By Andy Federico, Carlile Patchen & Murphy LLP
In late October (2015), the Securities and Exchange Commission adopted final rules to permit companies to offer and sell securities through crowdfunding. The new rules were adopted in response to the federal exemption under the securities laws created by the JOBS Act in 2012. “Regulation Crowdfunding” will be effective May 16, 2016 (180 days after publication in the Federal Register).
Under “Regulation Crowdfunding”, companies will be allowed to raise capital through the sale of the company’s securities over the internet. The company would be permitted to sell up to $1 million of securities during a 12 month period pursuant to the exemption. An investor could not purchase securities in an amount greater than $2,000.00 or 5% of that person’s net worth, if the person has annual income or net worth of less than $100,000; or greater than $10,000or 10% of net worth, if the investor has annual income or net worth of more than $100,000.
Companies that rely on “Regulation Crowdfunding” to conduct an offering must file certain information with the SEC and provide this information to investors and the intermediary facilitating the offering, including among other things:
- The financial terms of the offering (price, target amount, deadline, etc.)
- A discussion of the company’s financial condition Financial statements (reviewed by an independent accountant for offerings of more than $500,000 but less than $1,000,000; audited financial statements for offerings of more than $1,000,000)
- A description of the business and use of proceeds of the offering
- Information about officers, directors and principal shareholders.
Crowdfunding transactions must be conducted through a broker or funding portal. These intermediaries will be required to provide the disclosures listed above; ensure that each investor reviews investor education information in accordance with standards established by the SEC and positively affirms that the investor understands the risks of the investment; take measures to reduce the risk of fraud, including obtaining background checks on each officer, director and 20% shareholder of the issuer; and ensure that offering proceeds are only made available to the issuer when the amount of capital raised has reached the target amount.
In addition the funding portal is not permitted to provide investment advice or make recommendations; solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; or hold, manage, possess or otherwise handle investor funds or securities.
During the same SEC meeting at which Regulation Crowdfunding was adopted, the SEC proposed amendments to Rule s 147 and 504. The proposed amendments to Rule 147 would update the rule to permit crowdfunding transactions within a single state without compliance with federal registration requirements or Regulation Crowdfunding. The proposed amendments to Rule 504 would update the rule to increase the aggregate amount of securities that may be offered and sold under the exemption in any 12 month period from $1,000,000 to $5,000,000 and disqualify certain bad actors from participation in Rule 504 offerings.
