Fung

Institute, Program for Entrepreneurial and Social Finance

Crowdfunding Case Study:

How to build a $500 Million Biotech in Silicon Valley,
Without Silicon Valley


The Gerrans Chronicle

Author: Richard Swart, PhD, Research Director, Program in Entrepreneurial and Social Finance
Graduate Assistant, Peter Trujillo, MBA Haas 2015
Copyright 2015

License is granted to any accredited academic institution to use this case study for teaching purposes.
Any commercial use or reprinting without the prior permission of the author is expressly prohibited.

Prologue
In many ways, Larry Gerrans looks like many other successful Silicon Valley CEOs.

After a fast-track career working for a Fortune 500 medical device firm, he launched a biotechnology
company and has scaled it into a life science accelerator. Gerrans has grown the valuation of his holding
company from $60 million to nearly $500 million. He has the drive, the sports car, the impressive team,
and the work ethic and dedication of a former collegiate star athlete which he was. What he has that
most other Silicon Valley CEOs do not have is a large pool of private investors whom he has essentially
crowd funded.

What he does not have are institutional investors in his company, or in its way.

This Crowdfunding Case Study will review the unique methods that San Rafael, California-based Sanovas
Inc. has used to attract non-institutional investment capital. We consider the opportunities and
challenges from raising capital from the crowd, as well as the methods Sanovas has used to overcome
entrenched barriers. We further consider possible challenges facing Sanovas as it attempts to use
Regulation D of the Securities Act and Title III of the JOBS Act to continue its growth.

This case study will make it clear that Gerrans is an exceptionally talented and laser focused CEO. The
question we must ask is whether this model is an artifact of his personality and network, is this an
example of social capital being used to finance corporate growth, or has Larry Gerrans innovated in
finance just as successfully as he has in the interventional sciences and in advancing minimally invasive
surgical technology and techniques? Indeed, is it possible that Gerrans has found a new model for
innovation capital?

Crowdfunding has moved from a tactic used by smaller firms who could not raise capital by any other
means, to an accepted, if not required part of the funding process for many firms. Entrepreneurs have
realized the value in mobilizing social and financial resources in a single, coordinated campaign. There
are literally dozens of business models within the field of crowdfunding but we must ask whether the
model used by Sanovas is a novel model of crowdfunding, or if it represents a traditional capital raise
with a strong social component.

Larry Gerrans Background

When joint replacement surgery was being pioneered, orthopedic companies hired and trained
consultants to work with the surgeons and technicians in the operating room, essentially supervising
and teaching them how to use the new technology and medical devices that had been created.

Larry Gerrans began his career at DePuy Orthopedics, a division of Johnson & Johnson, where on his
very first day he was involved in a hip replacement surgery. He was fascinated by the technology, but
also by the need for absolute accuracy, teamwork and precision - and the ability to teach surgeons and
other specialists how to be innovative. He quickly learned a huge amount about surgical techniques and

technologies despite not being a Medical Doctor. He would act as the interface between the Surgeons
and the engineering team helping them understand the challenges faced by surgeons in using their
devices and procedures.

At DePuy, he drove innovation and a salesforce distributing Orthopedic Implants and equipment for
Total Joint Replacements and minimally invasive arthroscopic surgery, growing his division into a $40
million business. He went on to become a successful corporate executive in the life sciences and medical
technology business most notably at Stryker Corporation and Smith & Nephew Corporation, Fortune 500
medical technology firms. Gerrans was so adept at identifying innovative opportunities and building
markets, that he was asked to bring together teams of surgeons and engineers to create novel
techniques, instruments and implant systems that have become the accepted best practice in many
surgical interventions today.

Today, he is the Founder, President and CEO of Sanovas Inc. an emerging medical and biotechnology
firm based out of San Rafael, California. Gerrans founded Sanovas with the initial mission of helping
cure pulmonary disease and Lung Cancer. This mission was partly personal. He watched many of his
friends and family members suffer from various pulmonary diseases. Gerrans noticed that while many
areas of medical technology were innovating quickly, pulmonary intervention was lagging behind.
Gerrans realized that there was a significant market opportunity in developing interventional
technologies for the lungs, where small diameter airways posed a dramatic technological challenge to
diagnosing and treating this tiny and hidden anatomy. In fact, the market for interventional pulmonary
technologies was a complete white space, so Larry started Sanovas to address that market need.

