Document:

Exhibit 10.32

    
      

    

     

    Exhibit
      10.32

    

      February
        23, 2005

      

      Smart
        Online, Inc

      2530
        Meridian Parkway 

      Durham,
        North Carolina 27713

      Attention:
        Michael Nouri 

      

      Re: Investment
        Banking Services 

      

      Dear
        Michael: 

      

      This
        letter agreement (this "Agreement") will confirm our understanding relating
        to
        the engagement of Berkley Financial Services (BFS) Ltd. ("we", or "us") as
        a
        financial advisor to Smart Online. Inc. (the "Company" or "you"). Capitalized
        terms used in this Agreement have the meanings set forth at Section 11. In
        consideration of the following mutual covenants, and intending to be legally
        bound. Berkley Financial Services (BFS) Ltd. and the Company agree as follows:
        

    

     

    
      1.
        Appointment. (a) The Company appoints Berkley Financial Services (BFS) Ltd.
        its
        non-exclusive agent to represent the Company in connection with the negotiation
        and closing of one or more Transactions with investors outside the United
        States. 

      

      (b)
        In
        the performance of our services under this Agreement, both Berkley Financial
        Services (BFS) Ltd. and our employees and representatives will be independent
        contractors. This Agreement does not give Berkley Financial Services (BFS)
        Ltd.
        or any of our employees or representatives any authority to bind the Company
        to
        any contractual arrangement. You will retain the sole discretion regarding
        any
        decision to proceed with any Transaction. 

      

      2.
        Services. (a) We will perform those financial advisory services that we deem
        necessary or appropriate for the closing of the Transaction, including (if
        analyzing historical and proforma financial information pertaining to your
        business and operations; (ii) assisting in performing due diligence relating
        to
        the Transaction (although you are responsible for completing any due diligence
        to your satisfaction); (iii) reviewing and commenting on financial projections
        prepared by you; (iv) preparation or review of presentation and placement
        documents; (v) review of documents required for the structuring. negotiation,
        and documentation of the Transaction; (vi) using our best efforts to identify
        and contact potential investors for the Transaction; (vii) using our best
        efforts to identify and contact potential acquirers of, investors in. or
        strategic partners or acquisition candidates for, the Company; (viii) advising
        and assisting you in the negotiation and structuring of a Transaction; and
        (ix)
        assisting in closing a Transaction, except that we will not perform any services
        that would require us or our employees to be licensed or registered as a
        broker-dealer or investment advisor. 

      

      (b)
        None
        of our services will be deemed to constitute legal representation, auditing,
        or
        tax services, and you agree that the Company will consult appropriately licensed
        attorneys or certified public accountants, respectively, on all material
        legal,
        auditing, and tax matters involving the Company. 

      

      (c)
        Our
        services will be performed by our employees or by other persons engaged and
        paid
        by us. We reserve the right to determine and change the personnel assigned
        to
        this engagement at any time, with the Company's consent; such consent not
        to be
        unreasonably withheld. 

      

      (d)
        Our
        services will generally be performed at our offices, although we expect to
        meet
        with your officers, directors, employees, auditors, and legal counsel at
        their
        respective offices and to provide other services at your offices or other
        locations from time to time. 

      

      3.
        Company Obligations. (a) For us to assist you with any Transaction and to
        render
        financial advisory services, you will promptly provide us with information
        that
        we request, allow us access to the Company's officers, directors, employees,
        auditors, legal counsel, and other consultants and advisors, and take any
        other
        commercially reasonable actions that we request. 

      

      (b)
        In
        preparing or reviewing any documentation to be delivered to any third party
        in
        connection with any Transaction, the Company is responsible for ensuring
        that
        any disclosures are true, correct, and complete in all material respects,
        and we
        assume no responsibility for the completeness or accuracy of any information
        prepared or reviewed by you. 

      

      4.
        Advisory Fees. (a) You will pay us a contingent fee in connection with each
        Transaction in an amount in cash from Three Percent (3%) to Ten Percent (10%)
        of
        the Aggregate Proceeds from the Transaction with any person or entity from
        the
        Approved Investor List. The amount payable for each Transaction will be agreed
        by you and us at the time of the Transaction. In calculating the fee under
        this
        Section, any Aggregate Proceeds in a form other than cash will be valued
        at
        their fair marker value. 

      

      (b)
        The
        Transaction Fee will apply to any Transaction occurring prior to termination
        of
        this Agreement. 

      

      5.
        Confidentiality. We will maintain the confidentiality of your Confidential
        Information during the term of this Agreement and for a period of one year
        thereafter. We may disclose Confidential Information to our employees and
        representatives as necessary to provide thee services, provided that they
        have
        agreed to protect your Confidential Information in accordance with this
        Agreement. 

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      February
        23, 2005

      Page
        2

       

      6.
        Liability, Indemnification, and Contribution. (a) No Indemnitee will be liable
        to you for any Liability for any acts or omissions that are taken or omitted
        in
        connection with the performance of this Agreement, except as provided below.
        

      

      (b)
        You
        must indemnify each Indemnitee from and against all Liabilities arising out
        of
        or relating to our services. You will also indemnify each Indemnitee for
        all
        costs and expenses (including fees of counsel selected by the Indemnitee)
        incurred in defending any claim for which the Indemnitee is entitled to
        indemnification. You must advance all costs to the Indemnitee on demand so
        long
        as the Indemnitee has agreed to reimburse you if a court finally determines
        that
        the Indemnitee was not entitled to indemnification. 

      

      (c)
        If it
        is determined for any reason that our rights to indemnification under Section
        6(b) are not available for any reason, then we and the Company will have
        rights
        of contribution with respect to any such Liability such that (i) we will
        be
        liable for a proportion determined by dividing our compensation under this
        Agreement by the Aggregate Proceeds upon which such compensation is calculated,
        and (ii) the Company and its Affiliates will be liable for the remainder.
        

      

      (d)
        The
        provisions of Sections 6(a), 6(b), and 6(c) will not apply if, but only to
        the
        extent that, the Indemnitee did not act in good faith and (i) the Indemnitee
        received a financial benefit to which he was not entitled or (ii) with intent
        to
        cause harm to the Company or your business. If Section 6(a), 6(b) and 6(c)
        do
        not apply by reason of this Section 6(d), then we will indemnify the Company.
        

      

      7.
        Term.
        (a) Either party may terminate this Agreement upon thirty (30) days prior
        written notice to the other upon if the other party defaults with respect
        to any
        obligation under this Agreement; provided that this Agreement will not terminate
        if the default is cured within that 30-day period. 

      

      (b)
        You
        may terminate this Agreement without cause at any time upon ten (10) days
        prior
        written notice to us. 

      

      (c)
        We
        may terminate this Agreement without cause at any time upon ten (10) days
        prior
        written notice to you. 

      

      (d)
        The
        termination of this Agreement will not affect your obligation to pay us any
        amount due under this Agreement or our respective rights and obligations
        under
        Section 5 and Section 6. 

      

      8.
        Certain Definitions. When capitalized in this Agreement, the following terms
        shall have the meanings set forth in this Section. The singular includes
        the
        plural and the masculine includes the feminine and the neuter, and vice versa,
        as the context requires. Unless expressly provided in this Agreement, all
        references to any contract or agreement shall mean the contract or agreement
        as
        amended from time to time, and all references to any statute shall mean the
        statute as amended from time to time, together with any regulations or judicial
        and administrative decisions implementing or interpreting that statute.

      

      "Affiliate"
        means, with respect to any person or entity, any other person or entity that
        controls, is controlled by, or is under common control with that person or
        entity, all as determined under the Securities Laws. 

      

      "Aggregate
        Proceeds" means the aggregate amount of cash paid to the Company in connection
        with the Transaction for sales of securities of the Company. 

      

      "Confidential
        information" means information concerning the Company and your business that
        is
        (i) disclosed in a writing marked "confidential" or (ii) disclosed orally
        and
        identified as "confidential" in writing prior to or within ten (10) days
        following disclosure. Confidential Information does not include information
        (i)
        that is or becomes publicly available or generally known to persons in your
        industry without breach of our obligations under this section, (ii) in our
        possession as of the date of this Agreement, unless notified that such
        information is "confidential", (iii) received by us after the term of this
        Agreement, unless notified that such information is "confidential",(iv) received
        from persons having no obligation of confidentiality to you, or (v) that
        we
        independently develop without reference to any Confidential Information.
        

      

      "Transaction"
        means any transaction or series of related transactions between the Company
        and
        parties on the Approved Investor List involving the issuance and sale by
        the
        Company of any class or series of its equity securities or any securities
        convertible into or exchangeable for its equity securities. 

      

      "Approved
        Investor List" means a written list of potential investors that have been
        pre-approved by the Company to be contacted directly by us on the Company's
        behalf. 

      

      "Indemnitee"
        means each of Berkley Financial Services (BFS) Ltd. any officer. director,
        employee, agent, counsel, or representative of either of the foregoing, and
        any
        person performing services to or on behalf of the Company under this Agreement.
        

      

      "Liability"
        means any liability, loss, claim, action, cause of action, settlement, or
        other
        cost or expense. 

      

      "Securities
        Laws" means the Securities Act of 1933, the Securities Exchange Act of 1933,
        and
        any Federal or state statute governing the issuance and sale of securities.
        

