What’s in the SEC’s proposed crowdfunding regulations?
At last, the Securities and Exchange Commission (SEC) has proposed “Regulation Crowdfunding” (the rules implementing Title III of the JOBS Act). I apologize for my delay in posting about this, but in my defense, the release containing the proposed rules is 585 pages long. (The length alone gives one pause about how workable this regulatory scheme, which is intended to be used by small companies with limited resources, will turn out to be.)
To briefly review: Title III the JOBS Act creates a new exemption to the general registration requirements of the 1933 Securities Act, permitting early-stage companies to raise financing of up to $1 million in a 12-month period by aggregating small investments from a broad base of investors. The most important provision of Title III is the ability to accept small amounts of money from investors who would not qualify as “accredited” under current law (i.e., individuals without consistent annual income above $200,000 or net worth in excess of $1 million).
Below are the (by no means comprehensive) highlights of the proposed rules. I will offer some personal opinions about the rules in my next post.
- Funds raised pursuant to the crowdfunding exemption would be viewed as separate from, and not count against, the fundraising limits under other exemptions (e.g., those found in Regulation D).
- Individual investments would be “means-tested,” as follows: (A) For those with annual income and net worth both less than $100,000, investment is limited to the greater of $2,000 or 5% of annual income or net worth; and (B) for those with annual incomes or net worth over $100,000, investment is limited to the greater of 10% of annual income or net worth, subject to an overall investment limit of $100,000. These calculations would include income and assets of one’s spouse.
- Title III requires companies to engage in crowdfunding via “funding portals” or “intermediaries,” and the proposed rules specify that all intermediaries must transact using an online platform. Also, a company may use only one intermediary for each crowdfunding round.
- The proposed rules clarify that scope of the information companies will have to provide the SEC and potential investors about their financial condition, which varies depending on the amount of money being raised:
- Companies raising $100,000 or less would be required to provide income tax returns for the most recently completed fiscal year, and a complete set of financial statements prepared in accordance with Generally Accepted Accounting Principles for the previous two years (or if shorter, for the duration of the business) certified by the company’s CEO.
- Companies raising more than $100,000 but less than $500,000 would be required to have the financial statements reviewed by an independent public accountant.
- Offerings of more than $500,000 would require the company’s financial statements to be audited.
- Companies would have to provide annual reports to its crowdfunding investors, including financial and other information similar to what is required for the offering statement.
- Advertising of crowdfunded offerings would be restricted to publication of a notice containing the terms of the offering, the identity and contact details of the company, and a link to the intermediary’s platform where all details of the offering can be found.
- Persons promoting a company’s offering on intermediary platforms (e.g., discussion forums) would have to disclose, on each communication, any compensation received from the company.
- The proposed rules include a substantial number of provisions governing the funding portals. Most importantly:
- Intermediaries must register with the SEC and become members of FINRA.
- Intermediaries and their directors, officers and partners cannot have any interest in the securities of a company using their services.
- Intermediaries must disclose, when registering an account for a prospective investor, the basis of its compensation in connection with crowdfunding offerings.
The period for commenting on the proposed regulations remains open until February 3, 2014, and therefore, the earliest the rules are likely to be implemented is the middle of next year. Have comments? Submit them to the SEC here.