Sanovas Technology
We will let Gerrans describe his initial technology:

Sanovas was conceived to advance diagnostic and therapeutic technologies to treat
Pulmonary Diseases and Lung Cancer. We discovered the lungs to be a new frontier that
had significant procedural risks and technological challenges to operate in. The lungs are
the only anatomy that cannot be turned off to operate on. Consequently, these risks and
challenges required us to conceive of entirely new methods of intervention and entirely new
kinds of small diameter tools that function effectively at smaller dimensions and possess the
sophistication and intelligence to operate on a moving target.
(From an email to the author, October 2014)

Gerrans developed a formulaic product development approach to lung intervention to Access, Image
and Measure lung anatomy and pathology, known as the A.I.M Method. He has orchestrated the
miniaturization and sophistication of a wide range of A.I.M technologies that enable therapy to regions
of the lungs where clinicians have never been able to get to, no less treat. These paradigm-changing
technologies include: (1) a new class of minimally invasive Smart catheters to Access small diameter
anatomy; (2) the worlds smallest surgical cameras to Image it; and (3) new physiologic measurement

tools and biofeedback systems to Measure it. These A.I.M. technologies are core to enabling the delivery
of the companys (4) molecular diagnostic tools; their (5) local drug delivery technologies and (6)
therapeutic solutions.

As Sanovas successfully miniaturized and enabled these technologies, Gerrans quickly realized the A.I.M.
tools and many of the Sanovas diagnostic and drug delivery assets could be applied to other regions of
the body to improve interventional capabilities in numerous medical fields. Opportunistically, Sanovas
expanded its focus from Pulmonology and diversified the companys core technologies into other
sectors, such as Cardiology, Neurosurgery, Gynecology, Urology, GI surgery, Otolaryngology and
Ophthalmology to address significant unmet clinical needs in these sectors. Sanovas is now a holding
company for 12 different businesses; each focusing on a specific sector with an integrated set of tools
that address unmet clinical needs in the targeted field. Sanovas has over 90 patents and patents pending
that encompass a broad spectrum of interventional tools and biotechnologies.

Growth Plans and Strategic Partnerships

Gerrans asset diversification and sector integration strategy is intended to expand market potentials and
maximize Sanovas shareholder value. Gerrans is highly concerned with keeping tight control over the
innovation and product pipeline while protecting the founders and investors from dilution. The model
described below is not without execution risk, but appears to have been a sage anti-dilution model as
the firm reaches scale.

Along the way, Gerrans has engaged Sanovas in Joint Ventures with Mayo Clinic and development
initiatives with medical faculty from Harvard. The company is pursuing asset licensing for its drug
delivery technologies with pharmaceutical and biotechnology companies and has already spun out the
first six (6) companies, each focused on a specific field or technology from its first three (3) asset classes
Access, Imaging and Physiologic Measurement (A.I.M). Gerrans believes that at least 8 of these 12
business units can become multi-billion dollar companies. Part of his competitive advantage is that his
minimally invasive technology has not only advanced miniaturization and improved the sophistication of
the clinicians operative intelligence and capabilities, but it has also eliminated more than 90% of the
devices required by the large-scale minimally invasive surgical systems and it has reduced acquisition
and maintenance costs of these systems by 80%.

These low-cost and highly portable solutions could disrupt and displace the handful of entrenched
competitors in the existing markets in the US, Canada, Europe and Japan. Sanovas value proposition is
expected to enable the company to accelerate its growth into developing countries to expand access to
minimally invasive surgery beyond the 750 million addressable patient populations in the existing
markets to the nearly 3 billion middle class patient populations in the emerging global markets. Given
Sanovas track record, strong patent portfolio, and deep bench of management talent, it would seem
that securing venture capital would be relatively easy and also the fastest way to secure the significant
capital needed for growth. However, the old way of raising money via Venture Capital did not appeal
to Gerrans.