      

      "Underwriter"
        means any broker or dealer licensed to effect transactions in securities
        under
        Securities Laws. 

      

      9
        Entire
        Agreement; Amendment. This Agreement represents the entire agreement and
        understanding between us concerning our services and supersede ail prior
        and
        contemporaneous agreements, understandings. representations and warranties.
        This
        Agreement may not be amended, changed or modified except by a written
        installment executed by or on behalf of both you and us. 

      

      10.
        Assignment. Neither patty may assign this Agreement to any other party without
        the other patty's prior written consent, except that you may assign this
        Agreement to any party that acquires substantially all of the assets and
        the
        goodwill of the Company. 

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      February
        23, 2005 Page 3 

      

      11.
        Binding Effect; No Third Party Beneficiaries. This Agreement is binding upon
        and
        inure to the benefit of the parties and our respective successors, transferees:
        and assigns. No person other than the parties to this Agreement has any legal
        or
        equitable right, remedy or claim under this Agreement. 

      

      12.
        Waivers and Consents. No waiver of any breach of any of the terms of this
        Agreement, nor any consent required or permitted to be given hereunder, will
        be
        effective unless in writing and executed by or on behalf of the party or
        parties
        against whom the waiver or consent is to be enforced. No waiver of any breach
        nor consent to any transaction will be deemed a waiver of or consent to any
        other or subsequent breach or transaction. 

      

      13.
        Notices. Any notice required or permitted under this Agreement must be in
        writing and will be deemed given if (i) personally delivered. (ii) sent by
        facsimile transmission to the party for whom such notice is intended at the
        fan
        number set forth below, or (iii) sent by registered or certified US. Mail,
        or by
        nationally recognized delivery service, postage prepaid, to the party for
        whom
        such notice is intended at the address set forth below. Either party may
        change
        the address or fax number by giving notice of to the other party in the manner
        provided in this Section. 

      

      14.
        Governing Law. This Agreement will be governed by and construed in accordance
        with the laws of the State of North Carolina applicable to agreements made
        by
        residents of that state and wholly performed in that state. 

      

      15.
        Arbitration. Any dispute or claim under this Agreement or otherwise relating
        to
        our services must be resolved by arbitration in Orange County, North Carolina
        under the rules of the American Arbitration Association then in effect. A
        judgment on any arbitration may be entered in any court in North Carolina
        or any
        other state or country having appropriate jurisdiction. 

      

      16.
        Construction and Interpretation. (a) Each party has had the opportunity to
        consult with legal counsel regarding the provisions of this Agreement. Every
        covenant, term and provision of this Agreement will be construed according
        to
        its fair meaning and not strictly for or against any party or parties.

      

      (b)
        When
        used in this Agreement, the term "including" means "including, but not limited
        to". 

      

      (c)
        Captions of the several sections of this Agreement are for reference purposes
        only, are not intended to describe, interpret, define or limit the scope,
        extent
        or intent of this Agreement or any provision hereof, and will not control
        or
        alter the meaning of this Agreement as set forth in the text. 

       

      17.
        Counterparts. This Agreement may be executed in any number of counterparts
        and
        all executed counterparts will constitute one agreement binding on all parties
        to this Agreement, notwithstanding that all parties have not signed the same
        counterpart. 

      

      Please
        confirm your agreement by signing below and returning a fully executed
        counterpart of this Agreement to us. We look forward to working closely with
        you
        and to an enthusiastic response from the market. 

      

      

      
        	 	
                BERKLEY
                  FINANCIAL SERVICES (BSF) LIMITED

                

                BY:
                  /s/ Illegible

                Title: 
                  by means of POA

                Date:
                  3/3/05

                Registered
                  Office: Post Office Box 1026

                                                
                  The Valley

                                                
                  Anguilla

                                                
                  British West Indies 

              

      

      

      

      Agreed
        and Accepted

      SMART
        ONLINE, INC.

      

      By 
        /s/ Michael Nouri

      Title: 
        President and CEO

      Date: 
        3/14/05Exhibit 10.36

    
      

    

     

    Exhibit
      10.36

    

       

      SUBSCRIPTION
        AGREEMENT

      

      Smart
        Online, Inc.

      2530
        Meridian Parkway

      2nd
        Floor

      Durham,
        North Carolina 27713

      Attention:
        Michael Nouri

      

      Gentlemen:

      

      (1)    Pursuant
        to prior understandings and discussions, the undersigned (“Subscriber”) hereby
        agrees to purchase from Smart Online, a Delaware corporation (the “Company”),
        for a purchase price of Two Dollars and Fifty Cents ($2.50) per share the
        number
        of shares of Common Stock, par value $0.001 per share (“Common Stock”) set forth
        on the signature page of this Agreement. (The Common Stock is sometimes
        hereinafter referred to as the “Securities.”) Subscriber hereby acknowledges (i)
        that this subscription shall not be deemed to have been accepted by the Company
        until the Company indicates its acceptance by returning to Subscriber an
        executed copy of this subscription, and (ii) that acceptance by the Company
        of
        this subscription is conditioned upon the information and representations
        of
        Subscriber hereunder being complete, true and correct as of the date of this
        subscription and as of the date of closing of sale of the Securities to
        Subscriber. As a condition to Subscriber’s purchase of the Securities pursuant
        to this Agreement, Subscriber and the Company will execute and deliver to
        one
        another a copy of the Subscriber Rights Agreement in substantially the form
        attached hereto as Appendix
        A
        (the
“Subscriber Rights Agreement”) and a Dribble Out Agreement in the form attached
        hereto as Appendix
        B
        (the
“Dribble Out Agreement”).

      

      (2)    Until
        actual delivery of the purchase price to the Company and acceptance by the
        Company of the purchase price and this Subscription Agreement, the Company
        shall
        have no obligation to Subscriber. The Company may revoke a prior acceptance
        of
        this Subscription Agreement at any time prior to delivery to and acceptance
        by
        the Company of the purchase price for the Securities.

      

      (3)      Subscriber
        hereby represents and warrants to the Company as follows:

      

      (a)    Disclosure.
        Subscriber has carefully reviewed a draft of the Company’s Annual Report on Form
        10-K (the “Draft 10-K”), including financial information, provided by the
        Company, including all risk factors, and fully understands all risks associated
        with investment in the Company. Subscriber acknowledges that it has a received
        the Draft 10-K and that it is aware that the Company is undergoing an
        investigation by the Securities and Exchange Commission (the "SEC") and an
        internal investigation by independent counsel ("Independent Counsel") acting
        at
        the direction of the Audit Committee. Subscriber acknowledges that it is
        aware
        that these investigations are on-going and that Independent Counsel has not
        given a final report regarding its findings and recommendations. Subscriber
        acknowledges that the Company has given Subscriber an opportunity to discuss
        the
        internal investigation with Independent Counsel and the Subscriber has had
        an
        opportunity to ask questions of management regarding its knowledge of the
        status
        of the internal investigation and the SEC investigation. Subscriber

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

      acknowledges
        that it is entering into this Agreement with knowledge that the final report
        of
        Independent Counsel has not been delivered to the Company and that the findings
        and recommendations of the report may change the disclosure in the Draft
        10-K
        provided to it and may result in a material and adverse impact on the Company's
        business and financial condition.

      

      (b)    Authorization.
        Subscriber has full power and authority to enter into this Agreement. This
        Agreement constitutes Subscriber’s valid and legally binding obligation,
        enforceable in accordance with its terms except as limited by (i) applicable
        bankruptcy, insolvency, receivership, reorganization, moratorium and other
        laws
        of general application affecting enforcement of creditors’ rights generally, and
        (ii) general principals of equity, the application of which may deny the
        Company
        the right to specific performance, injunctive relief and other equitable
        remedies.

      

      (c)    Experience.
        Subscriber is experienced in evaluating and investing in private placement
        transactions of securities of technology companies such as the Company, has
        such
        knowledge and experience in financial and business matters that Subscriber
        is
        capable of evaluating the merits and risks of Subscriber’s investment in the
        Securities, is able to bear the economic risk of the investment and is prepared
        to hold the shares for an indefinite period of time.

      

      (d)    Investment.
        Subscriber is acquiring the Securities for investment for Subscriber’s own
        account and not with a view to, or for resale in connection with, any
        distribution thereof, and Subscriber has no present intention of selling
        or
        distributing the Securities. Subscriber does not have any contract, undertaking,
        agreement or arrangement with any person to sell, transfer or grant
        participation to such person or to any third person with respect to any of
        the
        Securities other than as set forth in this Agreement. Subscriber understands
        that the Securities to be purchased by Subscriber have not been registered
        under
        the Securities Act of 1933, as amended (the “Act”) by reason of a specific
        exemption from the registration provisions of the Act which depends upon,
        among
        other things, the bona fide nature of the investment intent as expressed
        herein.

      

      (e)    Reliance
        Upon Subscriber Representations.
        Subscriber understands that the Securities are not registered under the Act
        on
        the grounds that the sale provided for in this Agreement and the issuance
        of
        Securities hereunder is being made in reliance upon an exemption from the
        registration requirements of the Act pursuant to Section 4(2) thereof as
        a
        transaction by an issuer of Securities not involving a public offering or
        pursuant to Section 4(6) thereof as a transaction by an issuer of securities
        solely to accredited investors, and is similarly exempt under applicable
        state
        securities laws, and that the Company’s reliance on such exemption is predicated
        on Subscriber’s representations as set forth in this Agreement. 

