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Banking and Finance

Final Senate Version of Crowdfunding

As we know, the Senate changed the version of the Jumpstart our Business Startups (JOBS) Act in only one way, they added an amendment, drafted by Sen. Merkley (but also supported by Sens. Bennet and Brown), which added more investor protections to the "crowdfunding" section of the bill. The House is expected to vote to approve the revised bill this week. My prior posts do not have information about the Senate amendment, so I will provide it now.

The new section of the bill, to be called the Crowdfund Act, creates a new Section 4(6) of the Securities Act which exempts crowdfunded offerings from SEC registration.  It has the following highlights:

  • An issuer can only raise up to $1,000,000 per 12-month period
  • Each investor can only invest in all crowdfunded investments in a year for all companies the greater of (a) $2,000 or 5% of annual income or net worth if either is less than $100,000 or (b) 10% of annual income or net worth with a cap of $100,000 if income or net worth are more than $100,000
  • The deal MUST be done through a broker or "funding portal" registered with the SEC and FINRA
  • Lots of information, including risks, must go to investors at least 21 days before closing
  • Information to be given includes management certified financial statements for offerings under $100,000, "reviewed" financial statements for offerings between $100k and $500k, and audited financials for offerings over $500,000
  • Issuers must file updated results of operations and financials annually with the SEC
  • Investors cannot transfer stock for one year with limited exceptions
  • The company must be organized in the US and non-SEC reporting
  • The SEC has 270 days to make rules to implement
  • Bad actors will be disqualified
  • Offerings are exempt from state regulation (other than enforcement) but certain filings and fees may be required

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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