On October 23, 2013 the U.S. SEC voted to permit companies to offer and sell securities through crowdfunding. Crowdfunding describes a method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a variety of projects. Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can be used to offer and sell securities as well. Consistent with the JOBS Act, the proposed rules permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions. Click Here to Read the Proposed Crowdfunding Rules
Under the proposed rules:
A company can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
Investors, over the course of a 12-month period, can invest up to:
$2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
Certain companies are not eligible to use the crowdfunding exemption including non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Companies are required to amend the offering document to reflect material changes and provide updates on the company's progress toward reaching the target offering amount. Companies relying on the crowdfunding exemption to offer and sell securities are required to file an annual report with the SEC and provide it to investors.
Under the proposed rules, the offerings are conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.The proposed require these intermediaries to:
Provide investors with educational materials.
Take measures to reduce the risk of fraud.
Make available information about the issuer and the offering.
Provide communication channels to permit discussions about offerings on the platform.
Facilitate the offer and sale of crowdfunded securities.
The proposed rules prohibit funding portals from:
Offering investment advice or making recommendations.
Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
Imposing certain restrictions on compensating people for solicitations.
Holding, possessing, or handling investor funds or securities.
The proposed rules provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions. The U.S. SEC seeks public comment on the proposed rules for 90 days.