Self-Directed IRAs
Sanovas was started in 2010, during the great recession and at a time when capital markets essentially
dried up. As a result, Sanovas was bootstrapped through its initial growth phases which is nearly
unheard of for biotechnology firms. Nevertheless, Gerrans could not escape the inevitable day when
Sanovas had burned through available cash. So Gerrans approached his family, friends, and former
colleagues and found that despite being connected to a fairly successful network of high net worth
individuals, nearly none of their friends had the capital to make investments. Many had their funds in
401k programs, and had no liquidity.

Gerrans could relate: he had watched the tech boom of the 1990s and considered moving into IT. He
saw the allure of early access to equity in fast growing firms. However, he did not want to change the
focus of his career. Unfortunately, his 401k manager had made substantial bets on the IT sector and
when the market crashed in the late 90s Gerrans found himself down 40% in his 401k, with essentially
no control over those investments. Gerrans moved his money out of his Traditional 401k into a Self-
Directed IRA program and bought 120,000 shares of stock in a life science company where he knew the
founders and their technology well. That firm went public at $13 a share and has traded as high as $27 a
share. This experience taught Gerrans that wealth comes from early access to private companies and
that Traditional 401k programs do not allow investors the opportunity to invest in companies they
happen to know well.

Based on this personal experience, Gerrans shared his example with potential investors, and has so far
raised over $30 million from his personal network. He and his team have singlehandedly helped
hundreds of his friends and family extract over $20 million from their Traditional 401k accounts and
redirect them to Self Directed IRA Trusts to invest in Sanovas and to take control their retirement
futures. He has developed systems and processes to help potential investors through the laborious and
often intentionally opaque processes of transitioning a Traditional 401k and creating a self-directed IRA.

A Broken VC System?
Gerrans did not immediately start with the Self-Directed IRA model. He approached and met with some
VCs, but also conducted fairly extensive research into the prevailing business model of most VC firms.
Gerrans believes that even in Silicon Valley, the VC system is broken.

Thought not explicitly designed as an impact investment, part of the pitch of Sanovas is that investors
can realize significant financial returns while also helping promote the development of interventional
technology that has the potential to significantly affect numerous classes of procedures and treatment
for multiple difficult to treat diseases. There is some risk in positioning an early stage company as
providing social impact at the same time it is raising early stage capital as most investors, especially
institutional investors, do not base investment decisions on double bottom-line factors.

Gerrans strategy was based on his need to build a complex inter-connected series of technologies and
companies without being forced to spinout promising technologies before their full potential across

interventions could be realized. He needed patient risk capital willing to allow Sanovas to develop a
multipronged strategy and technology suite a strategy usually reserved for profitable divisions of large
multinational biotechnology firms. The section below highlights the logic Gerrans presents to investors
and strategic partners.

Gerrans Views of the VC System

First, by some estimates, as few as .01% of firms seeking venture capital will ever receive it. Gerrans
was shocked at the requisite effort and the distraction to growing the business caused by raising VC
funds. Second, Gerrans was very concerned about the issue of control and exit horizons. Third, Gerrans
learned very quickly that the capital markets do not invest in Start Up only in Scale. He is very
concerned about the lack of access to Innovation Capital in America and the impact this is having on
innovation and entrepreneurship in the U.S.

Gerrans has maintained close control over Sanovas and has built a very strong foundation for future
growth. He has surrounded the company with the very best minds and best talents from across the
clinical, business and legal communities: securing a joint venture with Mayo Clinic, a development
relationship with Physicians from Harvard and numerous advisory relationships from esteemed
institutions of higher learning and medical investigation. Sanovas has grown into new technology sectors
and markets and amassed a large portfolio of products and patents.

Equally important, Gerrans has amassed a passionate investor base that believes in the company and its
humanitarian cause to do well by doing good, and he is passionate about delivering on his promise to
maximize their shareholder value and return on investment. On the other hand, Gerrans is concerned
about the traditional modus operandi of VCs who fully expect to generate high value very quickly and
who seek expedited exits with disproportionate liquidation preferences to other investors. He is
concerned about their lack of interest in growing large complex enterprises that can maximize
shareholder value.

