Proposed Equity Crowdfunding Rules Released
On Thursday, October 24th, the SEC released a proposed set of equity crowdfunding rules that would allow companies to sell securities via equity crowdfunding. While made legal when President Obama signed the JOBS Act on April 5, 2012, crowdfunding will remain limited to selling special, limited edition, or autographed merchandise in exchange for capital until the SEC finalizes rules regulating equity crowdfunding offerings. The purpose of the JOBS Act and equity crowdfunding is to allow startups to raise capital while increasing investment opportunities for the public.
With the release of the proposed rules comes a ninety-day public comment period, after which the SEC will issue a final set of rules.
The Proposed Equity Crowdfunding Rules
The proposed equity crowdfunding rules would limit the amount investors are allowed to invest, limit the amount a company may raise, require specific disclosures from companies, and create a regulatory framework for equity crowdfunding intermediaries as follows:
Limits on Individual Investors
Investors would be limited to investing via equity crowdfunding, over the course of a twelve-month period:
- The greater of $2,000 or 5% of the investor’s annual income or net worth, if both annual income and net worth are less than $100,000; or
- The greater of 10% of the investor’s annual income or net worth, if either annual income or net worth is greater than $100,000, with a limit of $100,000 in a twelve-month period.
Limits on Companies
A company would be able to raise an aggregate amount of $1,000,000 through equity crowdfunding offerings in a twelve-month period if it is a U.S. company that is not already an SEC reporting company, an investment company, a company disqualified under the proposed disqualification rules, a company that has failed to comply with annual reporting requirements, a company with no specific business plan, or that a company that plans to merge with or acquire an unidentified company or companies.
Limits on Securities
Securities purchased in an equity crowdfunding transaction cannot be resold within a one year period; however, the holders of securities purchased in an equity crowdfunding transaction do not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Securities Exchange Act of 1934.
Disclosure by Companies
The proposed rules require companies conducting an equity crowdfunding offering to file certain information with the SEC, provide that information to investors and the crowdfunding intermediary facilitating the offering, and make such information available to potential investors. Such disclosures must include:
- Information about officers and directors as well as owners of 20% or more of the company;
- A description of the company’s business and the use of proceeds from the offering;
- The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
- Certain related-party transactions;
- A description of the financial condition of the company; and
- Financial statements of the company that, depending on the amount offered and sold during a twelve-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.
Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount. Companies with equity crowdfunded securities would also be required to file an annual report with the SEC and provide it to investors.
Equity Crowdfunding Intermediary Proposed Rules
All equity crowdfunding issuances would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the equity crowdfunding offerings would be conducted exclusively online. Equity crowdfunding intermediaries would be required to comply with the following proposed rules:
- Provide investors with educational materials;
- Take measures to reduce the risk of fraud;
- Make available information about the issuer and the offering;
- Provide communication channels to permit discussions about offerings on the platform; and
- Facilitate the offer and sale of equity crowdfunded securities.
Equity crowdfunding intermediaries would be prohibited from doing any of the following, according to the proposed rules:
- Offering investment advice or making recommendations;
- Soliciting purchases, sales, or offers to buy securities offered or displayed on its website;
- Imposing certain restrictions on compensating people for solicitations; and
- Holding, possessing, or handling investor funds or securities.
The proposed rules would provide a safe harbor under which equity crowdfunding intermediaries may engage in activities consistent with the rules.