Yesterday, the SEC proposed rules to permit companies to offer and sell securities through crowdfunding, as required by the Jumpstart Our Business Startups Act of 2012. Crowdfunding, which has become popular in recent years with the growth in social media, typically involves raising funds for a common cause or venture through small contributions from many individuals. The JOBS Act amended the Securities Act of 1933 by adding a new Section 4(a)(6) that, subject to SEC rulemaking, exempts certain crowdfunding offerings from the registration requirements of the Securities Act. Under the proposed rules, several conditions must be satisfied to qualify for the exemption, including:
- Cap on amount raised. The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, cannot exceed $1 million.
- Cap on individual investments. The aggregate amount that can be sold to any investor pursuant to the crowdfunding exemption during the 12-month period cannot exceed the greater of:
- $2,000 or five percent of the investor’s annual income or net worth, whichever is greater, if both the annual income and net worth of the investor are less than $100,000; or
- 10 percent of the investor’s annual income or net worth, whichever is greater, not to exceed an amount sold of $100,000, if either the investor’s annual income or the investor’s net worth is $100,000 or more.
- Required use of broker or funding portal. The transaction must be conducted through an SEC-registered intermediary—either a broker-dealer or a new type of entity called a funding portal that complies with the requirements described in the proposed rules.
- Disclosure document. The issuer must file with the SEC on EDGAR and provide to investors and the broker or funding portal certain information, including information about the issuer’s officers, directors and 20 percent shareholders, the issuer’s business and anticipated business plan, the use of proceeds from the offering, the terms of the offering, certain related party transactions, the issuer’s capital structure and financial condition, and details regarding the offering process. The issuer must also provide financial statements of the company that, depending on the size of the offering, would have to be accompanied by the issuer’s tax returns or reviewed or audited by an independent public accountant or auditor.
- Annual reporting. The issuer must file with the SEC on EDGAR and provide to investors an annual report of its results of operations and financial statements within 120 days after the end of the most recent fiscal year. The issuer would be required to file an annual report until (i) the issuer becomes a reporting company under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, (ii) all the securities are purchased or repurchased by the issuer or another party, or (iii) the issuer liquidates or dissolves.
- Eligible issuers. The crowdfunding exemption would not be available to certain companies, including non-U.S. companies, SEC-reporting companies, investment companies, private funds, companies that are disqualified under the bad actor rules, companies that fail to comply with the annual reporting requirements in the proposed rules and companies that have no specific business plan or have a business plan to engage in a merger or acquisition with an unidentified company.
Crowdfunding offerings meeting the requirements of the exemption would be exempt from state blue sky regulation relating to registration, documentation and offering requirements. Securities issued in a crowdfunding transaction will be restricted for one year after purchase, unless they are registered or are transferred to the issuer, an accredited investor or a family member, or in connection with the purchaser’s death or divorce.
The SEC is seeking public comment on the proposed rules for 90 days.