To his point, VCs have increasingly focused their efforts on deconstructing a company into its most
promising application or technology eliminating everything else, and positioning the firm for a quick
exit. Conversely, Gerrans has built his model on a challenge to the core tenet of the VC funding system
arguing that firms can achieve growth, provide excellent returns to investors and maintain control
without needing to strip their business down to one core technology or market opportunity.

Gerrans respects the need to accelerate the velocity of capital, but not to the dilution of shareholder
value in the process, especially seed capital. VCs follow an ideology that new money trumps old
money. Essentially, VCs and Private Equity wait for a company to reach a level of maturity, typically
revenue generation and market adoption, then they move in with their investment to scale the
business growth. Their deal tenets dilute prior investors by using liquidation preferences to reserve the
terms and conditions of their return on investment to the exclusion of seed investors.

The Internal Rate of Return for all Venture Capital during the last decade, 2000 to 2010, was 4% - the
worst Internal Rate of Return the Venture Capital industry has recorded. Gerrans believes that the
current VC systems provides too many rights and preferences to later venture investors which he
described as based on greed, not the best interests of the company and all investors. Gerrans points out
that the VC system is essentially broken, with terrible returns across the industry, many smaller firms
collapsing, and an over-representation of a handful of very powerful VC firms in Silicon Valley controlling
the majority of all investment capital in the United States. Gerrans describes this as a dearth of
innovation capital.

Gerrans also discusses the fact that the ecosystem in Silicon Valley was based on a cooperative set of
institutional actors that was conceived in the 1960s and 1970s and grew in scale in the 1980s to create
the tech boom of the 1990s. He relates the aspirational influence Hewlett and Packard and other garage
start-ups had on entrepreneurship in Silicon Valley and the synergistic model of innovation, intellect and
investment that built it the Service Corp of Retired Executives, early Angel investors, the Small
Business Administration, the venture firms and institutional banks. He describes a tightly integrated
ecosystem that diversified both risk and rewards across seed and venture stage financing. Gerrans
believes that the power of the large VC firms has distorted market dynamics such that the interests of
different parts of the risk capital community are no longer aligned. He points to the accidental
Millionaires the tech boom created, the vogue trend that led to the explosion in VC firms in the late
1990s, their hunger for instant gratification, the greed metrics that permeate institutional investing
and have clouded rationale thinking and expectations in the capital markets.

Gerrans believes that the key to building a multi-billion dollar company is the ability to focus on
exploration of new technologies, the integration of existing technologies and their applications across
interventions, industries and disease classes to address the challenges and unmet needs of a growing
global healthcare marketplace. Gerrans sees the growth in emerging markets and the global middle
class as a renaissance opportunity for the Life Sciences. He sees a 400% increase in the global patient
population from 750 Million addressable patients (largely comprised of Americans, Europeans,
Canadians and Japanese) to more than 3 Billion addressable patients by 2020, that include new
populations from China, India, the Baltic States, South America and southeast Asia.

The Gerrans vision believes in Patient Capital as a critical component of building significant shareholder
value, and he is creating the model at Sanovas to achieve it. He wanted to build an autonomous
accelerator, where he and his staff of engineers could experiment with new applications of technology
from his patent pool and spin out companies as their technology was ready for a broad market. To do
this, Gerrans needed to maintain control and looked for alternative sources of funding.

Self-Directed IRA Process and Syndication Model

United States law allows private citizens to create a Self-Directed Investment Retirement Account (IRA)
and to control the assets held in that account. This little utilized provision is now receiving significant
attention within crowdfunding as a potential source of investment capital.


Traditional IRA companies generally try to prevent their investors from doing private placements with
their IRA accounts. They employ procedural tactics that makes the process very difficult, since their
business relies on the management of the IRA funds through their own vehicles. There are a few
Retirement Trust companies who specifically focus on serving as Custodians to private investors.
These Self-Directed IRA companies enable private investors to Roll Over their individual retirement
accounts from the Traditional IRA companies and are generally more accommodating to their clients
wishing to make private placement investments.

