rendered to maintain a sustainable market, but all fees should be disclosed to maintain professional integrity.

Multiple State Compliance

The registration of broker dealers is regulated by the securities laws of most states. Should the funding portals be able to collect transaction based fees for effectuating transactions in securities pursuant to federal law, the laws will be inconsistent with the laws of several states. Our position is that the pre-emption provisions of the Crowdfunding exemption do not deal with the registration of broker dealers.

Comment #4 Investor Education

As stated earlier, investor knowledge is one of the three essential components in the Crowdfunding process. All investors must receive and review educational materials concerning an investment in an issuer disclosed on the funding portals platform. We foresee two types of investor education programs: 1 just over the horizon is there time to implement effective educational forums for the investors. However, CommunityLeader has already more details visit www.live.communityleader.com. 2 be launched within 2-3 weeks following announcement of the Online Education Platform A viable platform can cost effectively In-Person Educational Seminars - This type of platform can be cumbersome and intensive. Since the legalization of Crowdfunding is

launched a series of introductory Crowdfunding Success Workshops for businesses, followed by a two-day Crowdfunding Intensive. For

Why this is important?

It is important for the businesses and their respective Crowdfunding opportunity that investors are fully informed and educated. To be effective, it cannot be as simple as checking boxes.

Crowdfunding rules. CommunityLeader will include on its website educational video clips that must be viewed by any investor on the funding portal as a prerequisite to investing. We will continue to review, improve and update videos on a regular schedule.

Accountability
To ensure the full viewing of the video clips, either an online test is given or software will be installed to assure that an investor has actually reviewed the entirety of the video clip. CommunityLeader believes that a representation and warranty be included in the issuer subscription documents stating that the investor has reviewed the educational material and had the ability to ask questions and have those questions addressed by CommunityLeader.

Comment #5 Issuer Disqualication

Disclosure or Disqualication?
Depending on any adverse information (bankruptcy excluded) divulged in the background and securities check of any ofcer, director or 20% shareholder, a question arises as to whether this is merely a disclosure item or cause for disqualication of the issuer from conducting a Crowdfunding transaction. CommunityLeader believes that an issuer should not be able to conduct a transaction pursuant to the Crowdfunding exemption with any such strike marks against them.

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Disqualication
To prevent repetitive fraudulent activities, a bad boy provision should be adopted. With a few modications, Item 401(d) of Regulation S-B should be the basis for applying the bad boy provisions while Regulation S-B dealt with smaller issuers. Regulation S-B covered the ve year period prior to the offering which we believe to be more applicable than the ten year requirement of Item 401(f) of Regulation S-K. The only disclosure item should be bankruptcy of any ofcer, director or 20% shareholder in the ve year period.

Why this is important?

There are some legitimate reasons certain individuals should not be able to take advantage of Crowdfunding. It is in the best interest of the industry, and investors, for there to be clear disclosure and certain disqualications.

Comment #6 - Offering Memorandum versus Tickler

After the issuer les its Crowdfunding application with the SEC, an Offering Memorandum must be supplied to the SEO and potential investors. In lieu of providing each investor the Offering Memorandum, CommunityLeader proposes that the funding portal posts on its platform an investor tickler. This tickler would provide to a prospective investor a tombstone and a brief description of the company. The tickler would contain a legend to the point that it is clear that the tickler is not an offering of securities and that an offering of securities may only be accomplished through a ling with the SEC. In order to properly use the Crowdfunding exemption, it is necessary that the investors be apprised of the types of companies that may appeal to their investment requirements. The tickler is the best avenue to inform investors to the existence of an offering. All ticklers and other communication materials must be recorded and archived by the funding portal or broker dealer.

Why this is important?

Appropriate concerns about providing prospective investors balanced information about the offering need to be balanced by desire for Crowdfunding capital to attract interest in the opportunity.

Cooling Off Period

During the 21 day cooling off period after the ling of the Offering Memorandum with the SEC, CommunityLeader believes that the funding portal or broker dealer not be able to solicit subscriptions or escrow investors funds. Rather, during the cooling off period, the funding portal or broker dealer should be able to receive indications of interest only. After the cooling off period, subscription agreements and investors funds would be collected.

Why this is important?

It is neither the businesses nor the investors interest to have signed agreements prior to completion of the cooling off period.

