Securities

SEC’s Crowdfunding Rules

 Crowdfunding is a popular and controversial form of selling securities using the internet. Prior to the passage of the JOBS Act, which was designed to facilitate capital formation for small companies, such sales generally would have been required to comply with the registration provisions of the securities laws. Many see the form of financing as an inexpensive capital formation process which will boost small business and create jobs. Others see it as the wild west of securities sales with the unscrupulous taking advantage of small, inexperienced investors.

Over the next three years the truth may emerge. Once the Commission adopts its new crowdfunding rules the staff will be given three years to complete a study. Those rules will be effective 180 days after publication. Forms enabling funding portals to register with the SEC will be effective January 29, 2016.

The rules governing crowdfunding impose limitations on investors, issuers and the new portals through which the securities can be sold, in addition to traditional broker-dealers. Key provisions of the new rules include:

Limits on issuers: An issuer is only permitted to raise an aggregate of $1 million in a 12 month period. Only one offering through one intermediary platform at a time is permitted.

Individuals: There are two limits on purchases by individuals: 1) Income/net worth: if the person’s annual income or net worth is less than $100,000 they are only permitted to invest $2,000 or the lesser of 5% of their annual income or net worth in one 12 month period; 2) an investor can not purchase more than $100,000 or 10% of the lesser of their annual income or net worth in a 12 month period.

Disclosure: Issuers are required to make certain disclosures including: the offering price; the target offering amount; the deadline to reach the target; its financial condition; its financial statements; a description of the business; information about officers, directors and 20% shareholders; and certain related party transactions.

Platforms: A funding portal must register with the SEC and become a member of FINRA. The portal must also furnish investors with educational materials about the process; make available on its site the information that must be disclosed by the issuer for 21 days before any sale; provide a communication channel to permit discussions about offerings; have a reasonable basis for its belief that the investment limitations are being met; and comply with the completion, cancellation and reconfirmation of offerings requirements.

The rules for portals, but not broker-dealers using the process, also contain certain limitations that are intended to protect investors. Currently the Commission is soliciting comments which will be reviewed before the rules are effective.

 For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.     

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