      

      (f)    Restricted
        Securities.
        Subscriber acknowledges that the Securities have not been registered under
        the
        Act or any applicable state securities law and that the Securities may not
        be
        sold, assigned, pledged, hypothecated or transferred, unless there exists
        an
        effective registration statement therefor under the Act and all applicable
        state
        securities laws or the Company has received an opinion of counsel, reasonably
        acceptable to counsel for the Company, or other reasonable assurances, that
        such
        sale, assignment, pledge, hypothecation or transfer is 

      
        
          
          

        

        
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      exempt
        from registration. Subscriber understands that in the absence of an effective
        registration statement covering the Securities or an exemption therefrom
        under
        the Act and all applicable state securities laws, the Securities must be
        held
        indefinitely. In particular, Subscriber is aware that the Securities may
        not be
        sold pursuant to Rule 144 promulgated under the Act, unless all conditions
        of
        Rule 144 are met. Among the conditions for the use of Rule 144 may be the
        availability of current and adequate information to the public about the
        Company. Such information is not now available and, except as set forth in
        the
        Subscriber Rights Agreement, the Company has no obligation to make such
        information available. Notwithstanding the foregoing, no opinion of counsel
        shall be required by the Company in connection with the transfer of the
        Securities to an entity that is a direct or indirect wholly-owned subsidiary
        of
        Subscriber. 

      

      (g)    Legends.
          

      

      (i)    Each
        certificate representing the Securities shall, in addition to any legends
        required elsewhere, bear the following legend as appropriate for stock
        certificates and warrant agreements: 

      

      THE
        SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
        SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW AND
        MAY
        NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR TRANSFERRED UNLESS THERE
        EXISTS
        AN EFFECTIVE REGISTRATION STATEMENT THEREFOR UNDER THE SECURITIES ACT OF
        1933,
        AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR THE ISSUER HEREOF
        HAS
        RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL OF THE
        ISSUER, THAT SUCH SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR TRANSFER IS
        EXEMPT
        FROM REGISTRATION.

      

      (ii)    Each
        certificate representing Securities shall also bear any legend required by
        any
        applicable state securities law or by any other agreement to which the holder
        thereof is a party or by which the holder thereof is bound.

      

      (h)    No
        Public Market.
        Subscriber understands that no public market now exists for any of the
        securities issued by the Company and that it is uncertain whether a public
        market will ever exist for the Securities.

      

      (i)    Access
        to Information.
        Subscriber has received all information that Subscriber considers necessary
        or
        appropriate for deciding whether to purchase Securities. Subscriber has had
        an
        opportunity to ask questions and receive answers from the Company’s management
        regarding the terms and conditions of the offering of the Securities and
        the
        business, properties, prospects and financial condition of the Company and
        to
        obtain additional information from the Company (to the extent that the Company
        possessed such information or could acquire it without unreasonable effort
        or
        expense) necessary to verify the accuracy of any information furnished to
        Subscriber or to which Subscriber had access.

      
        
          
          

        

        
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      (j)    Accredited
        Investor.
        Subscriber
        recognizes it is important under the Act and state securities law that the
        Company determine if potential investors are “accredited investors,” as defined
        in Appendix
        C
        attached
        hereto. Subscriber represents that Subscriber is an “accredited investor” by
        reason of the following: __________________________________ (indicate number
        from Appendix
        C).
        Subscriber further represents that Subscriber is a citizen of the country
        of
        Switzerland. Subscriber is not a resident of any other
        jurisdiction.

      

      (4)    The
        representations, warranties, understandings, acknowledgments and agreements
        in
        this Agreement are true and accurate as of the date hereof, shall be true
        and
        accurate as of the date of the acceptance hereof by the Company and shall
        survive thereafter.

      

      (5)    This
        Agreement shall be enforced, governed and construed in all respects in
        accordance with the laws of the State of Delaware, as such laws are applied
        by
        Delaware courts to agreements entered into and to be performed in Delaware,
        and
        shall be binding upon Subscriber, the Subscriber’s heirs, estate, legal
        representatives, successors and assigns and shall inure to the benefit of
        the
        Company and its successors and assigns.

      

      (6)    Subscriber
        agrees not to transfer or assign this Agreement, or any of Subscriber’s interest
        herein, without the express written consent of the Company.

      

      (7)    This
        Agreement constitutes the entire agreement among the parties hereto with
        respect
        to the subject matter hereof and supersedes any and all prior or contemporaneous
        representations, warranties, agreements and understandings in connection
        therewith. This Agreement may be amended only by a writing executed by all
        parties hereto. This Agreement may be executed in one or more
        counterparts.

      

      (The
        remainder of this page is intentionally left blank.)

      
        
          
          

        

        
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      IN
        WITNESS WHEREOF, Subscriber has executed this Subscription Agreement this
        ____
        day of ________________, 2006.

      

      
        	
                SUBSCRIPTION

              	 
	 	 
	
                ___________________

              	
                Number
                  of Shares of Common Stock

              
	 	 
	
                $__________________

              	
                Total
                  payment enclosed

              
	 	 
	 	 
	 	 
	
                ______________________________

              	
                __________________________________

              
	
                (Address)

              	
                (Name
                  of Subscriber)

              
	 	 
	
                ______________________________

              	
                __________________________________

              
	
                _____________________________

              	
                (Signature)

              
	
                ______________________________

              	 
	
                (Address)

              	 
	 	 
	
                _______________________

              	 
	
                Social
                  Security Number

              	 

      

      

      ACCEPTANCE

      

      The
        foregoing Subscription Agreement is accepted on this the ____ day of
        ____________, 2006.

      

      
        	 	
                SMART
                  ONLINE, INC.

              
	 	 
	 	 
	 	 
	 	
                By:
                  ___________________________

              
	 	
                Name:
                  ________________________

              
	 	
                Title:
                  __________________________

              

      

      

      

      

      

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      APPENDIX
        A

      

      SUBSCRIBER
        RIGHTS AGREEMENT

      

      

      SUBSCRIBER
        RIGHTS AGREEMENT (this “Agreement”), dated as of ___________ ____, 2006, by and
        among Smart Online, Inc., a Delaware corporation with its headquarters located
        at 2530 Meridian Parkway, Durham, North Carolina 27713 (the “Company”), and the
        undersigned (together with its affiliates and any assignees or transferees
        of
        all of its respective rights hereunder, the “Investors”).

      

      WHEREAS:

      

      A.    In
        connection with the Subscription Agreement by and among the parties hereto
        dated
        as of the date hereof (the “Subscription Agreement”), the Company has agreed,
        upon the terms and subject to the conditions contained therein, to issue
        and
        sell to the Investors shares of the Company’s common stock (the “Common Stock”),
        upon the terms and subject to the limitations and conditions set forth in
        such
        Subscription Agreement; and

      

      B.    To
        induce
        the Investors to execute and deliver the Subscription Agreement, the Company
        has
        agreed to provide certain rights under the Securities Act of 1933, as amended,
        and the rules and regulations thereunder, or any similar successor statute
        (collectively, the “1933 Act”), and applicable state securities
        laws;

      

      NOW,
        THEREFORE, in consideration of the premises and the mutual covenants contained
        herein and other good and valuable consideration, the receipt and sufficiency
        of
        which are hereby acknowledged, the Company and each of the Investors hereby
        agree as follows: 

      

      1.    DEFINITIONS.

      

      (a)    As
        used
        in this Agreement, the following terms shall have the following
        meanings:

      

      (i)    “Investors”
        means any person who acquires shares of Common Stock of the Company, or any
        security of the Company pursuant to which the holder has a right to receive
        shares of Common Stock of the Company upon exercise or conversion of such
        security, who agrees to become bound by the provisions of this Agreement
        or a
        counterpart of this Agreement, and permitted transfers and assignees of
        Investors in accordance with Section 9 hereof.

      

      (ii)     “register,”
        “registered,” and “registration” refer to a registration effected by preparing
        and filing a Registration Statement or Statements in compliance with the
        1933
        Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing
        for offering securities on a continuous basis (“Rule 415”), and the declaration
        or ordering of effectiveness of such Registration Statement by the United
        States
        Securities and Exchange Commission (the “SEC”).

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      

      (iii)    “Registrable
        Securities” means (x) all shares of Common Stock sold by the Company pursuant to
        the Subscription Agreement or pursuant to a warrant issued to Investor at
        the
        time of purchase of such shares of common stock; and (z) all shares of capital
        stock issued or issuable as a dividend on or in exchange for or otherwise
        with
        respect to the foregoing.

      

      (iv)    “Registration
        Statement” means a registration statement of the Company under the 1933
        Act.

      

      (b)    Capitalized
        terms used herein and not otherwise defined herein shall have the respective
        meanings set forth in the Subscription Agreement.