Gerrans created a customer service process to help his investors manage the administrative and
compliance issues involved with rolling into a Self-Directed IRA and then making the investment into
Sanovas. Through the process of syndicating investors through their personal IRAs, Sanovas has raised
$20 million out of a total of $30 million raised.

This syndication process is administratively intensive and expensive, which also makes this method
unique. Sanovas estimates that 2% of the money raised goes into the administrative and legal processes
of their investment offering. They have full time staff members dedicated to managing investor relations
for over 300 investors who made 589 investments in Sanovas as of August 1, 2014.

Gerrans and his team have built a meticulous system that helps investors through the entire process.
First, they have built an SEC compliant online system that allows potential investors access to their
investor portal where investors have to cede their personal information and referral source before they
are given access to the sensitive information within the portal. There is an authentication process that
happens internally and once a potential investor is verified by Gerrans, they are given a 96-hour access
window into the data room, which provides investors with a full and highly transparent analysis of the
company. This data room is built with many security redundancies to protect the companys private
information.

Once an investor has committed to invest through an IRA, he is contacted by Sanovas to begin the
investment process. Gerrans has built an administrative process that helps these investors navigate the
IRA process including the necessary diligence and paperwork. This process can take anywhere from 3
weeks to several months depending on the responsiveness and compliance of the investor and IRA
company.

This unique model, conceived by Gerrans, is essentially a peripheral enterprise that had developed deep
expertise in the process of converting Traditional 401k investment funds into Self-Directed IRAs. Gerrans
had particular expertise in the cumbersome process and has learned what models to pursue with which
401k custodians.

It is not clear if Gerrans should provide this service to other firms. One possible business model would
be to bring other life science firms into the state of the art biotech facility that Gerrans has created. In
addition to the typical administrative offices, it has its own tissue bank, microbiology laboratories,

molecular science laboratories, manufacturing clean rooms, engineering and design studios and could
become a world class life science accelerator especially if it adapts its expertise in this novel form of
finance to assist their client companies in the accelerator to use this business unit for finance.

Regulatory Landscape
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or
meet an exemption. Regulation D (Reg D) contains three rules providing exemptions from the
registration requirements, allowing some companies to offer and sell their securities without having to
register the securities with the SEC.

Sanovas uses the exemptions under Rule 506 in Regulation D (non-JOBS Act exemption). Under this
exemption, the issuer can raise an unlimited amount of capital from issuing restricted shares to mostly
accredited investors, with restrictions on the amount of non-accredited investors. The issuer also cannot
use general solicitation to recruit investors. While companies using the Rule 506 exemption do not have
to register their securities and usually do not have to file reports with the SEC, they must file what is
known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names
and addresses of the companys owners and stock promoters, but contains little other information
about the company. Issuing companies are required to issue periodic audited financial statements.

The JOBS Act was passed in 2012 and is a substantial modification to existing security regulations.
Through funding portals, companies are able to solicit their private offering to a broader universe of
investors. Title II allows firms to raise money from accredited investors, and in a remarkable break with
securities regulations, allow general solicitation.

As of this writing the Securities and Exchange Commission has not released rules to enact Title III, which
will allow firms to raise equity investments from non-accredited investors. Sanovas intends to take
advantage of Title III when passed, but the proposed regulations only allow companies to raise a
maximum of $1 million per year through Title III, and the cost of capital is estimated to be between 12
and 25% (this variation is due to a lack of clarity about ongoing compliance costs and the level of
accounting scrutiny that will be required).

Sanovas Capital Structure

Sanovas first started raising capital in 2010 with an $8.5 million convertible loan. As of June 2012,
Sanovas converted that note into 10 million shares of equity at a $60 million valuation. This valuation
was based on one subsidiary company and 25 patents.

Today the valuation of the whole portfolio of 12 companies and 90 multi-national patents/patents
pending is expected to be more than $500 million, largely based on the value of the first six (6) business
units, with a total of $30 million of equity invested. Sanovas has a cost of capital of 12% that includes 5%
of equity, 2% of overhead, and 5% in warrants.

