The Wisdom of Crowds II: SEC’s New Crowd Funding Rules

CrowdfundingAn earlier Blog discussed Florida’s Intrastate Crowd Finance Act; amending the Securities and Investor Protection Act, permitting Florida-based entrepreneurs, commercial and real estate businesses capital formation through web-intermediary Crowdfunding Platforms.

The SEC has now adopted its Jobs Act Title III (Crowdfunding) Rules; expanding Crowdfunding’s reach.  Transactions relying on the new rules would be required to use an SEC-registered intermediary, either a broker-dealer or a funding web-portal.

The SEC seeks public comment on the proposed rule amendments for a 60-day period following their publication in the Federal Register. The new rules and forms become effective 180 days after Federal Register publication.

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for intermediaries facilitating those transactions.  More specifically:

  • Permitting a company, in any 12-month, period to raise a maximum aggregate of $1 million through crowdfunding offerings;
  • Permitting individual investors, over any 12-month period, to invest across all crowdfunding offerings an aggregate up to the following:
      • If either their annual income or net worth is less than $100,000, then the greater of $2,000 or 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to, or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the recommended rules, certain companies not eligible to use the exemption include:

  • non-U.S. companies,
  • Exchange Act reporting companies,
  • certain investment companies,
  • companies subject to disqualification under Regulation Crowdfunding,
  • companies not complying with the Regulation’s annual reporting requirements during the two years immediately preceding the offering statement filing, and
  • companies with no specific business plan, or that indicate  their business plan includes a merger or acquisition with an unidentified company or companies.

Crowdfunding securities cannot be resold for one year. Securities would not count towards the threshold requiring a company to register its securities under Exchange Act Section 12(g) if the company is current in its annual reporting obligations, retains the services of a registered transfer agent, and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

Companies relying on the recommended rules must file with the Commission certain disclosure information, the intermediary, and the investors. Additionally, in an annual report to the SEC companies must disclose:

  • The securities price or the method for determining price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • A discussion of the company’s financial condition;
  • Company financial statements that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.
    • A company offering more than $500,000 (but not more than $1 million of securities relying on these rules for the first time) would be permitted to provide reviewed rather than audited financial statements, unless company financial statements are available that have been audited by an independent auditor;
  • The business’ description and the use of proceeds;
  • Information about officers and directors and of owners of 20% or more of the company; and
  • Certain related-party transactions.

Intermediary Crowdfunding Platforms would be SEC registered as Funding Portals and be members of a national securities association (currently, FINRA). They would be prohibited from, among other things,

  • offering investment advice or making recommendations;
  • soliciting purchases, sales, or offers to buy securities;
  • compensating promoters and other persons for solicitations or based on the sale of securities; and
  • holding, possessing, or handling investor funds or securities, Crowdfunding Platforms.

The rules would require Intermediaries to, among other things:

  • Provide investors with educational materials explaining, among other things, the platform’s investing process; types of securities offered; information a company is required to provide investors; resale restrictions; and investment limits;
  • Take certain measures to reduce fraud risk, including having a reasonable basis for believing
    • that the company complies with Regulation Crowdfunding, and
    • that the company has established means to keep accurate records of securities holders;
  • Make available to the public (on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering)  the company’s disclosure information;
  • Provide communication channels on the platform permitting discussions about offerings;
  • Provide investors with disclosure the intermediary’s compensation;
  • Accept an investment commitment from an investor only after that investor has opened an account;
  • Have a reasonable basis for believing an investor complies with the investment limitations;
  • Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • Comply with maintenance and transmission of funds requirements; and
  • Comply with completion, cancellation, and reconfirmation of offerings requirements.

Intermediaries would also would be prohibited from engaging in certain activities, such as:

  • Providing platform access to companies that they have a reasonable basis for believing have the potential for fraud or have other investor protection concerns;
  • Having a financial interest in a company offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

With its October 30th announcement, SEC Chair Mary Jo White said: “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”

For more information on crowd funding matters, please contact:

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.


1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main:  (561) 361-6566

Fax: (561) 361-6466


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