      

      2.    SUBSCRIBER
        RIGHTS.

      

      (a)    Mandatory
        Registration.
        No
        later than September 30, 2006 (the “Target Filing Date”), the Company shall
        prepare and file with the SEC a Registration Statement on Form S-1, SB-1
        or SB-2
        as determined by the Company in its sole discretion (or, if such Forms are
        not
        then available, on such form of Registration Statement as is then available)
        to
        effect a registration of the Registrable Securities covering the resale of
        the
        Registrable Securities. The Company may also include in such Registration
        Statement in its sole discretion, shares for sale by the Company or the Company
        may file a separate Registration Statement covering shares to be sold by
        the
        Company before, at the same time or after the Company files a Registration
        Statement covering resale of Registrable Securities by Investors.

      

      (b)    Payments
        by the Company.
        The
        Company shall use its best efforts to cause the Registration Statement to
        be
        effective as soon as reasonably practicable. If the Registration Statement
        covering the Registrable Securities required to be filed by the Company pursuant
        to Section 2(a) hereof is not filed by the Target Filing Date, then the Company
        will make payments to the Investors in such amounts and at such times as
        shall
        be determined pursuant to this Section 2(b) as liquidated damages by reason
        of
        any such delay in their ability to sell the Registrable Securities (which
        remedy
        shall be exclusive of any other remedies available at law or in equity).
        The
        Company shall pay to each holder of Registrable Securities an amount (the
        “Damage Amount”) equal to the product obtained by multiplying (i) the purchase
        price (the “Purchase Price”) paid for the Registrable Securities by the
        Investor, by (ii) the Applicable Percentage (as defined below) by (iii) the
        number of 30-day periods (prorated for partial periods) after the Target
        Filing
        Date that the Registration Statement covering the Registrable Securities
        of the
        Investor is actually filed; provided, however, that there shall be excluded
        from
        such period any delays which are attributable (i) to Investor, or any other
        Investor who holds Registrable Securities, with respect to information relating
        to the Investors, including, without limitation, the plan of distribution
        or
        beneficial ownership of securities, or (ii) to the failure of any Investor
        (or
        legal counsel to the Investor) to conduct their review of the Registration
        Statement pursuant to Section 3(h) below in a reasonably prompt manner or
        (iii)
        any person or entity named in the Prospectus as an underwriter. The term
        “Applicable Percentage” means one half of one percent. (For example, if the
        Registration Statement is filed thirty days after the Target Filing Date,
        the
        Company would pay as the Damage Amount $500 for each $100,000 of the Purchase
        Price. In the sole discretion of the Company, the Company may issue to Investor
        in lieu of the cash payment described above, a number of shares of Common
        Stock
        of the Company equal to the quotient derived by dividing (i) the Damage Amount,
        by (ii) Purchase Price per share (as defined above).

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

       

      (c)    Eligibility
        for Form S-3; Conversion to Form S-3.
        If the
        Company meets the registration eligibility and transaction requirements for
        the
        use of Form S-3 (or any successor form) for registration of the offer and
        sale
        by the Investor and any other Investors of their Registrable Securities before
        the earlier of the dates stated in clauses (ii) and (iii) in the definition
        of
        the Registration Period (as defined in Section 3(a) below), the Company shall
        file a Registration Statement on Form S-3 (or such successor form) with respect
        to the Registrable Securities covered by the Registration Statement, filed
        pursuant to Section 2(a) (and include in such Registration Statement on Form
        S-3
        the information required by Rule 429 under the 1933 Act) or convert the
        Registration Statement, filed pursuant to Section 2(a) to a Form S-3 pursuant
        to
        Rule 429 under the 1933 Act and cause such Registration Statement (or such
        amendment) to be declared effective as soon as practicable after filing.
        If the
        Company becomes eligible to use Form S-3 during the Registration Period,
        the
        Company agrees to use reasonable efforts to file all reports required to
        be
        filed by the Company with the SEC in a timely manner so as to remain eligible
        or
        become eligible, as the case may be, and thereafter to maintain its eligibility,
        for the use of Form S-3. After such Registration Statement on Form S-3 become
        effective, subject to Section 3 hereof, the Company shall maintain such
        Registration Statement in effect until the earlier of clauses (ii) and (iii)
        in
        the definition of Registration Period in Section 3(a) hereof.

      

      3.    OBLIGATIONS
        OF THE COMPANY.

      

      In
        connection with the registration of the Registrable Securities, the Company
        shall have the following obligations: 

      

      (a)    The
        Company shall prepare promptly, and use reasonable efforts to file with the
        SEC
        not later than the Target Filing Date, a Registration Statement with respect
        to
        the number of Registrable Securities provided in Section 2(a), and thereafter
        use its best efforts to cause such Registration Statement relating to
        Registrable Securities to become effective as soon as possible after such
        filing, and use reasonable efforts to keep the Registration Statement effective
        pursuant to Rule 415 at all times until such date as is the earlier of (i)
        270
        days after the effective date of the Registration Statement; (ii) the date
        on
        which all of the Registrable Securities have been sold by Investor and (iii)
        the
        date on which the Registrable Securities of Investor (in the opinion of counsel
        to the Company) may be immediately sold to the public without registration
        or
        restriction (including without limitation as to volume by Investor) under
        the
        1933 Act (the “Registration Period”), which Registration Statement (including
        any amendments or supplements thereto and prospectuses contained therein)
        shall
        not contain any untrue statement of a material fact or omit to state a material
        fact required to be stated therein, or necessary to make the statements therein
        not misleading. The right of other Investors to have the Registration Statement
        remain in effect shall not confer any rights on Investor.

      

      (b)    The
        Company shall prepare and file with the SEC such amendments (including
        post-effective amendments) and supplements to the Registration Statements
        and
        the prospectus used in connection with the Registration Statement as may
        be
        necessary to keep the Registration Statement effective at all times during
        the
        Registration Period, and, during such period, comply with the provisions
        of the
        1933 Act with respect to the disposition of all Registrable Securities of
        the
        Company covered by the Registration Statement until such time as all of such
        Registrable Securities have been disposed of in accordance with the intended
        methods of disposition by the Investor as set forth in the Registration
        Statement. 

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

      

      (c)    If
        requested, the Company shall furnish to one legal counsel for all Investors
        whose Registrable Securities are included in a Registration Statement (i)
        promptly (but in no event more than two (2) business days) after the same
        is
        prepared and publicly distributed, filed with the SEC, or received by the
        Company, one copy of each Registration Statement and any amendment thereto,
        each
        preliminary prospectus and prospectus and each amendment or supplement thereto,
        and, in the case of the Registration Statement referred to in Section 2(a),
        each
        letter written by or on behalf of the Company to the SEC or the staff of
        the
        SEC, and each item of correspondence from the SEC or the staff of the SEC,
        in
        each case relating to such Registration Statement (other than any portion
        of any
        thereof which contains information for which the Company has sought confidential
        treatment), and (ii) promptly (but in no event more than two (2) business
        days)
        after the Registration Statement is declared effective by the SEC, such number
        of copies of a prospectus, including a preliminary prospectus, and all
        amendments and supplements thereto and such other documents as Investor may
        reasonably request in order to facilitate the disposition of the Registrable
        Securities owned by Investor. The Company will immediately notify one legal
        counsel representing all Investors where Registrable Securities are included
        in
        a Registration Statement by facsimile of the effectiveness of each Registration
        Statement or any post-effective amendment. The Company will promptly respond
        to
        any and all comments received from the SEC (which comments shall promptly
        be
        made available to one legal counsel representing all Investors whose
        Registration Securities are included in a Registration Statement upon request),
        with a view towards causing the Registration Statement or any amendment thereto
        to be declared effective by the SEC as soon as reasonably practicable, and
        (ii)
        promptly file an acceleration request as soon as reasonably practicable (but
        in
        no event more than two (2) business days) following the resolution or clearance
        of all SEC comments. If applicable, following notification by the SEC that
        any
        such Registration Statement or any amendment thereto will not be subject
        to
        review, the Company shall promptly file with the SEC a final prospectus as
        soon
        as reasonably practicable (but in no event more than two (2) business days)
        following receipt by the Company from the SEC of an order declaring the
        Registration Statement effective. 

      

      (d)    The
        Company shall use reasonable efforts to (i) register and qualify the Registrable
        Securities covered by the Registration Statement under such other securities
        or
“blue sky” laws of such jurisdictions in the United States as the Investors who
        hold a majority of the Registrable Securities being offered by the Registration
        Statement reasonably request or qualify for an exemption for resale afforded
        companies listed in a Standard & Poor’s corporate handbook or similar
        publications, (ii) prepare and file in those jurisdictions such amendments
        (including post-effective amendments) and supplements to such registrations
        and
        qualifications as may be necessary to maintain the effectiveness thereof
        during
        the Registration Period, (iii) take such other actions as may be reasonably
        necessary to maintain such registrations and qualifications in effect during
        the
        Registration Period, and (iv) take all other actions reasonably necessary
        or
        advisable to qualify the Registrable Securities for sale in such jurisdictions;
        provided, however, that the Company shall not be required in connection
        therewith or as a condition thereto to (i) qualify to do business in any
        jurisdiction where it would not otherwise be required to qualify but for
        this
        Section 3(d), (ii) subject itself to general taxation in any such jurisdiction,
        (iii) file a general consent to service of process in any such jurisdiction,
        (iv) provide any undertakings that cause the Company undue expense or burden,
        (v) make any change in its charter or bylaws, or (vi) spend more than $10,000
        in
        filing fees and legal fees and expenses for such “blue sky”
compliance.

