Audit, Compliance and Risk Blog

SEC Proposes Crowdfunding Rules for Private Securities Offerings

Posted by Jon Elliott on Wed, Nov 06, 2013 you ever "crowdfunded?" On October 23, the Securities and Exchange Commission (SEC) proposed regulations that may expand your opportunity to do so…

In this increasingly popular fundraising mechanism, people with creative ideas post proposals on dedicated websites (such as Kickstarter for creative projects). People intrigued by the project provide contributions, and typically receive acknowledgements and perhaps suitable gratuities (tickets to the movie, copies of the game, etc.).

A few websites have pushed these efforts closer to traditional small-cap investing—for example the Mosaic website facilitates investments in financing for solar energy projects. But these efforts have been limited by provisions of federal securities laws designed to protect investors ... although those limitations are changing.

JOBS Act Provisions for Crowdfunding

The 2012 Jumpstart Our Business Startups (JOBS) Act revises federal securities laws to allow small companies to grow before having to register securities or stage an initial public offering (IPO). Title III adopts a new Section 4A into the 1933 Securities Act, outlining a new crowdfunding exemption from requirements to register securities, for qualifying U.S.-based companies in compliance with the following conditions:

  • Make no more than $1 million in sales to all investors in the 12 months up to the exempt transaction (whether or not made under this exemption.

  • Each investor invests no more than the following amount in the 12 months up to the transaction:

    • Greater of $2,000 or 5% of the investor’s annual income or net worth (if either is less than $100,000).
    • Greater of $100,000 or 10% of the investor’s annual income or net worth (if either is $100,000 or more)
  • Transaction is conducted through an “intermediary” — broker or “funding portal” —that complies with newly established registration and reporting requirements.

  • Issuer meets information filing, investor notice, and intermediary compensation rules that the SEC is to define.

SEC's Proposed Rules

SEC was to have published these regulations by December 2012, but is running late. Despite the delay, SEC's new proposal hews close to the lines established by the JOBS Act and other registration and exemption provisions in the federal securities acts.

  • Requirements for companies

SEC’s proposal repeats the requirements noted above, specifying that the issuing company disclose the following basic information about the company and the offering:

    • Information about officers, directors, and owners of 20 % or more of the company.

    • Description of the company’s business and the use of proceeds from the offering.

    • Price at which the securities are offered, target amount, deadline to reach the target amount or withdraw the offering, and whether the company will accept investments in addition to the target amount.

    • Certain related-party transactions, if any.

    • Description of the company’s financial condition.

    • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, may have to be audited or accompanied by the company’s tax returns.

  • Requirements for intermediaries

Most of the new details to be found in SEC’s proposal involve requirements for SEC-registered third party intermediary – either a broker-dealer or a newly-defined “funding portal.” SEC also proposes to require that intermediaries conduct these transactions exclusively through online platforms. They also must meet investor information and protection goals by doing the following:

    • Providing investors with educational materials.

    • Taking specified measures to reduce the risk of fraud.

    • Providing information about the issuer and the offering.

    • Providing communication channels to permit discussions about offerings on the platform.

    • Facilitating the offer and sale of crowdfunded securities.

Conversely, the proposed rules would prohibit funding portals from all of the following:

    • Offering investment advice or making recommendations

    • Soliciting purchases, sales or offers to buy securities offered or displayed on its website

    • Imposing specified restrictions on compensating people for solicitations

    • Holding, possessing, or handling investor funds or securities

  • Requirements for investors

SEC's proposal copies the limits on investment set forth above, in total amounts and relative to their assets. Investors generally cannot sell these shares for at least a year.

Self-Assessment Checklist

These rules are only proposals, so nobody can rely on them yet. However, SEC is moving to finalize them next year, so it’s not too early to start making contingency plans. Consider the following:

Does my organization anticipate raising investment funds by selling securities?

  • Does the organization already have securities registered with SEC?

  • Has the organization already issued unregistered securities, under an exemption from registration provided by federal securities laws and SEC rules?

If the organization is considering raising no more than $1 million per year, has it reviewed “crowdfunding” provisions of the JOBS Act, and SEC’s proposed rules?

Am I an investor, interested in investing in non-public companies?

  • If so, have I considered whether to invest via “crowdfunding” websites, once SEC’s rules become final?

Where Can I Go For More Information?

Specialty Technical Publishers (STP) provides a variety of publications intended to facilitate clients’ understanding of and compliance with regulations. These include:

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About the Author Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products, including Securities Law: A Guide to the 1933 and 1934 Acts and their Amendments, including Sarbanes-Oxley and Dodd-Frank and Directors' and Officers' Liability.

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:

photo credit: lulupinney via photopin cc

Tags: Corporate Governance, Business & Legal, SEC, JOBS Act