Almost a year and a half after Congress passed the Jumpstart Our Business Startups (JOBS) Act in April 2012, and following scores of subsequent comment letters, the SEC finally released its proposed rules regarding equity-based crowdfunding on October 23, 2013. The SEC's press release heralding the proposed rules seemed both hopeful and hesitant, describing crowdfunding as an "evolving method of raising capital" and eliciting further comments on the rules for an additional 90 days after the proposed rules have been published in the Federal Register.
At first glance, the proposed crowdfunding regulations follow the road map created for the SEC in the original Title III of the JOBS Act. (For a refresher on the crowdfunding provisions of the JOBS Act, see our 2012 Alert here.) Upon closer inspection, however, there are some subtle and not-so-subtle provisions that, if adopted in their present form, could impair the effectiveness and affect the widespread adoption of crowdfunding that many proponents hoped to achieve.
Broadly put, the crowdfunding provisions contained in the JOBS Act and the SEC's proposed rules providing for an exemption from the existing SEC registration requirements for sales of securities by issuers, are (theoretically) supposed to offer a more streamlined process for private securities offerings and a method for nonaccredited investors who have been shut out by existing investor qualifications to participate in the growing investment market in startups. There is no limit on the number of investors in a crowdfunded offering.
The SEC's proposed rules, referred to by the SEC as "Regulation Crowdfunding," address only equity-based crowdfunding. Non-equity-based crowdfunding (in which sponsors receive products and other rewards instead of securities) has been thriving for some time on websites such as Kickstarter.
The crowdfunding process established by the JOBS Act and followed by the proposed rules provides that issuers can sell securities to investors only through intermediaries, which will be regulated entities. Following that basic premise triggers many additional requirements, including the following:
The issuer also needs to describe the conditions for the offering - the amount of money sought, any minimum investment requirements and the deadline for investment. A reminder that investors can cancel their commitment to invest up to 48 hours prior to the investment deadline is also required.
This summary is not intended to be a complete or comprehensive review of the proposed rules, which include many other provisions and conditions not addressed above. In addition, no crowdfunding offering may be made by anyone until the rules are finalized. At that point, prospective issuers and intermediaries would be well-advised to consult with counsel before proceeding.
The proposed rules reflect the difficult balancing act faced by the SEC in the past 18 months with respect to crowdfunding - trying to balance the desire to make these smaller securities offerings efficient and accessible with the fulfillment of the SEC's historic charge (echoed by state securities regulators) to protect investors from fraud and abuse. The question is whether the structure that eventually emerges after the comment period will be, from a practical standpoint, too burdensome and fraught with liability for issuers and intermediaries to gain traction and effect the change in financing for businesses that the JOBS Act envisioned.
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