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      

      (e)    If
        the
        Company has not selected an underwriter for the offering, and in the event
        Investors who hold a majority of the Registrable Securities being offered
        by the
        Registration Statement select underwriters for the offering, the Company
        shall
        enter into and perform its obligations under an underwriting agreement, in
        usual
        and customary form, including, without limitation, customary indemnification
        and
        contribution obligations, with the underwriters of such offering. 

      

      (f)    As
        promptly as practicable after becoming aware of such event, the Company shall
        notify each Investor of the happening of any event, of which the Company
        has
        knowledge, as a result of which the prospectus included in any Registration
        Statement, as then in effect, includes an untrue statement of a material
        fact or
        omission to state a material fact required to be stated therein or necessary
        to
        make the statements therein not misleading, and use its best efforts promptly
        to
        prepare a supplement or amendment to any Registration Statement to correct
        such
        untrue statement or omission, and deliver such number of copies of such
        supplement or amendment to each Investor as such Investor may reasonably
        request; provided that, for not more than sixty (60) consecutive trading
        days
        (or a total of not more than ninety (90) trading days in any twelve (12)
        month
        period), the Company may delay the disclosure of material non-public information
        concerning the Company (as well as prospectus or Registration Statement
        updating) the disclosure of which at the time is not, in the good faith opinion
        of the Company, in the best interests of the Company (an “Allowed Delay”);
        provided, further, that the Company shall promptly (i) notify the Investors
        in
        writing of the existence of material non-public information giving rise to
        an
        Allowed Delay and (ii) advise the Investors in writing to cease all sales
        under
        such Registration Statement until the end of the Allowed Delay. Upon expiration
        of the Allowed Delay, the Company shall again be bound by the first sentence
        of
        this Section 3(f) with respect to the information giving rise
        thereto.

      

      (g)    The
        Company shall use its reasonable best efforts to prevent the issuance of
        any
        stop order or other suspension of effectiveness of any Registration Statement,
        and, if such an order is issued, to obtain the withdrawal of such order within
        a
        reasonable time and to notify each Investor who holds Registrable Securities
        being sold (or, in the event of an underwritten offering, the managing
        underwriters) of the issuance of such order and the resolution
        thereof.

      

      (h)    The
        Company shall permit a single firm of legal counsel designated by Investors
        who
        own a majority of the Registrable Securities offered under the Registration
        Statement to review such Registration Statement and all amendments and
        supplements thereto (as well as all requests for acceleration or effectiveness
        thereof) a reasonable period of time prior to their filing with the SEC.
        The
        role of such legal counsel to the Investors shall be to confirm that the
        sections of such Registration Statement covering information with respect
        to the
        Investors, the Investor’s beneficial ownership of securities of the Company and
        the Investors intended method of disposition of Registrable Securities shall
        conform to the information provided to the Company by each of the Investors,
        subject to review and approval by the Company and its legal counsel. Such
        legal
        counsel for the Investors shall not have the right to require changes to
        the
        description of the Company, its business or other matters not related to
        selling
        stockholders. 

      

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

      (i)    The
        Company shall make generally available to its security holders as soon as
        practicable, but not later than ninety (90) days after the close of the period
        covered thereby, an earnings statement (in form complying with the provisions
        of
        Rule 158 under the 1933 Act) covering a twelve-month period beginning not
        later
        than the first day of the Company’s fiscal quarter next following the effective
        date of the Registration Statement.

      

      (j)    Until
        the
        Registration Statement ceases to be effective, the Company shall make available
        for inspection following reasonable prior written notice by (i) any underwriter
        participating in any disposition pursuant to a Registration Statement, (ii)
        one
        firm of attorneys or other agents retained by the Investors who own a majority
        of the Registrable Securities, and (iii) one firm of attorneys retained by
        all
        such underwriters (collectively, the “Inspectors”) all pertinent financial and
        other records, and pertinent corporate documents and properties of the Company
        (collectively, the “Records”), as shall be reasonably deemed necessary by each
        Inspector to enable each Inspector to exercise its due diligence responsibility,
        and cause the Company’s officers, directors and employees to supply all
        information which any Inspector may reasonably request for purposes of such
        due
        diligence; provided, however, that each Inspector shall hold in confidence
        and
        shall not make any disclosure (except to an Investor) of any Record or other
        information which the Company determines in good faith to be confidential,
        and
        of which determination the Inspectors are so notified, unless (a) the release
        of
        such Records is ordered pursuant to a subpoena or other order from a court
        or
        government body of competent jurisdiction, or (b) the information in such
        Records has been made generally available to the public other than by disclosure
        in violation of this or any other agreement. The Company shall not be required
        to allow such inspection more than once per calendar year. Following such
        due
        diligence review, Investor may require the Company to withdraw the Registrable
        Securities of such Investor from the Registration Statement, if the Company
        does
        not make changes to the Registration Statement requested by such
        Investor.

      

      (k)    The
        Company shall not be required to disclose any confidential information in
        such
        Records to any Inspector or to any Investor pursuant to this Agreement until
        and
        unless such Inspector and Investor shall have entered into confidentiality
        agreements (in form and substance satisfactory to the Company) with the Company
        with respect thereto. Each Investor agrees that it shall, upon learning that
        disclosure of such Records or other information is sought in or by a court
        or
        governmental body of competent jurisdiction or through other means, give
        prompt
        notice to the Company and allow the Company, at its expense, to undertake
        appropriate action to prevent disclosure of, or to obtain a protective order
        for, the Records deemed confidential. Nothing herein (or in any other
        confidentiality agreement between the Company and any Investor) shall be
        deemed
        to limit the Investor’s ability to sell Registrable Securities in a manner which
        is otherwise consistent with applicable laws and regulations.

      

      (l)    The
        Company shall (i) cause all the Registrable Securities covered by the
        Registration Statement to be listed on each national securities exchange,
        if
        any, on which securities of the same class or series issued by the Company
        are
        then listed, if any, if the listing of such Registrable Securities is then
        permitted under the rules of such exchange, or (ii) to the extent the securities
        of the same class or series are not then listed on a national securities
        exchange, to use reasonable efforts to arrange for at least two market makers
        to
        register with the National Association of Securities Dealers, Inc. (“NASD”) as
        such with respect to such Registrable Securities.

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

      

      (m)    The
        Company shall provide a transfer agent and registrar, which may be a single
        entity, for the Registrable Securities not later than the effective date
        of the
        Registration Statement. 

      

      (n)    At
        the
        request of the holders of a majority of the Registrable Securities offered
        pursuant to the Registration Statement, the Company shall prepare and file
        with
        the SEC such amendments (including post-effective amendments) and supplements
        to
        a Registration Statement and any prospectus used in connection with the
        Registration Statement as may be necessary in order to change the plan of
        distribution set forth in such Registration Statement.

      

      (o)    The
        Company shall take all other reasonable actions necessary to expedite and
        facilitate disposition by the Investors of Registrable Securities pursuant
        to a
        Registration Statement. 

      

      4.    OBLIGATIONS
        OF THE INVESTORS.

      

        In
        connection with the registration of the Registrable Securities, the Investors
        shall have the following obligations: 

      

      (a)    It
        shall
        be a condition precedent to the obligations of the Company to complete the
        registration pursuant to this Agreement with respect to the Registrable
        Securities of a particular Investor that such Investor shall furnish to the
        Company such information regarding itself, the Registrable Securities held
        by it
        and the intended method of disposition of the Registrable Securities held
        by it
        as shall be reasonably required to effect the registration of such Registrable
        Securities and shall execute such documents in connection with such registration
        as the Company may reasonably request. At least five (5) business days prior
        to
        the first anticipated filing date of the Registration Statement, the Company
        shall notify each Investor of the information the Company requires from each
        such Investor.

      

      (b)    Each
        Investor, by such Investor’s acceptance of the Registrable Securities, agrees to
        cooperate with the Company as reasonably requested by the Company in connection
        with the preparation and filing of the Registration Statements hereunder,
        unless
        such Investor has notified the Company in writing of such Investor’s election to
        exclude all of such Investor’s Registrable Securities from the Registration
        Statements.

      

      (c)    In
        the
        event the Company or Investors holding a majority of the Registrable Securities
        being registered determine to engage the services of an underwriter, each
        Investor agrees to enter into and perform such Investor’s obligations under an
        underwriting agreement, in usual and customary form, including, without
        limitation, customary indemnification and contribution obligations, with
        the
        managing underwriter of such offering and take such other actions as are
        reasonably required in order to expedite or facilitate the disposition of
        the
        Registrable Securities, unless such Investor has notified the Company in
        writing
        of such Investor’s election to exclude all of such Investor’s Registrable
        Securities from such Registration Statement.

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

      (d)    Each
        Investor agrees that, upon receipt of any notice from the Company of the
        happening of any event of the kind described in Section 3(f) or 3(g), such
        Investor will immediately discontinue disposition of Registrable Securities
        pursuant to the Registration Statement covering such Registrable Securities
        until such Investor’s receipt of the copies of the supplemented or amended
        prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the
        Company, such Investor shall deliver to the Company (at the expense of the
        Company) or destroy (and deliver to the Company a certificate of destruction)
        all copies in such Investor’s possession, of the prospectus covering such
        Registrable Securities current at the time of receipt of such notice.

