SEC Concerns Offered Principles regarding Crowdfunding Investments

Crowdfunding is really a term used to explain an evolving approach to raising money through the Internet. For many years, this funding method has been used to generate financial support for things like artistic endeavors like films and music recordings, typically through small individual contributions from a big number of people.


While crowdfunding may be used to boost funds for several things, it generally has not been used as a means to offer and sell securities. That's because supplying a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and a present or sale of securities should be registered with the SEC unless an exemption is available.


Congress created an exemption to permit securities-based crowdfunding when it passed the JOBS Act last year. Among other things, the JOBS Act was meant to help alleviate the funding gap and accompanying regulatory concerns faced by startups and small businesses in reference to raising capital in relatively low dollar amounts


Here are some highlights from the proposed regulations. We will explore each in increased detail in following articles.


For Companies


Eligible companies would have the ability to raise as much as $1 million in just about any 12-month period. Companies aren't qualified to receive Crowdfunding if: (i) they are a non-U.S. company Start Engine Fees, (ii) they are already an SEC reporting company, (iii) they fall beneath the certain investment companies, (iv) they do not have a particular business plan or (v) their business plan is to engage in a merger or acquisition having an unspecified company or companies. Companies is likewise disqualified if they do not adhere to the annual reporting requirements in the proposed regulations.


Disclosure by Companies


The proposed regulations would require companies to file certain information with the SEC, and to create it available to investors and the relevant intermediary (broker or funding portals). Companies will be needed to amend the offering document to reflect material changes and provide updates on the company's progress toward reaching the target offering amount. Companies depending on the crowdfunding exemption to supply and sell securities will be needed to file an annual report with the SEC and provide it to investors.


For Investors


Crowdfunding investments are inherently more risky than investing in registered securities. Securities issued in Crowdfunding transactions couldn't be sold or exchanged for 12 months. Start-ups and small companies are often more risky than larger more established companies. Accordingly, beneath the proposed rules investors will be limited in the total amount that they might invest through Crowdfunding, based upon their income and net worth. Investors with income or net worth significantly less than $100,000 will be limited to aggregate investment of $2,000 or five percent of the income or net worth, whichever is greater in just about any 12-month period. Investors with income or net worth greater than $100,000 will be limited to aggregate investment of 10 percent of the income or net worth never to exceed $100,000 in a 12-month period.


Crowdfunding Platforms


Crowdfunding solicitations and transactions will have to take place via an SEC registered intermediary, either a registered broker or a new entity called a funding portal. Intermediaries would provide investors with educational materials, take measures to combat fraud, make company offering documents available to investors, and supply a platform for the crowd to discuss the offering. In conclusion, the proposed regulations open a thrilling new method for startup and small companies to access capital through Crowdfunding with greatly reduced regulatory burden than the usual traditional "going public" transaction. We will explore the proposed regulations at length in a series of articles over the coming months. Stay tuned.

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