The SEC Takes On The Crowd
The SEC has made public its much anticipated crowdfunding rules. Required by Title III of the Jumpstart Our Business Startups Act, proposed Regulation Crowdfunding would permit companies to offer and sell securities through either a traditional broker-dealer or via a new type of entity – a funding portal – which would allow internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.
The SEC’s press release announcing the proposal outlines proposed Regulation Crowdfunding’s basic provisions:
- A company may raise a maximum aggregate amount of $1 million through crowdfunded 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, investors would not be able to purchase more than $100,000 of securities through crowdfunding.
- Certain companies would not be eligible to use the crowdfunding exemption. Ineligible companies include non-U.S. firms, existing reporting companies, certain investment companies, 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.
- As required by the JOBS Act, securities purchased through crowdfunding cannot be resold for one year. Holders of crowdfunded securities would not count toward the registration thresholds of the Securities Exchange Act.
- Offering document disclosures would include information about officers and directors as well as owners of 20 percent or more of the company; a description of the company’s business and the use of proceeds; the price of the securities and the target offering amount; the closing date; certain related party transactions; and a description of financial condition.
- Amendments disclosing material changes would also be required as would be the filing of annual reports.
Under the proposal, offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which will be a new type of SEC registrant.
These intermediaries would provide investors with educational materials, make available information about the issuer and the offering, provide communication channels, and facilitate the offer and sale of crowdfunded securities.
Funding portals would not: be able to offer investment advice or make recommendations; solicit purchases, sales or offers; or be permitted to hold, possess, or handle investor funds or securities.
In these fractious governmental times, the SEC’s unanimity in proposing Regulation Crowdfunding makes it unique. Comments made by the Commissioners at the open meeting however, may indicate that the agency will revert to form. For example, Commissioner Kara Stein was particularly concerned about investor protection issues. Stein objected to the proposal’s “greater than” language when limiting investor exposure. She also questioned the proposal’s provisions which permit non-U.S. funding portals. A third concern involves recordkeeping. Acknowledging the costs associated with transfer agents, she asked whether other cost effective third-party solutions may exist.
Although the proposing release contains some 295 comments, Chairman Mary Jo White appeared optimistic regarding the proposal’s chances. Assuming that the proposal will move forward, she has instructed staff to develop a comprehensive work plan to review and monitor the use of the crowdfunding exemption. The work plan would evaluate the types of issuers using the new crowdfunding exemption, how issuers and intermediaries are complying with the rule, and whether the exemption is promoting capital formation and effectively protecting investors.
Comments on the proposed rule should be submitted within 90 days after publication in the Federal Register, which is expected during the week of October 28.