      

      (e)    No
        Investor may participate in any underwritten registration hereunder unless
        such
        Investor if requested by the Company (i) agrees to sell such Investor’s
        Registrable Securities on the basis provided in any underwriting arrangements
        in
        usual and customary form entered into by the Company, (ii) completes and
        executes all questionnaires, powers of attorney, indemnities, underwriting
        agreements and other documents reasonably required under the terms of such
        underwriting arrangements, and (iii) agrees to pay its pro rata share of
        all
        underwriting discounts and commissions and any expenses in excess of those
        payable by the Company pursuant to Section 5 below. Notwithstanding the
        foregoing, there is no obligation on the part of the Company or any underwriter
        to include Registrable Securities of Investor in the securities to be purchased
        or sold by the underwriter.

      

      5.    EXPENSES
        OF REGISTRATION.

      

      All
        reasonable expenses, other than underwriting discounts and commissions, incurred
        in connection with registrations, filings or qualifications pursuant to Sections
        2 and 3, including, without limitation, all registration, listing and
        qualification fees, printers and accounting fees, the fees and disbursements
        of
        counsel for the Company, and the reasonable fees and disbursements of one
        counsel selected by the Investors holding a majority of the Registrable
        Securities shall be borne by the Company, provided the Company shall not
        be
        required to pay legal fees and disbursements of such legal counsel in excess
        of
        $15,000. 

       

      6.    INDEMNIFICATION.

      

      In
        the
        event any Registrable Securities are included in a Registration Statement
        under
        this Agreement:

      

      (a)    To
        the
        extent permitted by law, the Company will indemnify, hold harmless and defend
        (i) each Investor who holds such Registrable Securities, (ii) the directors,
        officers, partners, employees, agents and each person who controls any Investor
        within the meaning of the 1933 Act or the Securities Exchange Act of 1934,
        as
        amended (the “1934 Act”), if any, (iii) any underwriter (as defined in the 1933
        Act) for the Investors, and (iv) the directors, officers, partners, employees
        and each person who controls any such underwriter within the meaning of the
        1933
        Act or the 1934 Act, if any (each, an “Indemnified Person”), against any joint
        or several losses, claims, damages, liabilities or expenses (collectively,
        together with actions, proceedings or inquiries by any regulatory or
        self-regulatory organization, whether commenced or threatened, in respect
        thereof, “Claims”) to which any of them may become 

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

      subject
        insofar as such Claims arise out of or are based upon: (i) any untrue statement
        of a material fact in a Registration Statement or the omission to state therein
        a material fact required to be stated or necessary to make the statements
        therein not misleading; (ii) any untrue statement of a material fact contained
        in any preliminary prospectus if used prior to the effective date of such
        Registration Statement, or contained in the final prospectus (as amended
        or
        supplemented, if the Company files any amendment thereof or supplement thereto
        with the SEC) or the omission to state therein any material fact necessary
        to
        make the statements made therein, in light of the circumstances under which
        the
        statements therein were made, not misleading; or (iii) any violation by the
        Company of the 1933 Act, the 1934 Act, any other law, including, without
        limitation, any state securities law, or any rule or regulation thereunder
        relating to the offer or sale of the Registrable Securities (the matters
        in the
        foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject
        to the restrictions set forth in Section 6(c) with respect to the number
        of
        legal counsel, the Company shall reimburse the Indemnified Person, promptly
        as
        such expenses are incurred and are due and payable, for any reasonable legal
        fees or other reasonable expenses incurred by them in connection with
        investigating or defending any such Claim. Notwithstanding anything to the
        contrary contained herein, the indemnification agreement contained in this
        Section 6(a): (i) shall not apply to a Claim arising out of or based upon
        a
        Violation which occurs in reliance upon and in conformity with information
        furnished in writing to the Company by any Indemnified Person or underwriter
        for
        such Indemnified Person, or any of their legal counsel, expressly for use
        in
        connection with the preparation of such Registration Statement or any such
        amendment thereof or supplement thereto; (ii) shall not apply to amounts
        paid in
        settlement of any Claim if such settlement is effected without the prior
        written
        consent of the Company, which consent shall not be unreasonably withheld;
        and
        (iii) with respect to any preliminary prospectus, shall not inure to the
        benefit
        of any Indemnified Person if the untrue statement or omission of material
        fact
        contained in the preliminary prospectus was corrected on a timely basis in
        the
        prospectus, as then amended or supplemented. Such indemnity shall remain
        in full
        force and effect regardless of any investigation made by or on behalf of
        the
        Indemnified Person and shall survive the transfer of the Registrable Securities
        by the Investors pursuant to Section 9. 

      

      (b)    In
        connection with any Registration Statement in which an Investor is
        participating, each such Investor agrees severally and not jointly to indemnify,
        hold harmless and defend, to the same extent and in the same manner set forth
        in
        Section 6(a), the Company, each of its directors, each of its officers who
        signs
        the Registration Statement, each person, if any, who controls the Company
        within
        the meaning of the 1933 Act or the 1934 Act, any underwriter and any other
        shareholder selling securities pursuant to the Registration Statement or
        any of
        its directors or officers or any person who controls such shareholder or
        underwriter within the meaning of the 1933 Act or the 1934 Act (collectively
        and
        together with an Indemnified Person, an “Indemnified Party”), against any Claim
        to which any of them may become subject, under the 1933 Act, the 1934 Act
        or
        otherwise, insofar as such Claim arises out of or is based upon any Violation
        by
        such Investor, in each case to the extent (and only to the extent) that such
        Violation occurs in reliance upon and in conformity with written information
        furnished to the Company by such Investor, or its legal counsel, expressly
        for
        use in connection with such Registration Statement; and subject to Section
        6(c)
        such Investor will reimburse any legal or other expenses (promptly as such
        expenses are incurred and are due and payable) reasonably incurred by them
        in
        connection with investigating or defending any such Claim; provided, however,
        that the

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

      indemnity
        agreement contained in this Section 6(b) shall not apply to amounts paid
        in
        settlement of any Claim if such settlement is effected without the prior
        written
        consent of such Investor, which consent shall not be unreasonably withheld;
        provided, further, however, that the Investor shall be liable under this
        Agreement (including this Section 6(b) and Section 7) for only that amount
        as
        does not exceed the net proceeds to such Investor as a result of the sale
        of
        Registrable Securities pursuant to such Registration Statement. Such indemnity
        shall remain in full force and effect regardless of any investigation made
        by or
        on behalf of such Indemnified Party and shall survive the transfer of the
        Registrable Securities by the Investors pursuant to Section 9. Notwithstanding
        anything to the contrary contained herein, the indemnification agreement
        contained in this Section 6(b) with respect to any preliminary prospectus
        shall
        not inure to the benefit of any Indemnified Party if the untrue statement
        or
        omission of material fact contained in the preliminary prospectus was corrected
        on a timely basis in the prospectus, as then amended or
        supplemented.

      

      (c)    Promptly
        after receipt by an Indemnified Person or Indemnified Party under this Section
        6
        of notice of the commencement of any action (including any governmental action),
        such Indemnified Person or Indemnified Party shall, if a Claim in respect
        thereof is to be made against any indemnifying party under this Section 6,
        deliver to the indemnifying party a written notice of the commencement thereof,
        and the indemnifying party shall have the right to participate in, and, to
        the
        extent the indemnifying party so desires, jointly with any other indemnifying
        party similarly noticed, to assume control of the defense thereof with counsel
        mutually satisfactory to the indemnifying party and the Indemnified Person
        or
        the Indemnified Party, as the case may be; provided, however, that an
        Indemnified Person or Indemnified Party shall have the right to retain its
        own
        counsel with the fees and expenses to be paid by the indemnifying party,
        if, in
        the reasonable opinion of counsel retained by the indemnifying party, the
        representation by such counsel of the Indemnified Person or Indemnified Party
        and the indemnifying party would be inappropriate due to actual or potential
        differing interests between such Indemnified Person or Indemnified Party
        and any
        other party represented by such counsel in such proceeding. The indemnifying
        party shall pay for only one separate legal counsel for the Indemnified Persons
        or the Indemnified Parties, as applicable, and such legal counsel shall be
        selected by Investors holding a majority of the Registrable Securities included
        in the Registration Statement to which the Claim relates (with the approval
        of a
        majority-in-interest of the Investors), if the Investors are entitled to
        indemnification hereunder, or the Company, if the Company is entitled to
        indemnification hereunder, as applicable. The failure to deliver written
        notice
        to the indemnifying party within a reasonable time of the commencement of
        any
        such action shall not relieve such indemnifying party of any liability to
        the
        Indemnified Person or Indemnified Party under this Section 6, except to the
        extent that the indemnifying party is actually prejudiced in its ability
        to
        defend such action. The indemnification required by this Section 6 shall
        be made
        by periodic payments of the amount thereof during the course of the
        investigation or defense, as such expense, loss, damage or liability is incurred
        and is due and payable. 

