SEC Difficulties Planned Policies intended for Crowdfunding Investments

SEC Difficulties Planned Policies intended for Crowdfunding Investments


Crowdfunding is a term used to describe an evolving approach to raising money through the Internet. For quite some time, this funding method has been used to generate financial support for specific things like artistic endeavors like films and music recordings, typically through small individual contributions from a sizable amount of people.


While crowdfunding may be used to improve funds for several things, it generally has not been used as a way to offer and sell securities. That's because offering a share of the financial returns or profits from business activities could trigger the application of the federal securities laws, and a supply 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 designed 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 a few 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 are not qualified to receive Crowdfunding if: (i) they are a non-U.S. company, (ii) they are already an SEC reporting company, (iii) they fall under the certain investment companies, (iv) they do not have a particular business plan or (v) their business plan is always to take part in a merger or acquisition having an unspecified company or companies. Companies will also be 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 make it open to investors and the relevant intermediary (broker or funding portals) What is Start Engine. Companies would be necessary to amend the offering document to reflect material changes and provide updates on the company's progress toward reaching the target offering amount. Companies counting on the crowdfunding exemption to provide and sell securities would be necessary to file an annual report with the SEC and provide it to investors.


For Investors


Crowdfunding investments are inherently more risky than buying registered securities. Securities issued in Crowdfunding transactions could not be sold or exchanged for 12 months. Start-ups and small companies tend to be more risky than larger more established companies. Accordingly, under the proposed rules investors would be limited in the amount that they may invest through Crowdfunding, based on their income and net worth. Investors with income or net worth less than $100,000 would 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 higher than $100,000 would be limited to aggregate investment of 10 percent of the income or net worth to not exceed $100,000 in a 12-month period.


Crowdfunding Platforms


Crowdfunding solicitations and transactions will have to take place through an SEC registered intermediary, whether 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 open to investors, and supply a platform for the crowd to discuss the offering. To sum up, the proposed regulations open a fantastic new means for startup and small companies to get into capital through Crowdfunding with greatly reduced regulatory burden than the usual traditional "going public" transaction. We will explore the proposed regulations in detail in some articles over the coming months. Stay tuned.