The Securities and Exchanges Commission (“SEC) has agreed to draft rules under the Jumpstart Our Business Startups (JOBS) Act to allow companies to offer and sell securities through crowdfunding. SEC Chair Mary Jo White stated that the intent of the JOBS Act is to make it easier for start-up companies and small business to obtain equity through a wide range of investment opportunities from investors worldwide. In October of 2013, the SEC obtained public opinion and comments regarding the proposed rules for a 90-day period through the end of last year.
The proposed rules would permit investors to invest a certain amount of capital into a company. The amount of capital that can be invested into a company would be subject to thresholds set forth by the SEC. In order for companies to receive capital from investors they would need to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.
Pursuant to the proposed rules:
Companies would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 365-day period.
Investors, over the course of a 365-day period, would be permitted to invest up to:
The greater amount of $2,000 or 5% of their annual income or net worth if their annual income and net worth is less than $100,000 or
10% 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.
Certain companies may not be eligible to use the crowdfunding exemptions. These companies include: foreign companies, SEC reporting companies, certain investment firms, disqualified companies pursuant to the proposed disqualification rules, companies that have not complied with the annual reporting requirements in the proposed rules, and companies that do not have a explicit business plan or have conveyed that their business plan is to participate in a merger or acquisition with an unidentified company or companies. Securities purchased in a crowdfunding transaction are not eligible for resale until one year has passed since the transaction. Holders of the securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.
Disclosure by Companies
Pursuant to Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC and provide that information to investors and the intermediaries overseeing the crowdfunding offering. The information filed with the SEC must also be made available to potential investors.
The information that will be disclosed with the filing to the SEC would be:
Information about executive management as well as those who have at least 20 percent or more in equity with the company,
A description of the company’s business, financial state, related-party transactions, and the use of proceeds from the offering,
The price incurred by the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and if the company will accept investments greater than the target offering amount, and
Financial statements that must be accompanied by a copy of the company’s tax returns or reviewed by an independent public accountant or auditor.
An important investor protection that is in the JOBS Act and provides for crowdfunding is the requirement that crowdfunding transactions are completed through an intermediary registered with the SEC. Under the proposed rules, the offerings must be conducted exclusively online through a medium operated by a registered broker or a funding portal.
The proposed rules would require the intermediaries to do the following:
Provide investors with educational materials,
Take measures to reduce the risk of fraud,
Disclose information about the issuer and the offering,
Provide communication channels to permit discussion about offerings on the platform, and
Oversee the offer and sale of securities backed by crowdfunding.
Additionally, the proposed rules would prohibit funding portals from offering investment advice, soliciting purchases or offers to buy securities, imposing restrictions, or holding investor funds. The SEC believes that the proposed rules would provide a safe haven where funding portals can engage in certain activities consistent with these restrictions
Over the next 4-8 weeks, the SEC will seek public comment and opinion on the proposed rules. The SEC will review the comments and make a decision whether to adopt and implement the proposed rules.