Providing Legal Services For More Than 125 Years

Crowdfunding Rules Released By The Securities And Exchange Commission

On Behalf of | Nov 7, 2013 | Business Transactions

Last month, the Securities and Exchange Commission (SEC) released its proposals setting out the crowdfunding framework as required by Title III of the Jumpstart Our Business Startups Act 2012 (JOBS Act).

The rules, once finalized, will become known as “Regulation Crowdfunding,” and are intended to provide another way for companies looking to raise capital outside of the more heavily regulated securities framework.

The JOBS Act established a new Section 4(a)(6) that exempts certain crowdfunding transactions from registration under the Securities Act of 1933. The three main prongs to qualifying for the exemption are:

  • The amount raised by the company through crowdfunding offerings must not exceed a maximum aggregate amount of $1 million (subject to periodic inflation adjustments) in any 12-month period. Funds raised under the Section 506 “safe harbor” exemption of the 1933 Act, or through methods that do not involve the sale of securities (e.g. loans or gifts from family members), would not be included in any calculation. An issuer must comply with certain disclosure requirements regarding its business and operations, as well as the terms of the offer, and other material facts that an investor would need to know. Securities sold in a crowdfunding transaction would be subject to a one-year transfer restriction following the sale.
  • From the investor perspective, the aggregate amount of securities sold to any investor through a crowdfunding transaction, over a 12-month period, cannot exceed the greater of: (i) $2,000 or 5% of the investor’s annual income or net worth, if both annual income and net worth are less than $100,000, or (ii) 10% of the investor’s annual income or net worth, whichever is greater, if annual income or net worth is equal to or greater than $100,000. During a 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding transactions.
  • All exempt crowdfunding offerings must be conducted through an SEC-registered intermediary, either a broker-dealer or the newly-designated “funding portal” entity. The funding portal would also be regulated by the Financial Industry Regulatory Authority, which proposed its own rules for comment on the same day the SEC released its proposals. As part of the crowdfunding offering, the intermediary will have to meet specific disclosure requirements about the company seeking investment, the risks of crowdfunding, and take other steps to protect investors. Funding portals would be prohibited from offering investment advice or making recommendations, soliciting purchases, sales or offers to buy securities offered on its website or holding, possessing or handling investor funds or securities.
  • Paul D. Creme is an attorney with Hamblett & Kerrigan PA. His practice is focused on business and corporate law. Of particular interest are the areas of software and emerging technologies. You can reach Attorney Creme at [email protected].