      

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      7.    CONTRIBUTION.

      

      To
        the
        extent any indemnification by an indemnifying party is prohibited or limited
        by
        law, the indemnifying party agrees to make the maximum contribution with
        respect
        to any amounts for which it would otherwise be liable under Section 6 to
        the
        fullest extent permitted by law; provided, however, that (i) no contribution
        shall be made under circumstances where the maker would not have been liable
        for
        indemnification under the fault standards set forth in Section 6, (ii) no
        seller
        of Registrable Securities guilty of fraudulent misrepresentation (within
        the
        meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
        from
        any seller of Registrable Securities who was not guilty of such fraudulent
        misrepresentation, and (iii) contribution (together with any indemnification
        or
        other obligations under this Agreement) by any seller of Registrable Securities
        shall be limited in amount to the net amount of proceeds received by such
        seller
        from the sale of such Registrable Securities.

      

      8.    ASSIGNMENT
        OF REGISTRATION RIGHTS.

      

      The
        rights under this Agreement shall be automatically assignable by the Investors
        to any transferee of all or any portion of Registrable Securities if: (i)
        the
        Investor agrees in writing with the transferee or assignee to assign such
        rights, and a copy of such agreement is furnished to the Company within a
        reasonable time after such assignment, (ii) the Company is, within a reasonable
        time after such transfer or assignment, furnished with written notice of
        (a) the
        name and address of such transferee or assignee, and (b) the securities with
        respect to which such registration rights are being transferred or assigned,
        (iii) following such transfer or assignment, the further disposition of such
        securities by the transferee or assignee is restricted under the 1933 Act
        and
        applicable state securities laws, (iv) at or before the time the Company
        receives the written notice contemplated by clause (ii) of this sentence,
        the
        transferee or assignee agrees in writing with the Company to be bound by
        all of
        the provisions contained herein, (v) such transfer shall have been made in
        accordance with the applicable requirements of the Subscription Agreement,
        and
        (vi) such transferee shall not be a “U.S. Person” as that term defined in
        Regulation S promulgated under the 1933 Act. 

      

      9.    AMENDMENT
        OF REGISTRATION RIGHTS.

      

      Provisions
        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 written consent of the Company and Investors who
        hold
        a majority of the Registrable Securities, except that any person or entity
        who
        acquires Registrable Securities may become a part to this Agreement by the
        Company and such person or entity signing a counterpart of this Agreement.
        Any
        amendment or waiver effected in accordance with this Section 10 shall be
        binding
        upon each Investor and the Company. In the event the Company becomes a
        subsidiary of any company whose Common Stock is publicly traded (“Holding
        Company”), and the Investor receives shares of Common Stock of such Holding
        Company, all obligations of the Company under this Agreement shall terminate
        upon such Holding Company assuming this Agreement, which may be done without
        the
        consent or approval of Investor.

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

      

      10.    MISCELLANEOUS.

      

      (a)    A
        person
        or entity is deemed to be a holder of Registrable Securities whenever such
        person or entity owns of record such Registrable Securities. If the Company
        receives conflicting instructions, notices or elections from two or more
        persons
        or entities with respect to the same Registrable Securities, the Company
        shall
        act upon the basis of instructions, notice or election received from the
        registered owner of such Registrable Securities.

      

      (b)    Any
        notices required or permitted to be given under the terms hereof shall be
        sent
        by certified or registered mail (return receipt requested) or delivered
        personally or by courier (including a recognized overnight delivery service)
        or
        by facsimile and shall be effective five days after being placed in the mail,
        if
        mailed by regular United States mail, or upon receipt, if delivered personally
        or by courier (including a recognized overnight delivery service) or by
        facsimile, in each case addressed to a party. The addresses for such
        communications shall be:

      

      If
        to the
        Company:

      

      Michael
        Nouri

      Smart
        Online, Inc.

      Post
        Office Box 12794

      Research
        Triangle Park, NC 27709-2794

      Telephone:
        (919) 765-5000

      E-mail:
        dnouri@us.smartonline.com

      

      With
        copies to:

      

      Smith,
        Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP

      P.O.
        Box
        2611

      Raleigh,
        NC 27602-2611

      Telephone:
        (919) 821-1220

      Facsimile:
        (919) 821-6800

      Email:
        mrosenfeld@smithlaw.com

      

      If
        to an
        Investor:

      

      to
        the
        address set forth immediately below such Investor’s name on the signature pages
        to the Subscription Agreement, or on the address set forth immediately below
        such Investor’s name on the agreement entered into pursuant to the Assignment
        Section of this Agreement.

      

      (c) Failure
        of any party to exercise any right or remedy under this Agreement or otherwise,
        or delay by a party in exercising such right or remedy, shall not operate
        as a
        waiver thereof. 

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

      

      (d)    THIS
        AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
        THE
        LAWS OF THE STATE OF NORTH CAROLINA APPLICABLE TO AGREEMENTS MADE AND TO
        BE
        PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF
        CONFLICT OF LAWS. 

      

      (e)    In
        the
        event that any provision of this Agreement is invalid or unenforceable under
        any
        applicable statute or rule of law, then such provision shall be deemed
        inoperative to the extent that it may conflict therewith and shall be deemed
        modified to conform with such statute or rule of law. Any provision hereof
        which
        may prove invalid or unenforceable under any law shall not affect the validity
        or enforceability of any other provision hereof.

      

      (f)    This
        Agreement constitutes the entire agreement among the parties hereto with
        respect
        to the subject matter hereof and thereof. There are no restrictions, promises,
        warranties or undertakings, other than those set forth or referred to herein
        and
        therein. This Agreement supersede all prior agreements and understandings
        among
        the parties hereto with respect to the subject matter hereof and
        thereof.

      

      (g)    Subject
        to the requirements of Section 9 hereof, this Agreement shall be binding
        upon
        and inure to the benefit of the parties and their successors and
        assigns.

      

      (h)    The
        headings in this Agreement are for convenience of reference only and shall
        not
        form part of, or affect the interpretation of, this Agreement.

      

      (i)    This
        Agreement may be executed in two or more counterparts, each of which shall
        be
        deemed an original but all of which shall constitute one and the same agreement
        and shall become effective when counterparts have been signed by each party
        and
        delivered to the other party. This Agreement, once executed by a party, may
        be
        delivered to the other party hereto by facsimile transmission of a copy of
        this
        Agreement bearing the signature of the party so delivering this
        Agreement.

      

      (j)    Each
        party shall do and perform, or cause to be done and performed, all such further
        acts and things, and shall execute and deliver all such other agreements,
        certificates, instruments and documents, as the other party may reasonably
        request in order to carry out the intent and accomplish the purposes of this
        Agreement and the consummation of the transactions contemplated
        hereby.

      

      (k)    Except
        as
        otherwise provided herein, all consents and other determinations to be made
        by
        the Investors pursuant to this Agreement shall be made by Investors holding
        a
        majority of the Registrable Securities, determined as if the all options,
        warrants and convertible securities then outstanding have been issued and/or
        converted into Registrable Securities.

      

      (l)    The
        Company and each Investor acknowledges that a breach by it of its obligations
        hereunder will cause irreparable harm by vitiating the intent and purpose
        of the
        transactions contemplated hereby. Accordingly, the parties acknowledge that
        the
        remedy at law 

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

      for
        breach of its obligations under this Agreement will be inadequate and agrees,
        in
        the event of a breach or threatened breach of any of the provisions under
        this
        Agreement, that the other parties shall be entitled, in addition to all other
        available remedies in law or in equity, and in addition to the penalties
        assessable herein, to an injunction or injunctions restraining, preventing
        or
        curing any breach of this Agreement and to enforce specifically the terms
        and
        provisions hereof, without the necessity of showing economic loss and without
        any bond or other security being required.

      

      (m)    The
        language used in this Agreement will be deemed to be the language chosen
        by the
        parties to express their mutual intent, and no rules of strict construction
        will
        be applied against any party.

      

      (n)    No
        Investor may bring any legal or other action or proceeding for breach of
        this
        Agreement or arising out of any matter related to this Agreement, unless
        the
        Investors who own a majority of the Registrable Securities consent to the
        bringing of such action. Any claim may be settled by the Company and the
        Investors who own a majority of the Registrable Securities. 

      

       

      [The
        Remainder of this Page is Blank.]

      

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

      IN
        WITNESS WHEREOF, the Company and the undersigned Investors have caused this
        Agreement to be duly executed as of the date on the first page of this
        Agreement.

      

      

      SMART
        ONLINE, INC.

      

      By:
        ______________________________

      Name:
        ____________________________

      Title:
        ____________________________

      

      

      

      INVESTOR:

      _________________________________

      

      

      By:_________________________________

      Name:_______________________________

      Title:________________________________

      Address:_____________________________

      ____________________________________

      Telephone:___________________________

      Facsimile:____________________________

      Email:_______________________________

      

      

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

      APPENDIX
        B

      

      DRIBBLE
        OUT AGREEMENT

      

      

      AGREEMENT
        dated as of ________________, 2006 between Smart Online, Inc., Delaware
        corporation (the “Company”), and Atlas Capital, S.A. (Subscriber”).

