Today, the Securities and Exchange Commission (SEC) approved long-awaited final rules and forms related to the offer and sale of securities through crowdfunding under Section 4(a)(6) of the Securities Act of 1933, as mandated by Title III of the JOBS Act.
In their statements, discussed in further detail below, the Commissioners touted the final rules’ balance between investor protection and a workable way for small companies to raise capital.
The Commissioners and staff members pointed out key differences between the final rules and the SEC’s proposed rules; among them:
- More authority for intermediaries to screen issuers prior to offerings
- Relaxed audit requirements for first-time issuers with offerings above $500,000
- Safe harbor for intermediaries that reasonably rely on issuer representations when certain due diligence steps are taken
- Flexibility for issuers with low-dollar offerings to present information to investors in different ways, including a “Q&A” format
- Permission for intermediaries to have a stake in issuers
These changes largely favor the positions advanced by crowdfunding advocates during the comment period.
The Commission voted 3-to-1 to adopt the final rules. Commissioner Piwowar voted against the rules.
Chair Mary Jo White
Chair White began by acknowledging that the full suite of securities regulations are not appropriate for small-issuer crowdfunding, which presents an innovative and evolving way for small businesses to raise money. She characterized the final rules as a tailored approach to ensuring that investors are protected, but small businesses have a workable way to raise capital.
Some portions of the proposed rule, she noted, were changed to accommodate the unique needs of small issuers. For example, the full audit requirement for companies offering more than $500,000 in securities was relaxed for first-time crowdfunding issuers. Additionally, issuers offering smaller amounts will have flexibility in the way they present their company and financial information to investors, including an optional “Q&A” format.
Chair White also noted that, per the terms of the JOBS Act, strong investor protections are contained in the rules, such as strict investment limits to minimize potential losses. The final rules also give intermediaries more authority to screen issuers prior to offerings, which will help ensure that only quality investment opportunities are made available.
Finally, Chair White stated that staff will be required to conduct a study over the next three years regarding how the rules are working for investors and issuers, and how crowdfunding models are evolving.
Commissioner Luis Aguilar
Commissioner Aguilar began by recognizing the vital role played by small businesses and entrepreneurs in the US economy and job market. He stated that the crowdfunding rules will help connect those who need financing with those who are eager to provide it, which will increase small businesses’ ability to access capital. In general, the commissioner was supportive of the final rules and their potential for helping secondary market players compete with larger established markets.
The Commissioner also called for further action by the Commission in the unregistered/unlisted securities space. Specifically, he recommended elimination or revision of the broker-dealer “piggybacking” exception, which allows use of previously published quotes and information. He also urged staff members to intensify their efforts to police compliance and advocated for greater small business access real-time market data. He indicated that he has already begun conversations with industry officials to try to facilitate alternative information delivery systems for small issuers.
Commissioner Kara Stein
Commissioner Stein stated her belief that the final rules will help small businesses by pioneering a new way for them to raise money. She said the final rules will protect both investors and small issuers by inspiring confidence and participation in a safe and well-regulated structure. She noted that one way the structure will increase public confidence in crowdfunding is by empowering intermediaries and accountants to identify and weed out fraudulent issuers and investments. Intermediaries’ incentive to screen out bad actors will be heightened by a final rule provision allowing them to have a stake in approved issuing companies.
Like Chair White, Commissioner Stein pointed out the relaxed audit requirement under the final rules for first-time issuers. She also pointed to certain protections in the final rules for intermediaries, including a safe harbor for reasonable reliance on information provided by issuers. Finally, she expressed approval for the JOBS Act’s conservative approach to investor caps, calling crowdfunding investments “inherently risky.”
Commissioner Mike Piwowar
Commissioner Piwowar, the lone dissenter, expressed overall concerns about the usefulness and workability of the final rules. He described the rules as complex and containing “nightmares” and “traps” for small businesses. He expressed his belief that the onerous rules will keep reputable actors from participating. He also stated that the restrictive rules demonstrate distrust of ordinary Americans to make their own investment choices. While he acknowledged that many of the restrictions come from the JOBS Act text, he stated his belief that the Commission “overshot” and imposed requirements beyond what is required under the law. He encouraged staff as they study the impact of these rules over the coming years to compare those results to the results of other approaches currently in effect in several states.
Staff from the Division of Corporate Finance and the Division of Trading and Markets described the general framework and objectives of the final rules. While the rules represent an important and appropriate loosening of securities regulations for crowdfunding investments, they reiterated the need for strong consumer protections. One such protection is the requirement that intermediaries be registered financial professionals subject to SEC oversight. Intermediaries also must make available on their platforms investor education information about crowdfunding, including rules and restrictions. Additionally, they must have in place certain privacy protections and provide channels of communication for crowd members.
On the other hand, they pointed out certain compromises in the final rule that will make it easier and more desirable for small businesses to participate in crowdfunding. For example, they noted the “Q&A” option for delivering information to investors in small offerings and the relaxed audit requirement for first-time issuers.
As noted above, the final rules also contain some benefits for intermediaries, including the ability to have a stake in issuers, greater ability to screen issuers, and a safe harbor for reasonable reliance on issuer representations.
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During the open meeting, the Commission also adopted proposed regulations to amend Regulation D rules on community-based capital. Those proposed rules contain an exemption from federal registration requirements for intrastate offerings, including offerings under state crowdfunding laws.