Comment #7 All or Nothing

Section 4A(a)(7) of the JOBS Act provides that the funding portal ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount. This rule considers closing escrow only when the stated offering amount of the raise has been attained. This could be a disaster, since a Crowdfunding investor has the right to cancel their investment at any time prior to the closing. It only makes logical sense for an issuer to raise more than the stated amount or they may never be a to close escrow. This modication would coincide with the statutory requirements of the 1933 Act.

Raising More Than Stated Amount

If more than the stated amount is raised is allowed, an issuer should have two choices. The rst choice is to reduce each investors subscription on a pro rata basis so each investor may participate in the securities offering. The second choice, in the sole discretion of the issuer, should be the ability to sell a green shoe. The issuers option would have to be disclosed in the Offering Memorandum that is led with the SEC. CommunityLeader urges that the SEC give an issuer the latitude to sell a greater percentage of the issuer, in the issuers sole discretion.

Why this is important?

The ability to over subscribe will protect the businesses ability to complete a raise while protecting the investors ability to withdrawal prior to close

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Comment #8 Centralized Platform

We recommend that there needs to be a universal centralized platform to compile information which will be gathered from investors in at least three occasions. First, when an investor registers with a funding portal. Second, upon subscription and the third is at the close of a raise for an issuer. Obviously, an investor can make a representation and warranty at each step as to his involvement in Crowdfunding offerings. If a central platform is not formed, CommunityLeader believes that the representation and warranty of the Crowdfunding activity of an investor be respected and that no further independent verication be obtained. However, a centralized platform would be connected to all funding portals and broker dealers who conduct Crowdfunding. This would have to be mandatory. CommunityLeader and presumably other vendors are willing to develop, secondary to its funding portal, the centralized platform as a not-for-prot industry resource. In actuality, much of the centralized platform has already been developed. The centralized platform would automatically compile the information in real time and inform all funding portals and broker dealers of the availability of an investor to participate under Section 4A(a)(8) of the 1933 Act.

Why this is important?

Requiring intermediaries to be legally responsible without ensuring a proper platform will make crowdfunding untenable.

Comment #9 Promotion Compensation

Section 4A(a)(10) of the 1933 Act provides that the funding portal or broker dealer shall not compensate promoters, nders or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor. This provision is divided into two separate categories of analysis.

Promoter
The rst category concerns the identity of a promoter, nder or lead generator. These groups are rms who provide compiled lists of investors, whether the investor consents or not. They usually have a list of potential investors names, contact information and possibly information as to whether they are accredited investors. With the advent of social media, tools now exist to forward Internet trafc to a website. This may be accomplished through GoogleAdWords, a search engine optimization (SEO) tool, sweepstakes sites or other similar sites. Use of SEO tools is for a fee, but is not a promoter, nder or lead generator in the traditional sense. CommunityLeader does not consider these non-traditional social media tools to be considered a promoter, nder or lead generator.

Private Information
The second category for analysis, in a social media context is actually voluntarily provided by the potential investor. It is not compiled by a promoter, nder or lead generator. Therefore, it is the position of CommunityLeader that the use of social media tools, as listed above, should not be considered compensation of promoters, nders or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor.

Why this is important?

The ability to appropriately leverage social media responsibly is essential to the success of crowdfunding raises.

Comment #10 Communication to the Crowd

Information requirements are set forth in Section 4A(b)(1) of the 1933 Act. The information will be included in a prospectus ling with the SEC during the 21 day cooling off period and will be provided by the funding portal to prospective investors. CommunityLeader is also aware of the concept of prospectus generally under the securities laws. A prospectus could include oral statements made by the funding portal of the issuer. Any statement made in a prospectus, whether the prospectus required under Section 4A(b)(1) of the 1933 Act, or an oral prospectus, is subject to the anti-fraud and civil liability provisions of Section 4A(c) of the 1933 Act. While many investors will rely solely on the prospectus led with the SEC and will subscribe online with no need to further communicate with an issuer, other investors will have questions concerning the content of the prospectus. CommunityLeader believes that the SEC should provide specic guidance concerning this potential communication between the interested investor and the issuer. www.communityleader.com

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CommunityLeader also believes that any communication be controlled by the funding portal or broker dealer by sponsoring blogs and webinars between issuers and potential investors. All of the communication should be recorded and archived by the funding portal or broker dealer and be readily accessible by the SEC and FINRA. Direct communication by the issuer and the investors (without recording by the funding portal or broker dealer) should be discouraged through education of both the investors and the issuers and be explained in the regulations under Section 4A(1) of the 1933 Act.