      

      WHEREAS,
        Subscriber has purchased shares of Common Stock (the “Purchased Shares”) from
        the Company and the Company desires Subscriber to agree to limit its sales
        of
        the Purchased Shares in return for granting Subscriber the right to have
        the
        Purchased Shares registered. (The Purchased Shares are hereinafter individually
        and collectively referred to as the “Securities”).

      

      NOW,
        THEREFORE, the parties hereby agree as follows:

      

      (1)    Registration
        of Shares.
        The
        Company agrees to enter into the Registration Rights Agreement with
        Subscriber.

      

      (2)    “Dribble-Out”
        Agreement.
        

      

      (a)    In
        consideration for the Registration Rights Agreement, Subscriber hereby agrees
        that, except as permitted under subsection (c) of this Section, during the
        Dribble Out Period, as defined herein, Subscriber will not:

      

      (i)    Sell
        any
        of the Securities or other securities of the Company or Holding Company received
        on account of ownership of the Securities (the “Dribble-Out
        Securities”).

      

      (ii)         
        Transfer,
        assign or otherwise dispose of any of the Dribble-Out Securities.

      

      (iii)        
        Pledge,
        hypothecate or otherwise create a lien on any of the Dribble-Out
        Securities.

      

      (iv)        
        Loan
        to
        any person or entity any shares or other securities of the Company or Holding
        Company.

      

      (v)         
        Sell
        short any shares or other securities of the Company or Holding
        Company.

      

      (vi)       
        Acquire
        a
        put option or grant a call option with respect to any shares or other securities
        of the Company or Holding Company.

      

      (vii)      
        Enter
        into any agreement concerning any of the foregoing transactions, or otherwise
        facilitate any other person conducting any of the foregoing
        transactions.

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

      

      (b)    For
        purposes of this Section, Holding Company shall mean any company whose stock
        is
        publicly traded (i) with which the Company merges or consolidates or (ii)
        of
        which the Company or its successor becomes a subsidiary. For purposes of
        this
        Section, the Dribble Out Period shall mean the period beginning on the date
        of
        this Agreement and ending six (6) months after the effective date of the
        first
        registration statement of the Company that registers for resale the Dribble-Out
        Securities (the “Effective Date”). Notwithstanding the foregoing, after the
        Effective Date Subscriber may sell (if permitted under a registration
        statement), during any rolling thirty-day period during the Dribble Out Period,
        up to 25% of the Dribble-Out Securities owned by Subscriber on the Effective
        Date. The Board of Directors of the Company or Holding Company may terminate
        the
        Dribble Out Period or allow Subscriber to take a prohibited action prior
        to
        termination of the Dribble Out Period with respect to some or all of the
        Dribble-Out Securities owned by the Subscriber, if the Board provides all
        other
        Subscribers of the Company or Holding Company who have the same Dribble Out
        Period with the same termination or waiver at the same time and to the same
        extent as for Subscriber.

      

      (c)    Notwithstanding
        the foregoing, provided the transferee first signs an agreement on substantially
        the terms set forth herein and reasonably acceptable to the Company or Holding
        Company, Subscriber may transfer securities of the Company or Holding Company
        without payment or other consideration: (i) if Subscriber is an individual,
        to
        any family member, (ii) if Subscriber is a corporation, to any direct or
        indirect parent or subsidiary or any shareholder of Subscriber, (iii) if
        Subscriber is a partnership, to any partner of Subscriber, (iv) if Subscriber
        is
        a limited liability company, to any member of Subscriber, and (v) if Subscriber
        is a trust, to any beneficiary of such trust.

      

      (d)    Subscriber
        further agrees that before and after termination of the Dribble Out Period,
        Subscriber will comply with all securities laws, rules and regulations when
        purchasing or reselling securities of the Company or Holding Company, including,
        without limitation, those prohibiting sales and purchases of securities while
        in
        possession of material nonpublic information.

      

      (e)    The
        Dribble-Out Securities of Subscriber shall have a legend in form and substance
        acceptable to the Company and Holding Company referring to the restrictions
        of
        this Agreement and the Company or Holding Company may instruct the transfer
        agent of the Company or Holding Company to stop any transfer of any securities
        in violation of this Agreement and may take any other action required to
        avoid
        violation of this Agreement, including, without limitation, obtaining an
        injunction.

      

      (f)    The
        provisions of this Section shall continue in effect after the Dribble-Out
        Securities are registered pursuant to the Registration Rights
        Agreement.

      

      (g)    Stop
        Transfer Instructions.
        Subscriber agrees that the Company may issue instructions to its transfer
        agent
        that prohibit transfer in violation of this Agreement.

      

      (h)    Legends.
        The
        Company may place a legend on the Dribble Out Securities referring to the
        restrictions contained in this Agreement.

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

      

      (3)    The
        representations, warranties, understandings, acknowledgments and agreements
        in
        this Agreement are true and accurate as of the date hereof, shall be true
        and
        accurate as of the date of the acceptance hereof by the Company and shall
        survive thereafter.

      

      (4)    This
        Agreement shall be enforced, governed and construed in all respects in
        accordance with the laws of the State of Delaware, as such laws are applied
        by
        Delaware courts to agreements entered into and to be performed in Delaware,
        and
        shall be binding upon Subscriber, the Subscriber’s heirs, estate, legal
        representatives, successors and assigns and shall inure to the benefit of
        the
        Company and its successors and assigns.

      

      (5)    Subscriber
        agrees not to transfer or assign this Agreement, or any of Subscriber’s interest
        herein, without the express written consent of the Company.

      

      (6)    This
        Agreement constitutes the entire agreement among the parties hereto with
        respect
        to the subject matter hereof and supersedes any and all prior or contemporaneous
        representations, warranties, agreements and understandings in connection
        therewith. This Agreement may be amended only by a writing executed by all
        parties hereto. This Agreement may be executed in one or more
        counterparts.

      

      (The
        remainder of this page is intentionally left blank.)

      
        
          
          

        

        
          23

          
            

          

        

        
          
          

        

      

      IN
        WITNESS WHEREOF, the parties have executed this Agreement as of the date
        first
        written above.

      

      

      

      
        	
                SMART
                  ONLINE, INC.

              	
                _____________________________

              
	 	 
	 	 
	 	 
	
                By:
                  ___________________________

              	
                By:
                  __________________________

              
	
                Name:_________________________

              	
                Name:________________________

              
	
                Title:__________________________

              	
                Title:_________________________

              
	 	 
	 	
                Address:
                  _____________________ 

              
	 	
                _____________________
                  

              
	 	
                _____________________
                  

              
	 	
                _____________________
                  

              

      

      

      

      

      
        
          
          

        

        
          24

          
            

          

        

        
          
          

        

      

      APPENDIX
        C

      

      An
        Accredited Investor is defined as follows:

      

      
        	
                (1)

              	
                a
                  natural person whose individual net worth, or joint net worth,
                  with that
                  person’s spouse, at the time of purchase exceeds
                  $1,000,000;

              

      

      

      
        	
                (2)

              	
                a
                  natural person who had an individual income in excess of $200,000
                  in each
                  of the two most recent years or joint income with that person’s spouse in
                  excess of $300,000 in each of those years and has a reasonable
                  expectation
                  of reaching the same income level in the current year (the year
                  in which
                  the purchase is made);

              

      

      

      
        	
                (3)

              	
                any
                  trust, with total assets in excess of $5,000,000, not formed for
                  the
                  specific purpose of investing in the Company, whose purchase is
                  directed
                  by a sophisticated person having such knowledge and experience
                  in
                  financial and business matters that she is capable of evaluating
                  the risks
                  and merits of investing in the
                  Company;

              

      

      

      
        	
                (4)

              	
                a
                  director or executive officer of the
                  Company;

              

      

      

      
        	
                (5)

              	
                an
                  organization described in Section 501(c)(3) of the Internal Revenue
                  Code,
                  corporation, Massachusetts or similar business trust, or partnership,
                  not
                  formed for the specific purpose of acquiring the securities offered,
                  with
                  total assets in excess of
                  $5,000,000;

              

      

      

      
        	
                (6)

              	
                a
                  bank as defined in the Securities Act of 1933 (the “Act”), or a savings
                  and loan association or other institution as defined in the Act
                  whether
                  acting in its individual or fiduciary capacity; a broker or dealer
                  registered under the Securities Exchange Act of 1934; an insurance
                  company
                  as defined in the Act; an investment company registered under the
                  Investment Company act of 1940 or a business development company
                  as
                  defined in the Act; a Small Business Investment Company licensed
                  under the
                  Small Business Investment Act of 1958; an employee benefit plan
                  within the
                  meaning of Title I of the Employee Retirement Income Security Act
                  of 1974,
                  if the investment decision is made by a plan fiduciary, which is
                  either a
                  bank, savings and loan association, an insurance company, or registered
                  investment adviser, or if the employee benefit plan has total assets
                  in
                  excess of $5,000,000 or, if a self-directed plan, with investment
                  decisions made solely by persons that are accredited
                  investors;

              

      

      

      
        	
                (7)

              	
                a
                  “private business development company” as defined in the Investment
                  Advisers Act of 1940; or

              

      

      

      
        	
                (8)

              	
                an
                  entity in which all of the equity owners are accredited investors.
                  

              

      

      
 

      25

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