Kenneth C. Oh
Counsel
212-784-6911 koh@sh-law.comSEC Proposes Long-Awaited Crowdfunding Rules
Author: Kenneth C. Oh|November 4, 2013
After months of delays, the Securities and Exchange Commission (SEC) finally released proposed rules pursuant to the JOBS Act to permit companies to offer and sell securities through crowdfunding.
SEC Proposes Long-Awaited Crowdfunding Rules
After months of delays, the Securities and Exchange Commission (SEC) finally released proposed rules pursuant to the JOBS Act to permit companies to offer and sell securities through crowdfunding.
While crowdfunding has become a popular way to raise money online, securities regulations kept it out of reach for many investors and small businesses. Once final rules are adopted, start-ups and growing ventures will be permitted to solicit investments from “everyday” investors using the Internet.
The SEC’s proposed rules to implement the JOBS Act provisions set forth the regulatory framework under which equity crowdfunding will operate. Some of the most significant provisions include:
- Limits on capital raised: A company can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
- Investor caps: The rules place limits on the amount a person can invest over the course of a 12-month period. Investors with annual income and net worth of less than $100,000 can invest up to $2,000 or five percent of their annual income or net worth, whichever is greater. If either their annual income or net worth is $100,000 or more, the threshold increases to 10 percent of their annual income or net worth, whichever is greater, but investors would not be able to purchase more than $100,000 of securities through crowdfunding over a 12-month-period.
- Disclosures by companies: Companies conducting a crowdfunding offering must file certain information with the SEC, as well as provide it to investors and the intermediary facilitating the transaction. These disclosures include information about officers and directors, the company’s business and financial condition, and the offering itself. If more than $500,00 is raised, expensive certified financials are required of the issuer.
- Crowdfunding platforms: Crowdfunding transactions must take place through an SEC-registered intermediary, which can be either a broker-dealer or a funding portal. A “funding portal” does not have to register with the SEC as a broker-dealer, but must limit its operations to crowdfunding and cannot provide investment advice.
The proposed rules demonstrate the SEC’s goal of balancing the competing interests of promoting business growth and ensuring investor protection. On the one hand, the investor limits ensure that individuals do not risk more than they can afford to lose. On the other, the financial intermediary can rely on the information provided by investors regarding their income and net worth.
Now that the SEC has finally got the ball rolling on crowdfunding, the public has 90 days to comment. However, it could be six months or more before the final rules are issued. In the meantime, businesses can continue to raise money from investors through the present private placement exemptions from registration.
If you have any questions about the SEC’s proposed crowdfunding rules or would like to discuss the legal issues involved, please contact me, Kenneth Oh, or the Scarinci Hollenbeck attorney with whom you work.
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SEC Proposes Long-Awaited Crowdfunding Rules
Author: Kenneth C. Oh
While crowdfunding has become a popular way to raise money online, securities regulations kept it out of reach for many investors and small businesses. Once final rules are adopted, start-ups and growing ventures will be permitted to solicit investments from “everyday” investors using the Internet.
The SEC’s proposed rules to implement the JOBS Act provisions set forth the regulatory framework under which equity crowdfunding will operate. Some of the most significant provisions include:
- Limits on capital raised: A company can raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
- Investor caps: The rules place limits on the amount a person can invest over the course of a 12-month period. Investors with annual income and net worth of less than $100,000 can invest up to $2,000 or five percent of their annual income or net worth, whichever is greater. If either their annual income or net worth is $100,000 or more, the threshold increases to 10 percent of their annual income or net worth, whichever is greater, but investors would not be able to purchase more than $100,000 of securities through crowdfunding over a 12-month-period.
- Disclosures by companies: Companies conducting a crowdfunding offering must file certain information with the SEC, as well as provide it to investors and the intermediary facilitating the transaction. These disclosures include information about officers and directors, the company’s business and financial condition, and the offering itself. If more than $500,00 is raised, expensive certified financials are required of the issuer.
- Crowdfunding platforms: Crowdfunding transactions must take place through an SEC-registered intermediary, which can be either a broker-dealer or a funding portal. A “funding portal” does not have to register with the SEC as a broker-dealer, but must limit its operations to crowdfunding and cannot provide investment advice.
The proposed rules demonstrate the SEC’s goal of balancing the competing interests of promoting business growth and ensuring investor protection. On the one hand, the investor limits ensure that individuals do not risk more than they can afford to lose. On the other, the financial intermediary can rely on the information provided by investors regarding their income and net worth.
Now that the SEC has finally got the ball rolling on crowdfunding, the public has 90 days to comment. However, it could be six months or more before the final rules are issued. In the meantime, businesses can continue to raise money from investors through the present private placement exemptions from registration.
If you have any questions about the SEC’s proposed crowdfunding rules or would like to discuss the legal issues involved, please contact me, Kenneth Oh, or the Scarinci Hollenbeck attorney with whom you work.
