Crowdfunding and the JOBS Act
"Crowdfunding" is a term commonly used to describe a method of raising money through the Internet. While crowdfunding can be used to raise funds for many things, it has long been impermissible in the United States for businesses to offer and sell securities via crowdfunding. However, that began to change when Congress created an exemption to permit securities-based crowdfunding by passing the Jumpstart Our Businesses Act ("JOBS Act"), which was signed into law in April, 2012.
Title III of the JOBS Act established the foundation for a regulatory structure that would permit startup and small business entities to use crowdfunding, but required that the Securities and Exchange Commission ("SEC") first draft rules implementing the exemption.
SEC's Proposed Rules
It was a long time coming, but on October 23, 2013, eighteen months after the JOBS Act was signed into law, the SEC finally proposed new rules for equity-based crowdfunding. The proposed rules are intended to facilitate the use of crowdfunding by businesses while simultaneously providing protection for potential crowdfunding investors. Under the proposed rules:
Offering Company - A business would be permitted to raise up to $1 million through crowdfunding in any 12 month period.
An investor with annual income and net worth in each case less than $100,000 would be permitted to invest, via crowdfunding, up to the greater of (i) $2,000, or (ii) 5% of the investor's annual income or net worth.
An investor with either annual income or net worth equal to or greater than $100,000 would be permitted to invest, via crowdfunding, up to the greater of (i) 10% of the investor's annual income, or (ii) 10% of the investor's net worth. However, such investor would not be permitted in any event to purchase more than $100,000 of securities through crowdfunding in any 12 month period.
Disqualified Companies - Certain companies would not be eligible to take advantage of the crowdfunding exemption, including non-US companies, companies that already report to the SEC, and companies that are disqualified under the proposed disqualification rules.
Offering Document - Companies engaging in crowdfunding offerings would be required to file certain information with the SEC and provide such information to investors and a registered intermediary facilitating the crowdfunding offering. Required disclosures in this offering document include (1) information about officers and directors and certain owners of the company, (2) a description of the company's business and the intended use of proceeds from the offering, (3) the price to the public of the securities being offered, 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, and (4) financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed by an independent public accountant or auditor.
Crowdfunding must take place exclusively online through an SEC-registered intermediary, either a broker-dealer or a funding portal.
While it is certainly a much anticipated, and necessary, step towards making crowdfunding widely available to businesses and investors, crowdfunding securities offerings will still not be permitted until the proposed rules become final.
Comments on the SEC rule proposal are due 90 days after its publication in the Federal Register. The SEC will review the comments and determine whether to adopt the Proposed Rules as proposed, amend them or propose different rules.