SEC Approves Final Equity Crowdfunding RulesNovember 2015
On October 30, 2015, the Securities and Exchange Commission (SEC) adopted final rules implementing the "crowdfunding" provisions of the Jumpstart Our Business Startups (JOBS) Act. The new rules, which will become effective in the spring of 2016, will permit investments in startups and small businesses via securities-based crowdfunding platforms, subject to certain thresholds and limitations.
Crowdfunding Offering Rules
Securities offerings under the new crowdfunding rules must be conducted through an internet-based platform provided by either a securities broker-dealer or a "funding portal" (a newly created category described below under "Intermediary Requirements").
Under the new equity crowdfunding rules:
- An eligible issuer (discussed below) may raise up to $1 million in any 12-month period through crowdfunding offerings;
- Individual investors, over the course of a 12-month period, may invest in crowdfunding offerings up to
- If their annual income or their net worth is less than $100,000, the greater of (i) $2,000 or, (ii) 5% of the lesser of their annual income or net worth;
- If both their annual income and their net worth are $100,000 or more, 10 percent of the lesser of their annual income or net worth; and
- An investor, through all crowdfunding offerings, may invest up to $100,000 during any 12-month period.
Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year.
Offerings under the new crowdfunding rules may be made by any US company, as long as it isn't a publicly reporting company, an investment company (including for this purpose private equity and venture capital funds), or a company with no specific business plan or a plan to combine with an unidentified company or companies. The issuer must not fall under specified "bad actor" conditions (for example, no prior securities law violations), and if it has previously engaged in a crowdfunding transaction, it must be complying with its ongoing reporting requirements.
Issuers conducting a crowdfunding offering must file certain information with the SEC and provide that information to investors and the "intermediary" facilitating the crowdfunding offering. This information includes disclosures relating to the officers, directors, and current major owners of the issuer; a description of the issuer's business; the proposed use of proceeds from the offering; the target offering amount and deadline; the offering price; the issuer's ownership and capital structure; a discussion of the issuer's financial condition; and financial statements. (The scope of or audit requirements for the financial statements depends on the amount of the offering and the status of the issuer.) Issuers must also provide updates during the offering period to reflect material changes and to report on progress made toward the target offering amount. Finally, issuers must file with the SEC an annual report, including financial statements in addition to much of the information described above, and provide the report to investors.
Issuers engaging in a crowdfunding offering may not advertise the offering except for limited notices that direct investors to the funding portal or broker. Issuers may compensate third parties who promote the offering through the intermediary's platform, but such promotional communications must include a disclosure of any compensation received in connection therewith.
The SEC rules require that crowdfunding transactions take place through a program or application accessible via the internet or other similar electronic communication and that all such offerings are made through an SEC-registered intermediary, either a broker-dealer or a "funding portal." To facilitate the sharing of information among the "crowd," each issuer must use a single intermediary to conduct all of its concurrent crowdfunding offerings.
Funding portals must be members of the Financial Industry Regulatory Authority (FINRA) and are prohibited from offering investment advice; compensating promoters and others either for solicitations or based on the sale of securities; holding, possessing, or handling investor funds or securities; or making recommendations for, or soliciting purchases for, sales for, or offers to buy, securities offered or displayed on their platform. The funding portals must also satisfy recordkeeping and other obligations specified in the SEC rule and are responsible for matters such as determining compliance with investment limits and completing crowdfunding transactions effected via the portal.
Under the final rules, with respect to an issuer's seeking to offer and sell securities through its platform, an intermediary must have a "reasonable basis" for believing that the issuer has complied with the applicable requirements. This includes a responsibility to assess whether the intermediary may reasonably rely on an issuer's representation of compliance. Specific actions to be taken by an intermediary depends on the nature of, and the intermediary's relationship with, each individual issuer. Each intermediary has an obligation to deny access to its platform if it has a reasonable basis for believing that an issuer or any of the issuer's officers, directors, or major owners is subject to disqualification, and the rules require certain background and securities enforcement regulatory history checks on such persons.
The final rules provided by the SEC will be effective 180 days after they are published in the Federal Register, and the forms enabling funding portals to register with the SEC will be effective on January 29, 2016. The full text of the SEC's final regulation crowdfunding rules is available here. Proposed companion FINRA rule changes to adopt funding portal rules are available here. If you have any questions about securities crowdfunding compliance, please contact one of our securities attorneys.