Summary of Crowdfunding Proposed Rules - AEO Soliciting Feedback for Public Comment Submission

 

On October 23, 2013, the Securities and Exchange Commission (SEC) announced that it had adopted proposed rules for crowdfunding.  The Jumpstart Our Business Startups Act (P.L. 112-106), signed into law in April 2012, paved the way for small businesses to raise up to $1 million annually without the complicated compliance and regulatory burdens normally associated with the sale of securities. 

AEO was an early and strong supporter of the JOBS Act and the provisions that created crowdfunding.  AEO worked with industry partners to ensure that the legislation maintained an appropriate balance between preventing fraud and abuse while keeping the requirements practical for small businesses.

Timeline

The proposed rules were formally posted in the Federal Register on November 5, 2013, File Number S7-09-13, Docket ID 2013-25355.  The proposed rules are now open for public comment for 90 days.

To read the proposed rules, please click here.

AEO plans to comment on the proposed rules in the coming weeks, ensuring that the final program regulations meet the needs of microbusinesses.  The comment window will remain open until February 3, 2014.  All comments must be submitted by then on www.regulations.gov.

Please feel free to share any comments and concerns about the proposed rules with Martin Feeney (.(JavaScript must be enabled to view this email address) or 202-626-8528) by January 10, 2014.  The insights and commentary of our members is appreciated and will help guide the drafting of AEO’s comments to the SEC.

Background & Summary

Please note: This summary was compiled using publicly available documents provided by the SEC and Venable LLP. Links to both and additional resources are listed below.

Crowdfunding has existed for a number of years in the form of online platforms such as Kiva, Kickstarter, and GoFundMe.  These platforms allowed entrepreneurs to solicit financial donations and in return, would offer some type of product or good to the investor (example: a CD from a band). Under the JOBS Act, small businesses will now be able to raise up to $1 million from the sale of stock in their company without the costs and regulatory approval process normally required when selling stake in companies.

For Investors: Annual Amounts and Limits

  • A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
  • Investors, over the course of a 12-month period, would be permitted to invest up to:
    • $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
    • 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.  During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
    • Securities purchased in a crowdfunding transaction must be held for one year and cannot be resold until after that 12-month period is up.

For Companies: Disclosure Requirements

While companies are exempt from most SEC filings, some reporting remains. Companies relying on the crowdfunding exemption to offer and sell stocks would be required to file an annual report with the SEC and provide it to investors with the following information:

  • Information about officers and directors as well as owners of 20 percent or more of the company.
  • A description of the company’s business and the use of proceeds from the offering.
  • The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
  • A description of the financial condition of the company.
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Certain companies would not be eligible to use the crowdfunding exemption.  Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

For Crowdfunding Platforms: Investor Protections

The proposed rules would require these intermediaries to:

  • Provide investors with educational materials.
  • Take measures to reduce the risk of fraud.
  • Make available information about the issuer and the offering.
  • Provide communication channels to permit discussions about offerings on the platform.
  • Facilitate the offer and sale of crowdfunded securities.

The proposed rules would prohibit funding portals from:

  • Offering investment advice or making recommendations.
  • Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
  • Imposing certain restrictions on compensating people for solicitations.
  • Holding, possessing, or handling investor funds or securities.

Additional Resources

Federal Register Proposed Rules Publication (November 5, 2013)

The JOBS Act of 2012 (P.L. 112-106)

The Securities and Exchange Commission October 23, 2013 Announcement

Text of the Proposed Rules

The Securities and Exchange Commission Summary

Venable LLP Summary

Public Comment Submission Form