Today the SEC voted to propose a crowdfunding framework. We provide highlights below based on today’s meeting:
Intermediaries: All offerings must be conducted through an intermediary that is either a registered broker-dealer or a registered funding portal. The Commission is proposing a series of rules governing the activities of intermediaries participating in crowdfunding offerings. The Staff noted that FINRA is expected to propose its own regulations on portals.
Eligible Issuers: Certain companies will not be eligible to avail themselves of the crowdfunding exemption, including foreign issuers, SEC-reporting companies, companies that are registered under the Investment Company, issuers with no specific business plan, SPACs or blind pools, or issuers that are delinquent in their SEC filings.
Disclosure Requirements: An entity that wants to engage in crowdfunding must comply with certain disclosure requirements. The issuer will be required to provide disclosures concerning its business and operations; the terms of the offering; use of proceeds from the offering; the price to public; disclosures regarding related party transactions; and disclosures regarding management and directors.
Financial Statements: An issuer also will be required to prepare financial statements compliant with US GAAP for a period that is the shorter of the two most recently completed fiscal years or since the issuer’s inception. The Staff described a phased requirement as to review or audit of these financial statements, which requirements vary depending on the amount that the issuer proposes to raise in the offering. For example, for smaller offerings, the financial statements must be certified by the issuer’s chief financial officer; whereas for larger offerings, the financial statements must be audited.
Ongoing reporting requirements: An issuer that completes a crowdfunding offering will be required to file annual reports with the SEC that will be required to include information similar to the information prepared in connection with the offering. The annual report requirement will be applicable until such time as: the issuer becomes subject to Exchange Act reporting, all securities sold in the offering have been retired; or the company winds down its operations.
Funding Portals: Funding portals will be required to undertake certain activities, such as providing investors with educational materials about the risks of crowdfunding; making available information about the issuer on its website; and complying with AML and privacy requirements. The proposed rules incorporate requirements designed to prevent or mitigate conflicts of interest. The proposed rules require regulatory checks on officers, directors, major shareholders of portals.
Portal Framework: The activities of funding portals will be limited to crowdfunding. Funding portals must become members of FINRA and register with the SEC. Funding portals cannot offer investment advice; cannot handle customer funds or securities; or undertake other broker-dealer activities.
Resale Restrictions: Securities sold in a crowdfunding offering will be restricted for one year since securities were offered.
Bad Actors: The SEC is proposing bad actor rules to prevent bad actors from acting as intermediaries or being associated persons of intermediaries.
Holder of Record: Holders will be exempt from the Exchange Act Section 12(g) holder of record count.