Why this is important?

Issuers timing and content of communication with the crowd is critical a multiple stages in the Crowdfunding process, but the communication must also create a fair playing eld for both the businesses seeking capital and the investors wanting the best opportunity.

The Bottom Line

The opportunities around equity Crowdfunding emerges from a legislative change to existing law. Fidelity to the law and full compliance with all regulations will be essential to the success of a business raising funds, an investor or a Crowdfunding intermediary. It is for this reason; CommunityLeader has made its comments to the governing agencies based on existing code sections to expand on the current understanding, raise questions and offer potential remedies. But, we recognize that compliance is not the end goal. The rules will only create a framework and the requirements a baseline. There are ways that intermediaries can go farther to protect the businesses raising funds and the investors, taking the risk to help them grow. Quality equity Crowdfunding intermediaries will not simply meet the minimum expectations but will strive to be the best they can to help their business clients be successful. Success will not be determined solely by fully subscribing to a crowd fund raise but successfully using this money to grow their business and add jobs to the economy. And that was the ultimate intent of the law.

Seizing an Opportunity
The opportunity is now before equity Crowdfunding actually takes effect. There are dozens of companies and organizations jockeying for positioning in this emerging space as portals and hundreds more as providers of legal, accounting, valuation andmarketing services. But, at the end of the day, the companies that take the high road now with the goal of protecting their clients and the investorsby following prudent protocol will be most likely the industry leaders. Starting now will certainly provide you with a competitiveedge over your competition. Firms that act now will come out ahead, while those that don't, will lose out on critical time andopportunity to capture market share.

Partnering with CommunityLeader

CommunityLeader is a leading voice in the emerging Crowdfunding market. Built by executives with decades of rsthand experience growing and selling private and public business, CommunityLeader is uniquely positioned to help a company make the right choices in evaluating and preparing for an equity Crowdfund raise. However, we will need hundreds of strategic and tactical partners to provide legal, accounting, coaching and marketing services for the thousands of companies who will be reaching out to their community for way to grow their business.

To find out how you may fit, you can visit www.communityleader.com and click the big green button titled Professional Network.

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Actualizing Today
CommunityLeader is a full service provider of business, investor and portal services in the emerging equity Crowdfunding market. CampaignLeader is a business development platform for companies seeking to develop, implement and support a successful Crowdfund campaign. CommunityInvestor is a smart-phone enabled application for individuals to track, commit, and subscribe to the business they want to support. Apicista is an accredited engine for community-based portals and partners to bring community funding home to their communities. Together, these three applications create the markets rst quality-based compliance focused and community-centric ecosystem for community funding. Authors This is CommunityLeaders third whitepaper on Crowdfunding and the second which have brought together CEO Joseph Barisonzi and CCO Rick Weintraub. Their previous collaboration titled Why Its Important to Start Preparing for the Crowd Now was directed at business owners.

Joseph Barisonzi, ceo

jbarisonzi@communityleader.com

Joseph is Co-Founder, Chief Executive Ofcer and inspiration behind CommunityLeader.

He is an accomplished executive with eighteen years of veriable experience in increasing community-based organizational value, enhancing productivity, streamlining operations and improving bottom-line performance of dozens of companies in multiple industries. Joseph's dynamic and inspirational leadership skills and strong entrepreneurial spirit is ideally suited for grasping innovative ideas, developing comprehensive strategies and implementing the actionable plans needed for CommunityLeader to excel in the emerging crowdfunding industry.

Richard A. Weintraub, cco

Rick is the Chief Compliance Ofcer of CommunityLeader. He is also the Founder and Managing Partner of Weintraub Law Group PC. Practicing law for 30 years, Rick is an 'AV'-rated attorney by Martindale Hubble. He has been Lead Counsel in more than 400 public and private offerings and more than 200 mergers and acquisitions. Rick has extensive experience in the negotiation and structuring of hundreds of business transactions. He specializes in the formation of business entities; venture capital transactions; mergers, acquisitions, and divestitures; public and private offerings, and debt nancing.

rweintraub@communityleader.com

181 2nd Ave, Suite 458 San Mateo, California 94401 tel: 866.516.8922

7825 Washington Ave S, Suite 450 Minneapolis, MN 55439 tel: 866.516.8922

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