jobs act: proposed rules for crowdfunding

JOBS Act Update: Crowdfunding

12.18.13

Benjamin M. [email protected]

617.449.6584@HronEsq

Twitter #mecic

Overview of Proposed Rules

♦ Crowdfunding Exemption♦ Requirements on Issuers♦ Requirements on Intermediaries♦ Additional Requirements on Funding Portals♦ Miscellaneous Provisions

Crowdfunding Exemption

♦ Limitation on Capital Raised– $1 million aggregate amount limitation

in any 12-month period– Maximum limit only applies to amounts raised

under Section 4(a)(6)


♦ Investment Limitation– Amount sold to any investor by an issuer in any

12-month period cannot exceed: The greater of $2,000 or 5% of the annual income

or net worth of the investor if both the annual income and net worth of the investor are less than $100,000, and

The lesser of $100,000 or 10% of the annual income or net worth of such investor, whichever is greater, if either the annual income or net worth of the investor exceeds $100,000


♦ Transaction Conducted Through an Intermediary– A transaction in reliance on Section 4(a)(6) must

be conducted through a broker or funding portal– Issuers are prohibited from using more than one

intermediary to conduct an offering or concurrent offerings made in reliance on Section 4(a)(6)

– Transaction is required to be conducted exclusively through a platform “online-only”


♦ Exclusion of Certain Issuers from Eligibility under Section 4(a)(6)– Non-U.S. issuers– Issuers subject to Exchange Act reporting requirements– Investment companies as defined in the ‘40 Act or

companies exempt under 3(b) or 3(c) of the definition– “Bad actors”– Issuers that have not filed required ongoing annual

reports during the previous two years– Issuers with no specific business plan or with a plan to

engage in M&A activity with unidentified companies

Requirements on Issuers

♦ Disclosure Requirements - New Form C– XML-based, fillable form– Certain disclosures would be presented in a

specified format while allowing the issuer to customize the presentation of other disclosures

– Proposed rules do not mandate specific disclosure requirements for most items

– Form C will be used for initial filing, amendments, progress updates and ongoing annual reporting obligations


♦ Disclosure Requirements – Company Info– Name, legal status, address, website– Directors and officers; 20% beneficial owners– Description of the business and anticipated

business plan


♦ Disclosure Requirements – Offering Info– Stated purpose and use of proceeds of offering– Target offering amount and deadline to reach

target– Process for canceling an investment

commitment or to complete the transaction when target is met

– Price per share or method for determining the price

– Progress updates


♦ Disclosure Requirements – Ownership and Capital Structure– Capitalization– Terms of securities being offered and each other class of

security of the issuer– Description of how exercise rights of principal

shareholders could affect new investors– Name and ownership level of 20 percent beneficial owners– How the offered securities are being valued– Risks relating to minority ownership– Description of restrictions on transfer


♦ Disclosure Requirements – Additional Items– Information about intermediary (name, CRD #,

etc.)– Compensation and referral fees to intermediary– Legends– Number of employees of issuer– Material risk factors– Material terms of any indebtedness– Disclosure of exempt offerings in last three years– Disclosure of certain related-party transactions


♦ Disclosure Requirements – Financial Info– Tiered financial statement disclosures

< $100K – tax returns $100K - $500K – CPA reviewed > $500K – audited financials

– Narrative discussion of financial condition– Company financial statements for last two

years or since date of inception– Updates about any material changes


♦ Ongoing Reporting Requirements– Annual reports filed on EDGAR and company’s website no

later than 120 days after fiscal year end– Report would be similar to the information required in the

offering statement If multiple offerings with different requirements, then the report

would need to meet the highest standard previously provided

– Reporting obligation continues until one of the following occurs: Issuer becomes a reporting company Issuer or another party purchases all 4(a)(6) securities Issuer liquidates or dissolves


♦ Promotion/Advertising– Advertising is generally prohibited– Issuers may publish a notice advertising the terms of

an offering relying on Section 4(a)(6), provided that the notice includes the address of the intermediary’s platform


♦ Promotion/Advertising (cont.)– Notices advertising terms may include no more than

the following: Existence of offering and name of intermediary with

a link to intermediary’s platform Amount of securities offered Nature of the securities Price of the securities Closing date of the offering period Contact info for the issuer


♦ Promotion/Advertising (cont.)– Issuer may not compensate or commit to compensate

anyone for promotional activities outside of the channels provided by the intermediary Unless the issuer takes reasonable steps to ensure

that the person clearly discloses the receipt of compensation each time a promotional communication is made

Communications may only include information permitted by the advertising requirements

Requirements on Intermediaries

♦ General Requirements– Must register with SEC and join FINRA

Broker Funding Portal

– Prohibited from facilitating secondary trading through the crowdfunding platform


♦ Active role in policing issuers and offerings– Must have “reasonable basis” for believing:

Issuer is in compliance with relevant regulations Issuer has established means to keep required

records

– May “reasonably rely” on issuer reps– Must conduct background and securities

enforcement history check on each issuer (incl. officers, directors and 20%+ owners)

– Must terminate offerings where it suspects fraud


♦ Obligations vis-à-vis Investors– Must deliver educational materials

Investor must rep to receipt and review Must be updated as-needed

– Must clearly disclose manner in which it will be compensated


♦ Requirements with Respect to Transactions– Must make available to SEC and potential investors

information provided by issuer at least 21 days prior to first sale

– Must have “reasonable belief” an investor has satisfied the applicable investment limitations prior to permitting the investment May rely on investor reps absent “reason to question”

– Must notify investors of any material change in offering; investor must re-confirm investment within five business days


♦ Communication Channels– Intended to promote open exchange of

information about offering– All communication between issuers and

investors must take place through channels– Must be visible to anyone, but must require

registration with intermediary platform to post– Agents of issuer and any paid promoters of an

offering must disclose nature of compensation arrangement

Additional Requirements on Funding Portals

♦ SEC Registration – Effective 30 days after later of

Submission of completed Form Funding Portal Membership with FINRA effective

– Required to file amended registration within 30 days of change in relevant information

– Registration is transferrable, but successor must re-file application for registration within 30 days

– Multiple sites may be covered by one registration– $100K Fidelity Bond required


♦ Prohibited Activities:– Offering investment advice or making

recommendations– Soliciting purchases, sales or offers– Compensating persons for solicitation or based

on sale of securities– Handling investor funds or securities


♦ Safe Harbors– Limiting offerings on site– Highlighting and displaying offerings– Providing search/sorting functions– Providing communication channels– Advising on structure or content of offerings– Compensating others for referrals– Advertising portal’s existence


♦ Compliance– Must implement written policies and procedures

designed to achieve compliance with applicable securities laws and regulations. Ex. Provisions of the Bank Secrecy Act: Anti-money laundering requirements Customer Identification Program Suspicious Activity Reporting Requirements Financial Crimes Enforcement Network Requirements

– Must take steps to protect privacy of investor information (Reg. S-P, S-AM & S-ID)


♦ Record Keeping: – Required to maintain specific records for five yrs

Issuers, investors and potential investors on platform educational materials investment commitments and reconfirmations communications on or through the platform notices provided by the portal written agreements relating to portal’s business log of each offerings

– May utilize third-party service

Miscellaneous Provisions

♦ Insignificant deviations♦ Restrictions on resales♦ Information available to states♦ Exemption from 12(g)♦ Scope of Statutory Liability♦ Disqualification

McCarter & English LLP

Benjamin M. [email protected]

617.449.6584@HronEsq

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jobs act: proposed rules for crowdfunding

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