On April 10, 2014, the Investor Advisory Committee (the “IAC”) of the Securities and Exchange Commission (the “SEC”) held a meeting during which it recommended that the SEC adopt crowdfunding rules that are both consistent with the Dodd-Frank Act and commensurate with the risks inherent in allowing early stage start-up companies to sell securities based on limited information to unsophisticated, low net worth investors. The IAC specifically made six recommendations to strengthen the SEC’s proposed crowdfunding rules, which we describe briefly below.
Recommendation 1 - Investment Limits -
The IAC recommended that the SEC, as an initial matter, adopt tighter restrictions on the amounts that investors can invest in crowdfunding offerings. The IAC specifically recommended that the SEC initially use a “lesser of” approach to setting investment limits. In other words, unless both an investor’s income and net worth exceeded $100,000, they would only be allowed to invest up to 5%, and that 5% calculation would be applied to the lower of either their net worth or income; and if both an investor’s net worth and income exceeded $100,000, then they could invest up to 10%, but that 10% calculation would still be applied to the lower of either their net worth or income. However, the IAC noted that it would be appropriate if the investment limits for accredited investors be calculated using the “greater of” methodology since accredited investors are at least in theory better positioned to understand the investment risks and absorb potential losses. The IAC also suggested that if crowdfunded companies enjoy a lower than expected failure rate, if concerns about unfair valuations, liquidation risk and risk of dilution are found to have been exaggerated, and if efforts to ensure that investors understand the risks of crowdfunding offerings prove effective, then the SEC could consider adopting a “greater of” approach to setting investment limits for all crowdfunding investors.
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