SEC Issues Proposal on Crowdfunding
Yesterday, long overdue, the SEC voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.
Crowdfunding occurs when people pool their money and other resources together to support efforts initiated by other people or organizations. Such pooling of money and resources typically occurs via the internet for any variety of purposes, including funding political campaigns, disaster relief, small loans (micro credit), artists, and even startups. In the United States, crowdfunding has occurred largely on a donation basis or as a loan, where the lender can only expect to be repaid principal.
As part of the JOBS Act, Congress created an exemption to permit securities-based crowdfunding. The JOBS Act permitted crowdfunding, subject to SEC rulemaking, of domestic private companies.
Consistent with the JOBS Act, the proposed rules would among other things 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 (or platforms) that would facilitate the crowdfunding transactions.
Limits and Thresholds
Under the proposed rules:
- A company would be able to 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, would be permitted to 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.
Securities purchased in a crowdfunding transaction could not be resold for a period of one year. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.
The proposed rules require companies conducting a crowdfunding offering to file certain information (e.g. a description of the company’s business and the use of proceeds from the offering and financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor) with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.
Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.
One of the key investor protections provided by Title III of the JOBS Act is the requirement that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.
The SEC is seeking public comment on the proposed rules for a 90-day period following their publication in the Federal Register.
For further information, please see the press release (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677) and proposed rules (http://www.sec.gov/rules/proposed.shtml).
We will have an advisory coming out discussing crowdfunding shortly.