SEC and FINRA Propose Long-Awaited Crowdfunding Rules

by Jackson Walker
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On October 23, 2013, the SEC formally issued its proposed rules governing the "crowdfunding" registration exemption created under Title III of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and FINRA proposed rules for its oversight of registered "funding portals" in connection with crowdfunding offerings. The SEC's proposing release is available here, and FINRA's regulatory notice is available here. As noted in our previous e-Alerts available here and here, the JOBS Act considerably alters the regulations surrounding private security offerings and creates a new registration exemption under Section 4(a)(6) of the Securities Act of 1933 for  issuers wishing to raise capital through large numbers of small individual investments.

Specifically, the crowdfunding exemption will allow a domestic issuer to sell unregistered securities to an investor through a broker or through a registered "funding portal," so long as, during the 12-month period before the sale: (i) the issuer does not sell more than $1,000,000 of securities under Section 4(a)(6), and (ii) the investor does not make aggregate investments in one or more issuers under Section 4(a)(6) exceeding certain thresholds based on income and net worth. 

The SEC's proposed rules—which will reside within a new "Regulation Crowdfunding"—provide additional requirements, restrictions, and guidance regarding:

  • Classes of issuers for which the 4(a)(6) exemption is not available.
  • Determinations as to whether issuers have complied with the individual and aggregate dollar limits applicable to 4(a)(6) offerings.
  • Filing and disclosure requirements and ongoing reporting obligations for 4(a)(6) issuers.
  • Restrictions on the nature of advertising used and fees paid to promoters in connection with 4(a)(6) offerings.
  • Requirements for brokers acting as intermediaries for 4(a)(6) offerings.
  • Registration requirements and ongoing regulation of funding portals.
  • Transfer restrictions on securities sold in 4(a)(6) offerings. 

The FINRA regulatory notice proposes rules governing:

  • The application process for funding portals.
  • Standards of funding portal conduct.
  • Ongoing funding portal compliance, including reporting requirements,  supervisory systems and anti-money laundering compliance programs.

The initial comment period for the SEC rules will expire on or about January 22, 2014, while the comment period for the FINRA rules expires on February 3, 2014.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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