On October 30, 2015, more than three years after enactment of the JOBS Act in April 2012, and more than two years after the deadline imposed by the Act for adopting such rules, the SEC finally adopted Regulation Crowdfunding implementing the crowdfunding exemption from registration under the Securities Act of 1933. The new regulation will permit a company to raise up to a maximum of $1 million in a 12-month period through offerings conducted on crowdfunding platforms. Individual investors need not be accredited, unlike offerings under Regulation D Rule 506(c) (which permits offerings using general solicitation, including offerings conducted through the internet, as long as the issuer takes reasonable steps to ensure all purchasers are accredited investors as defined in Regulation D). However, the amount that any investor may invest in a new Regulation Crowdfunding offering is limited based on the investor’s annual income or net worth and an investor may not invest more than a total of $100,000 in all Regulation Crowdfunding offerings in a 12 month period.
There are several additional requirements for utilizing the new crowdfunding exemption. Offerings must be conducted through SEC –registered and FINRA member Form Funding Portals or brokers-dealers. There are significant requirements imposed upon these intermediaries that are designed to prevent fraud and ensure that investors are fully informed about offerings and their risks and the issuers offering the securities, verify the qualifications of the investors for investment limitation purposes and generally ensure the offerings are conducted in an orderly manner.
Issuers must disclose certain information about their businesses and about the securities offered, including the price of the securities and how it was determined, how the issuers intend to use the offering proceeds, the issuers’ financial condition and certain financial statements, and information about the issuers’ officers, directors and 20% owners. Not every issuer may take advantage of the new rules, including non-U.S. companies and Exchange Act reporting companies and issuers without a specific business plan or that intend to merge or enter into an acquisition with an unidentified company. Finally, securities purchased through a Regulation Crowdfunding offering generally may not be resold for one year after purchase.
Regulation Crowdfunding will become effective in approximately six months. Whether Regulation Crowdfunding will actually make it easier for small businesses to raise capital remains to be seen. As Michael Piwowar, an SEC Commission noted in questioning the “usefulness and workability” of the new rules, while the new rules are “intended “to be a treat for the smallest and least sophisticated companies seeking to raise capital, [the] rules are full of tricks,” with many restrictions and requirements imbedded in the rules. Read Commissioner Piwowar’s statement at http://www.sec.gov/news/statement/piwowar-regulation-crowdfunding-147-504.html.
At the same time as Regulation Crowdfunding was adopted, the SEC also proposed amendments to Rule 147, the federal intrastate offering safe harbor exemption, which is intended to facilitate intrastate crowdfunded offerings. More than 25 states, including Florida, have now adopted intrastate crowdfunding exemptions, which generally are modeled after the federal equity crowdfunding rule, but with a state specific focus. The proposed amendments to Rule 147 would eliminate the restriction that offers be made only to residents of the issuer’s state and permit general solicitation, including offerings conducted through the internet, but require that actual sales be made only to residents of the state of the issuer’s principal operations. The proposed amendments also would ease certain eligibility requirements, including the requirement that the issuer be organized in-state of the offering, permitting out-of-state issuers with local operations to utilize Rule 147. The focus would be on the principal place of business, determined by meeting one of four available thresholds (which are based on 80% of revenues, assets or use of offering proceeds being derived from, located or used in such state or a majority of its employees located in such state). Rule 147, as amended, would be available only for issuers or offerings registered in the state where offered or conducted under an exemption from that state’s securities laws that limits the amount that may be sold in offerings to no more than $5 million in a 12-month period and would impose certain investment limits on investors. The current Rule 147 would no longer function as a safe harbor under Section 3(a)(11) of the Securities Act, the current basis for the rule, but would be a new stand-alone exemption. Section 3(a)(11) is available for securities that are “offered and sold” only to persons resident within a single State or Territory. The proposed Rule 147 would eliminate this restriction on offerings, allowing offerings over the internet.
In July 2015, Florida adopted the Florida Crowdfunding Act, which permits issuers to raise up to $1 million in a 12-month period in offerings that comply with the federal intrastate exemption found in Section 3(a)(11) of the Securities Act. Florida’s exemption generally is modeled after the new SEC Regulation Crowdfunding but with some differences. Similar to Regulation Crowdfunding, the Florida Crowdfunding Act imposes limits on how much an investor may invest, depending on the investor’s income or net worth, but these limits do not apply to accredited investors. Offerings must be conducted through a Florida registered securities dealer or intermediary who has obligations similar to that imposed under Regulation Crowdfunding. Under the Florida exemption, the issuer must be a for-profit entity that maintains its principal place of business and primarily derives its revenues from operations in Florida. Additionally, investors must be given a three day rescission right. Unlike many Florida exemptions, this exemption from registration would not be self-executing and an issuer would be required to file a form with Florida’s securities division at least 10 days prior to commencement of the offering, containing information similar to that required under federal Regulation Crowdfunding.
The utility of the Florida Crowdfunding Act is uncertain for many of the same reasons as the utility of Regulation Crowdfunding is uncertain given its numerous requirements and restrictions but also due to one major restriction on the Florida exemption’s availability. Unlike proposed new Rule 147, the new Florida exemption is based on Section 3(a)(11) of the Securities Act, which applies to offerings where offers, and not just sales, are made only to residents within the issuer’s state of residence. This means many forms of social media will not be available for use in Florida Crowdfunding Act offerings. The availability of the federal Regulation Crowdfunding, which preempts state law, may also be a more useful alternative to the Florida Crowdfunding Act, although both will be available to issuers. The Florida Crowdfunding Act exemption will not be available until implementing rules are adopted, with rules are currently proposed but not yet effective.
The Florida Crowdfunding Act can be found at: http://www.flsenate.gov/Laws/Statutes/2015/517.0611.
