Standing out from the Crowd: A Closer Look at the SEC’s and FINRA’s Proposed Crowdfunding Rules

In this alert, we provide a detailed overview of the proposed regulatory framework that will be applicable to crowdfunding offerings conducted pursuant to Title III of the JOBS Act in reliance on Section 4(a)(6) of the Securities Act. As we have noted in our prior initial observations related to the rules proposed by the Securities and Exchange Commission, or SEC, in late October 2013, implementing the Congressional mandate to formulate a framework for crowdfunded offerings, whether or not one intends to avail oneself of this new offering exemption, the tailored approach taken by the SEC and by FINRA in their proposed regulations merits a close look. Both the SEC and FINRA acknowledge that regulation of these offerings requires adapting disclosure-based principles and the existing approach to broker-dealer regulation and oversight to an entirely new public offering rubric. While drawing on these well-established principles, the SEC’s and FINRA’s proposed rules stand out because the proposed rules attempt to provide a scaled or “right-sized” approach. For example, the SEC’s proposed rules would establish limited disclosure requirements for issuers that rely on crowdfunding, as well as limited ongoing reporting requirements for these issuers, although these issuers will not be SEC-reporting companies for the purposes of other SEC requirements. This is novel. Similarly, both the SEC’s and FINRA’s proposed rules relating to funding portals establish a pared-down regulatory framework that acknowledges the limited functions of a funding portal. We hope our discussion below provides a perspective as to whether the SEC and FINRA have struck the right balance in designing regulations that facilitate crowdfunding while promoting investor protection concerns.

PART ONE: ISSUER REQUIREMENTS -

Eligible Issuers -

The ability to engage in crowdfunding is not available to all issuers. The proposal excludes: issuers not organized under the laws of a state or territory of the United States or the District of Columbia; issuers already subject to Exchange Act reporting requirements; investment companies as defined in the Investment Company Act or companies that are excluded from the definition of “investment company” under Section 3(b) or 3(c) of the Investment Company Act; any issuer that has sold securities in reliance on Section 4(a)(6) if the issuer has not filed with the SEC and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding during the two years immediately preceding the filing of the required new offering statement; issuers subject to the “bad boy” disqualifiers in Section 302(d) of the JOBS Act and the proposed rules implementing that provision; and any issuer that is a development stage company that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. The SEC notes that there may be a higher risk of fraud in connection with “such blank” issuers.

Please see full alert below for more information.

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Topics:  Broker-Dealer, Crowdfunding, FINRA, Funding Portal, Investment Company Act of 1940, JOBS Act, SEC, Securities Act of 1933, Subsidiaries

Published In: General Business Updates, Communications & Media Updates, Finance & Banking Updates, Securities Updates

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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