Now, the U.S. Securities and Exchange Commission (SEC) has come back with a vengeance (if it ever really left) from the federal government shutdown. Specifically, with its long-awaited proposed rules for crowdfunding under the JOBS Act, all 585 pages of rules.
Notably missing from the list of possible uses for crowdfunding, til now, has been “to offer and sell securities.” The reason for this is that offering to sell a share of stock or interest in a company could trigger certain federal securities laws, and require the sale and the seller to register with the SEC unless an exemption is available.
That Was Then, This is Now
The JOBS Act intends to change this. Its aim is to promote and help startups and small businesses raise capital inexpensively by reducing the burden of securities regulations and allowing them to use the internet (crowdfunding) to keep acquisition costs to a minimum. All of this was waiting upon regulations from the SEC, and now they are here—in draft form for comment prior to implementation.
Refresher on Crowdfunding Opportunities
To qualify, transactions must meet specified requirements, including:
- Sums raised can’t be greater than $1 million in a 12-month period (to be adjusted for inflation at least every five years);
- Individual investments in a 12-month period are limited to:
- The greater of $2,000 or 5% of annual income or net worth, if annual income or net worth of the investor is less than $100,000; and
- 10% of annual income or net worth (not to exceed $100,000), if annual income or net worth of the investor is $100,000 or more (these amounts are to be adjusted for inflation at least every five years); and
- Transactions must be conducted through an intermediary that either is registered as a broker or is registered as a “funding portal.”
What the New Regs are Supposed to Do
The new regulations are intended to accomplish a couple of things:
- Set out the rules for the offer and sale of securities under newly created Section 4(a)(6) of the Securities Act of 1933.
- Provide a framework for the regulation of registered funding portals (or website) and brokers that issuers are required to use as intermediaries.
- Exempt securities sold under the new crowdfunding rules from the registration requirements of the Securities Exchange Act of 1934.
The challenge for the proposed rules is to avoid being too burdensome, as this could discourage investment. On the other hand, if the rules are overly loose, this could rebound on investors—increasing the risks and ultimately undermine the intent of the JOBS Act of allowing startups and small businesses to raise money in an efficient and inexpensive manner.
It may be important to note that the use of the crowdfunding medium will not mean an end to regulatory oversight. When final rules are ultimately adopted, the SEC will monitor and assess the offerings made. They plan to focus on the types of firms using the exemption, the level of compliance with regulation crowdfunding by both issuers and intermediaries, with an eye toward promoting new capital formation while at the same time providing key protections for investors.
The Iron is Hot and the Time is Now
As the proposed rules were published on October 23, 2013, and the 90-day comment period started from their publication in the Federal Register, interested parties have until almost the end of January to suggest changes to the regulation. This is perhaps a unique opportunity to influence what may be the most important change to the U.S. capital markets in our lifetimes.