SEC Proposes Rules on Crowdfunding

Background

Crowdfunding is an evolving method of raising money through the Internet by typically seeking small individual contributions from a large number of people. It has generally not been used as a means to offer and sell securities due to the registration requirements under Section 5 of the Securities Act. Under new Section 4(a)(6) of the Securities Act, an exemption from the registration requirements is provided for certain crowdfunding transactions. The proposed rules would, among other things: (i) limit the amount a company can raise via crowdfunding; (ii) permit individuals to invest subject to certain thresholds; (iii) require certain disclosure by companies; and (iv) create a regulatory structure for the intermediaries that facilitate the crowdfunding transactions.

Limitation on Capital Raised

Under new Section 4(a)(6), a company would be able to raise a maximum aggregate amount of US$1 million through crowdfunding offerings in a 12-month period. Offerings made in reliance on Section 4(a)(6) would not be integrated with other exempt offerings made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is relied upon in each transaction.

Investment Limitations

Investors, over a 12-month period, would be permitted to invest:

• if both their annual income and their net worth are less than $100,000, a limit of $2,000 or five percent of their annual income or net worth, whichever is greater; or
• if either their annual income or their net worth exceeds $100,000, 10 percent of their annual income or net worth, whichever is greater. An overall investment limit of $100,000 over a 12-month period applies for the purchase of securities through crowdfunding.

Disclosure Requirements

Issuers offering or selling securities in reliance on Section 4(a)(6) must file specified disclosures, including financial disclosures. The proposed rules would require companies conducting a crowdfunding offering to provide, amongst other disclosures, information to prospective investors about their business plan and financial condition, as well as a list of their officers, directors and those who own at least 20 percent of the company.

Crowdfunding Intermediaries

The proposed rules require all crowdfunding transactions to be conducted through an SEC-registered broker or funding portal, which is a new type of SEC registrant. The proposed rules require these intermediaries to, amongst other activities: provide investors with information about the issuer and the offering as well as educational materials; take fraud-reducing measures; and facilitate the offer and sale of crowdfunding securities. These intermediaries would also face restrictions including being prohibited from offering investment advice and soliciting purchases.

To view the SEC Proposed Rules regarding Crowdfunding, please click here.