On May 22, 2014, Sebastian Gomez Abero, Chief of the Office of Small Business Policy of the Division of Corporation Finance of the SEC, spoke about the SEC’s crowdfunding and Regulation A+ proposals. Mr. Gomez commented generally on a number of comments and questions raised by commenters to the proposals. Mr. Gomez also noted that the crowdfunding proposals are not yet final and the SEC will have to adopt final rules and that finalizing the Regulation A+ proposals is a priority for the SEC in 2014.
With respect to the SEC’s crowdfunding proposals, Mr. Gomez discussed the offering size limitation, integration with other offerings and the role of intermediaries. Mr. Gomez noted a tendency, while the SEC is deliberating on final rules, to fit crowdfunding under other exemptions from registration, such as Securities Act Rule 506(c) or current Regulation A. Mr. Gomez mentioned that some commenters thought the $1 million offering size limitation should be raised and asked for clarification on whether crowdfunding offerings would be integrated with offerings under other exemptions (e.g., offerings to accredited investors under Securities Act Rule 506(c)). Mr. Gomez said that the SEC is still considering the integration question, but noted that the question is closely tied to the offering size limitation. Mr. Gomez also mentioned guidance in the adopting release for the Securities Act Rule 506 amendments which indicates that a registered offering does not prohibit a Securities Act Rule 506(b) offering, so long as investors in the Rule 506(b) offering are not generally solicited and have a pre-existing relationship with the issuer, and then posed the question whether a crowdfunding offering should be treated as a registered offering in this context. Mr. Gomez also discussed the provisions covering intermediaries (which must register with the SEC and will be subject to FINRA regulation) and emphasized that intermediaries function as “gatekeepers” given that investors in crowdfunding offerings may not be very sophisticated. Another concern expressed by commenters was with liability attaching to intermediaries, although intermediaries are prohibited from providing investment advice in crowdfunding offerings, since the definition of “issuer” under the rule proposals also covers intermediaries. Mr. Gomez went on to discuss the issue of “curating” and noted the safe harbor list of activities provided in the rule proposals, but mentioned that the SEC does not want funding portals to promote types of offerings although funding portals could specialize in certain types of companies (e.g., companies in a particular state or companies in a particular industry). Mr. Gomez noted that the SEC also received comments regarding the information that crowdfunding issuers need to disclose, particularly the financial statement requirements, and that a large number of commenters requested that the threshold for audited financial statements be raised because audited financial statements impose a significant cost for start-up companies and the usefulness of such financial statements for start-up companies is questionable. Mr. Gomez finally mentioned that the SEC is still considering the proposed offering and ongoing reporting requirements for crowdfunding issuers.
With respect to the SEC’s Regulation A+ proposals, Mr. Gomez discussed the preemption of state blue sky laws, which he noted raised the largest number of comments. Mr. Gomez mentioned the coordinated review program approved by the members of the North American Securities Administrators Association (the “NASAA”), which was established to address concerns raised in a GAO report to Congress regarding multi-state review for Regulation A offerings. Mr. Gomez noted that the SEC staff has met with the NASAA to discuss the coordinated review program, although some commenters have noted that there may still be some redundancies even with a coordinated state review process. Mr. Gomez then mentioned that in contrast Securities Act Section 4(a)(6) clearly preempts state blue sky laws but indicated that some states have their established their own rules to exempt crowdfunding offerings. Mr. Gomez also noted that the SEC’s two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Securities Act Rule 147 (which provides a safe harbor for intrastate offerings conducted pursuant to Securities Act Section 3(a)(11)) are examples of the SEC’s efforts to clarify that use of the internet is not incompatible with Rule 147 and state blue sky laws (for more information regarding these two new CD&Is, see our blog post, “SEC Issues New and Revised Guidance on Intrastate Crowdfunding,” available here.