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28 Oct 2013


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New Crowdfunding Rules Coming Soon

According to new rules being drafted by the Securities and Exchange Commission (SEC) private companies will be allowed to raise up to $1,000,000 a year from unaccredited investors.  Currently private companies are allowed to solicit only accredited investors (those with a networth with at least $1,000,000, excludign the value of their homes or annual income of more than $200,000).

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.

As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction could not be resold for a period of one year.  Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Exchange Act.

Consistent with Title III of the JOBS Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors. 

In its offering documents, among the things the company would be required to disclose: 

-  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.

Certain related-party transactions.

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. 

One of the key investor protections Title III of the JOBS Act provides for crowdfunding is the requirement that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.  Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant. 

The rule being drafted was a requirement under the Jobs Act.  The public will have 90 days to comment on the rule.

SEC 2013-227

By Owen Daniels













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