Spinning Out and Keeping Control

Through this model Sanovas has been able to maximize shareholders return on equity in the near term
and maximize their return on investment by creating enduring and recurring value in the long term.
Gerrans strategy of asset diversification and sector integration has already served to mitigate the
dilution his shareholders would have, otherwise, endured at the hands of venture capitalists if Sanovas
had followed the traditional path to finance.

The Sanovas business has created 12 companies and already spun off six (6), realizing parts of their
shareholders equity, and more importantly reserving another six (6) opportunities for further capital
appreciation. These subsidiaries better align with the goals of the private equity and venture capital
investor, and thus those types of investors have committed to back some of these ventures. Since these
institutional investors have not been given access to the parent corporation, Sanovas has been able to
shield itself and its investors from any potential intervention or interference by these outside investors.

Clearly Sanovas views institutional investors are primarily sources of capital they do not believe that
the ancillary benefits access to investors networks, board input from investors, possible strategic
introductions, etc., justify the liquidation preferences and push for early exits. Gerrans believes
investors compensation should be commensurate to their contribution and that the ancillary benefits
of institutional capital rarely measures up to its promise and has not been respectful to the risk capital
that preceded it.

Given the dearth of innovation capital in recent years, Gerrans model has as much to do with necessity
being the mother of all invention as it does with saving innovation in America and turning around the
downward trends in the US savings rate in time for the last baby Boomers to cross the IRA savings
threshold in 2023. He has also worked to harmonize his investors interests by preaching the need to
make a socially responsible investment in the humanitarian cause to treat and cure pulmonary diseases
and Lung Cancer. This passionate plea falls deaf on the ears of institutional investors who rarely look
past the financial metrics to the people who make up these disease markets. So for that, Gerrans model
gives double meaning to social finance.

Risks and Benefits

Sanovas process for raising capital is cumbersome. There are many administrative and legal costs, but
these costs do come with some benefits. Their process provides much better control as these investors
are not strategic investors who want to take control of the business. No single investor owns enough
equity to exercise power over management, and thus management can retain full control of the
operation and maintain the flexibility they require. This capital is also much more patient, because the
Self-Directed IRA investors are not looking for a quick exit or quick profits, as they are in retirement
accounts and looking for the very long term benefits.

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It is unlikely that this patient capital is quiet capital, however. The company still has 30% of its
investor commitments in cash, and those investors interests may be short term. Managing this investor
base is clearly laborious. Gerrans maintains active dialogue with investors and has transmitted over 36
investor communications in 2014, alone. The Gerrans model has allowed him to insulate and protect his
early and core friends and family investors from the predation of new money investors, effectively
preventing new money from trumping the old money. This process also provides an alternative to VC
funding that is extremely difficult money to raise and comes with its own set of problems as previously
discussed. In considering all aspects of this model, has Gerrans developed an efficient model for
innovation capital that allows firms to scale without venture finance?



Discussion Point
If Gerrans model can return an average 5x return in 5 years to just 10% of the
retirement savings in 401k and IRA accounts in the U.S. what impact could this
model have on savings rates and retirement planning? Could this be a formula
to reduce the 30 year decline in the US Savings Rate and stimulate job growth in
the process? How could his model impact innovation, entrepreneurialism and
job creation in the US? What could its impact on US GDP be?

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The Economics of Retirement Savings

In discussions with potential investors, Gerrans argues that his model could be adapted by other firms to
make a significant impact on both the capital markets and the retirement prospects of Americans. His
argument is based on:

Baby Boomers need higher than average returns over the next 10 years.
The Life Sciences are best suited for this kind of investing as it requires patient capital and can
most responsibly manage investor risk/reward threshold while delivering on the increased ROI
needs required by Baby Boomers.
The fact that the Baby Boomers will be the biggest consumers and beneficiaries of Life Science
innovations.
The observation that as the baby boomer generation is now exiting the capital markets, there
will be a drain on holdings in IRA and 401k accounts.
The emerging global healthcare marketplace is growing in excess of 400% by 2020 and it cannot
afford the current technology to meet the standards of care its patient populations require.
The fact that the US has had a 30-year decline in savings rates.
The Great Recession and impact of Quantitative Easing and the Feds Zero Interest Rate Policy
has displaced over $9 Trillion in possible Savings to retirement accounts.
Most institutional investment capital is directed as consumer debt finance the proportion of
investment that seeks to invest in businesses is decreasing dramatically across banking and
institutional investors.

