Crowdfunding is a term used to describe an evolving method of raising money through the Internet. While crowdfunding can be used to raise funds for many things, it generally has not been used as a means to offer and sell securities. This has caused some confusion about the legality of crowdfunding for some market participants.
Congress created an exemption to permit securities-based crowdfunding when it passed the JOBS Act in 2012.
Title III of the JOBS Act established the foundation for a regulatory structure that would permit small businesses and startups to use crowdfunding, and directed the SEC to write rules implementing the exemption. It also creates an exemption allowing funding ports to operate internet based platforms to facilitate the offer and sale of securities without having to register with the SEC as brokers.
Consistent with the JOBS Act, the proposed rules would among other things permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions. Under the proposed rules: A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. 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 will be restricted securities that 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.
Disclosure by Companies
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. Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount. Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at firstname.lastname@example.org or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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