SEC Reveals Long-Anticipated Crowdfunding Regs

By A. Brian Dengler

Washington, DC — (Updated 12 PM Eastern) – In a unanimous vote, the Securities and Exchange Commission today released for public comment proposed rules to implement equity crowdfunding under the JOBS Act.  The SEC says it will seek the proposed rules for 90 days.

The crowdfunding proposals under the JOBS Act will empower entrepreneurs to harness the power of the Internet to attract up to $ 1 Million per year in capital from a large number of small investors via crowdfunding.

The burden fell on the SEC to formulate rules to implement crowdfunding, which the SEC revealed today, 18 months after the JOBS Act became law.

Summary of Rules

At a high level the proposals for issuers  — that is startups seeking investments must:

• Have a description of the business and the anticipated business plan of the issuer.
• File specific disclosures that will be required by the SEC.
• Disclose the name of officers, directors, and current owners of the business.
• Describe the business.
• Describe the pricing of the equity offerings and how the proceeds will be used.
• Provide financial statements reaching two years back, or the most current statements and income tax filing for newer businesses.
• Provide a financial statement certified by the principal executive officers for campaigns seeking $100,000 or less.
• Provide certified financials statements from a CPA for campaigns raising $100,000 to $500,000.
• Provide an independently audited financial statement for more than $500,000.

Regarding intermediaries that will facilitate crowdfunding:

• Crowdfunding must be performed by funding portals registered with the SEC or registered brokers.
• Intermediaries must provide educational materials to investors on the risks of crowdfund investing.
• Intermediaries may be required to perform background check on issuers and their principals.
• Intermediaries must verify investors’ eligibility to make a crowdfund investment.
• Intermediaries must make available to investors information about issuers.
• Intermediaries may not have a financial interest in an issuer.
• Intermediaries may not give financial advice.

Comments

SEC Commissioner Luis Aguilar believes the proposed rules strike a right balance. “Small business investment is inherently risky,” he said. “Small businesses tend to be illiquid.” He believe the disclosure requirements in the rules will help small investors appreciate the risks.

1. How much should an investor be able to invest? Which method should be used Income versus NET worth test?SEC Commissioner Kara Stein likewise commented that the proposed rules struck a balance between the SEC’s mission of facilitating capital formation and protecting investors. However, Commissioner Stein further sought public comments on three key issues:

2. Should Non US Based funding portals be permitted  Funding Portals that are not US Based to Register with FINRA?

3. What should Issuers responsibility be for tracking securities holders records? Specifically, is it possible for third party service providers to manage record holder information?

Members of the Crowdfund Intermediary Regulatory Advocates are cheerful that the rules finally saw the light of day. Kim Wales, an executive committee member of CFIRA and CEO of Wales Capital, a strategic advisory and consulting firm that serves the industry as JOBS Act thought leaders, pointed out that thought leaders from CFIRA provided more than 20 comment letters to the SEC during the process covering issues ranging from the 21 day cooling off period, fee structures, escrow, integration and other issues.

“By having a set of proposed rules available for public comment demonstrates Washington’s desire to increase liquidity for investment seeking ventures for small emerging companies,” said Ms. Wales.

“We are very pleased with the SEC’s decision to vote on whether to consider the rules of Title III at this time.,” added Daryl Bryant, CFIRA member, founder and CEO of StartupValley. “We look forward to getting this to the public commenting period and sharing our thoughts on the proposed rules.  We know the positive impacts this will have on businesses across the country and we look forward to helping facilitate transactions as an equity crowdfunding portal.”

“As a whole the industry is very excited right now,” say Joy Schoffler Principal of Leverage PR a financial services PR Firm with deep expertise in crowdfunding and JOBS Act regulations. “For a long time now no one was sure when or if it was even going to happen, seeing movement is incredibly exciting. This is what we have all been waiting for.”

In addition, FINRA will issue proposed rules for public comment on Intermediaries.

Author A. Brian Dengler is a member of CFIRA, information technology attorney and adjunct professor at Kent State University.