Gerrans argues that if Sanovas 5x average return to investors over a 5 year period could be extended to
only 10% of the retirement savings in the United States, this model of investing in technology startups
though Self-Directed IRAs could have significant impacts on retirement prospects. Given the body of
research showing that most job creation in the US comes from early stage companies, he also argues
that his model can have dramatic impact on job creation.

What objections would the consumer protection lobby offer to Sanovas claims?

What is the appropriate balance between consumer protection and providing access to investments
with significant upsides?

Are capital markets working for middle class American Investors does Gerrans have a point?

What would the impact on GDP be if 5-10% of all retirement money was directed to business
investment?

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Sanovas has essentially created an IRA crowd finance model using a private syndication under the old
Regulation D Rule 506. With the passing of the JOBS Act under the new Rule 506 provisions, Sanovas can
easily begin crowdfunding investors using general solicitation while maintaining its current system of
controls and processes. With a company that is mature but still in a growth stage this can be a very
attractive offering to the general public. With a generally solicited offering Sanovas has the potential to
raise a significant round of capital which will allow the company to reach the next level of research,
development and expansion.

Is Sanovas Crowdfunding?

Crowdfunding is traditionally viewed as the utilization of websites or platforms to raise funds from a
broad pool of potential backers, who are engaged through integrated marketing and social media
promotion. Since the Title II provisions of the JOBS Act were legalized in late 2013, there have been
dozens of new platforms launched to attract investments by accredited investors.

Large corporations such as Sony, Coca-Cola, Dodge and Lenovo have been using crowdfunding as a
marketing and product innovation model. 100 Billion dollar real estate development companies and
investment groups have been posting deals on their own equity crowdfunding platforms.

Is crowdfunding becoming a marketing and deal promotion model divorced from its original social
media origins? Is the novel application of a series of regulatory reforms by public companies an
extension of the crowdfunding model, or does the entrance of Fortune 100 firms represent a threat to
existing crowdfunding platforms?

Sanovas is mobilizing capital through its social network, directing potential investors to its self-hosted
deal room, and using existing security regulations to secure an exemption from a full security offering.
Many investors come from recommendations from existing investors. But, where most of the process of
creating the transfer of funds is done offline through specialized staff, is Sanovas model crowdfunding,
innovative finance or both?

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Key Questions:

1. What impact will the passage of Title III of the JOBS Act have on Sanovas business model and
cost of capital?
2. Has Sanovas hampered its growth by focusing on the Self-Directed IRA investor acquisition
rather than seek institutional investors?
3. What impact does this model have on the governance of Sanovas?
4. What impact has this model had on shareholder ROI? Dilution? In comparison to Angel, VC
investor funded companies?
5. What threatens Sanovass ability to scale this model across the 12 intended spinouts?
6. Should Gerrans spin out his Self-Directed IRA services group into a separate company and offer
services to other firms?
7. Given the tightly networked nature of the early investors in Sanovas, has the founder exposed
his firm to additional risks? Do these investors help or hinder the Founder?
8. Is Sanovas efficiently focusing on deriving value from its portfolio of patents and technologies?
Is crowdfunding an efficient mechanism to fund market expansion and growth capital?
9. Should Sanovas consider Title II general solicitation rather than pursue Title III what are the
benefits of one model over the other?
10. How should Sanovas fund its remaining capital formation requirements? At the Holding
company? At the Subsidiaries? What are its best sources of capital?
11. What are the most profitable exit opportunities for this enterprise?
12. Is Sanovas crowdfunding? If not, how would you describe the financing model
13. How should a VC firm approach a technology firm whose core value proposition is the
development of multiple technologies across disciplines?
14. Is the Sanovas model replicable?

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