Miriam R. Sowinski is a Associate in our Jacksonville office .
On October 23, 2013, the SEC issued a unanimous rule proposal authorized under Title III of the Jumpstart Our Business Startups Act (the JOBS Act) permitting securities-based crowdfunding. The proposed rules provide a registration exemption permitting the use of crowdfunding in connection with securities offerings for raising relatively low amounts of capital for startups and small businesses.
Proposed Rules
Under the proposed SEC rules, a company could raise a maximum of $1 million through crowdfunding in any 12-month period.
Investors would be permitted to invest up to the following thresholds:
- the greater of $2,000 or 5 percent of the investor's annual income or net worth, provided that the investor's annual income and net worth are both less than $100,000
- the greater of 10 percent of the investor's annual income or net worth, if either their annual income or net worth is equal to or greater than $100,000; these investors would not be permitted to purchase more than $100,000 of securities through crowdfunding during any 12-month period
Not all companies would be eligible to use the crowdfunding exemption. The following are disqualified from using the proposed exemption: non-U.S. companies, companies that are already SEC-reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an identified company or companies.
Pursuant to Title III of the JOBS Act, under the proposed rules, crowdfunded securities may not be resold for a period of one year. Holders of crowdfunded securities would not be counted toward the threshold that requires a company to register with the SEC under Section 12(g) of the Securities Exchange Act of 1934.
Required Company Disclosures
Under the proposed rules, companies engaging in crowdfunded offerings must file certain information with the SEC, provide such information to investors and the applicable intermediary facilitating the crowdfunding offering, and make such information available to potential investors.
The offering document will be required to disclose the following information:
- information about officers and directors and owners of 20 percent or more of the company
- a description of the company's business and the use of proceeds from the offering
- the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount and whether the company will accept investments in excess of the target offering amount
- certain related-party transactions
- a description of the financial condition of the company
- financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company's tax returns or reviewed by an independent public accountant or auditor
A company also would be required to amend the offering documents to reflect any material changes and provide updates on the company's progress toward reaching the target offering amount. Companies relying on the exemption would be required to file an annual report with the SEC and provide it to investors.
Crowdfunding Platforms
Under the proposed rules, crowdfunding must take place exclusively online through an SEC-registered intermediary, either a broker-dealer or a funding portal.
The proposed rules would require broker-dealers and funding portals to meet the following requirements:
- provide investors with educational materials
- take measures to reduce the risk of fraud
- make information available about the issuer and the offering
- provide communication channels to permit discussions about offerings on the platform
- facilitate the offer and sale of crowdfunded securities
Funding portals would be prohibited from any of the following:
- offering investment advice or making recommendations
- soliciting purchases, sales or offers to buy the securities offered or displayed on its website
- imposing certain restrictions on compensating people for solicitations
- holding, possessing or handling investor funds or securities
The proposed rules include a safe harbor for funding portals complying with the above prohibitions.
The SEC has requested public comment to the proposed rules. The comment period will be open for 90 days from the date of publication in the Federal Register.
SEC Proposed Rules Release:
http://www.sec.gov/rules/proposed/2013/33-9470.pdf
SEC Press Release:
http://www.sec.gov/News/PressRelease/Detail/PressRelease/
1370540017677#.UmkqgPn2b1w
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
