On October 30, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules under Title III of the Jumpstart Our Business Startups Act (the “JOBS Act”). Among other things, the JOBS Act permits companies seeking to raise capital, or “issuing companies”, to sell securities to investors through crowdfunding. Below is a brief overview of what companies, investors and others affected by the new crowdfunding rules need to know.
What is the Impact of the New Rules on Issuing Companies, Intermediaries and Portals?
- Issuing companies will be allowed to raise up to $1 million from accredited and unaccredited investors, through intermediaries, in any 12-month period.
- Intermediaries must be registered with the SEC as either a broker/dealer or a “funding portal”.
- Funding portals, in turn, will be required to register with the SEC via the SEC’s new Form C.
- Each intermediary must also become a member of the Financial Industry Regulatory Authority (FINRA).
- Each intermediary will be required, among other things, to disclose any compensation it receives in connection with an offering and to provide investors with educational materials explaining the platform, the securities offered, resale restrictions and investment limits.
- Platforms must also post certain issuer-drafted disclosures and provide a mechanism through which investors can communicate about the securities on offer.
- Issuing companies must file the information listed below with the SEC on Form C and must disclose this information to both investors and intermediaries:
- the price of the securities to be sold;
- the target offering amount;
- the deadline to reach the target offering amount;
- a discussion of the issuing company’s financial condition;
- financial statements;
- a description of the issuing company’s business and how the crowdfunding proceeds will be used; and
- certain information about officers, directors and 20% shareholders.
- Issuing companies are permitted to use one intermediary at any given time to conduct a single crowdfunding offering or multiple and concurrent crowdfunding offerings.
- Once an offering is consummated, the issuing company must file an annual report with the SEC on Form C-AR, which will contain disclosures substantially similar to those in its Form C registration statement and will include disclosures related to its directors and officers, current number of employees, financial condition, capital structure, material indebtedness and certain related-party transactions.
What is the Impact of the New Rules on Investors?
Under the new framework, individual investors will be permitted to invest across all crowdfunding offerings in any 12-month period up to the following amounts, in the aggregate:
- if the annual income or net worth of the investor is less than $100,000, the greater of (a) $2,000 or (b) 5% of the lesser of the investor’s annual income or net worth; or
- if both the annual income and net worth of the investor equal or exceed $100,000, 10% of the lesser of the investor’s annual income or net worth, which investment amount is not to exceed $100,000.
When will the New Rules Become Effective?
In general, the new crowdfunding rules will be effective 180 days after they are published in the Federal Register. However, to ensure fair competition with broker/dealers, funding portals will be able to register on Form C as of January 29, 2016, thereby providing them with sufficient time to register and establish the necessary infrastructure before any crowdfunding activities are permitted.
In a companion action to the new crowdfunding rules, the SEC also created an exemption from federal registration under Rule 147 and modified the offering limit of Rule 504 of Regulation D to accommodate intrastate crowdfunding exemptions that already exist in a majority of states. The new Rule 147 exemption provides that securities offerings are exempt from federal registration, provided that the securities are only sold to investors who reside in the state in which the issuer maintains its principal place of business. Additionally, the state in which the offering takes place must have its own method of registration or its own exemption from state registration, which includes investor investment limits and an aggregate raise limit of $5 million.