On October 23, 2013, the SEC proposed “Regulation Crowdfunding” pursuant to Title III of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Crowdfunding is a method of raising money using the internet, typically through small contributions from a large number of people. The JOBS Act, enacted on April 5, 2012, established a regulatory foundation for start-ups and small businesses to conduct securities offerings over the internet using crowdfunding. Without the proposed regulation, crowdfunding offerings would be considered public offerings required to be registered with the SEC under Section 5 of the Securities Act. The proposed rules would create an exemption in Section 4(a)(6) of Title III of to JOBS Act (the “Crowdfunding Exemption”) that would allow crowdfunding offerings transacted through an intermediary to proceed without SEC registration when certain conditions are met. Chief among these conditions are as follows:
- The size of any offering may not exceed $1 million in any rolling 12-month period.
- Issuers relying on the exemption must provide certain business and financial disclosures to the SEC, which vary depending on the size of the offering. The disclosures would be filed with the SEC on new Form C at least 21 days before any securities were sold. After the offering, ongoing disclosures would be required on an annual basis on new Form C-AR.
- An offering in reliance on the exemption must be effected through a single, online intermediary that is either a registered broker-dealer or registered funding portal.
- Securities sold in crowdfunding offerings would be restricted for a one-year period, except that such securities could be sold to the issuer, an accredited investor, as part of an SEC registered offering, or to a family member of the purchaser.
Certain categories of issuers will not be eligible to rely on the Crowdfunding Exemption, including (i) investment companies registered under the 1940 Act; (ii) companies excluded from the definition of investment company pursuant to Section 3(b) or 3(c) of the 1940 Act; (iii) issuers with SEC reporting requirements pursuant to Section 13 or 15(d) of the Exchange Act; (iv) and issuers organized outside the United States. The proposed rules can be found here.