What Are Regulation Crowdfunding Disclosures?

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On October 23, 2013, the Securities and Exchange Commission (“SEC”) proposed Regulation Crowdfund, setting forth the rules governing the offer and sale of securities through crowdfunded offerings, pursuant to Title III of the Jumpstart Our Business Startups Act (“JOBS Act”).

Within days, FINRA published its proposed rules for the licensing and regulation of “funding portals.” The recent SEC and FINRA proposals have spurred an interest in crowdfunded securities offerings.  With equity crowdfunding under the JOBS Act coming closer to reality many issuers involved in going public transactions are considering Regulation Crowdfund disclosure requirements.

This blog post addresses the disclosure requirements as proposed for offerings using equity crowdfunding.

An issuer wishing to rely upon Section 4(a)(6) and Regulation Crowdfund must file specific disclosures with the SEC and provide these disclosures to investors.  Additionally, the issuer must provide these disclosures to its intermediary for dissemination to investors by posting the disclosures on its platform.  Regulation Crowdfund requires issues make specific but manageable disclosures that include:

♦ the issuer’s name, type of entity, physical address and website address;

♦ information about officers, directors and owners of 20 percent or more of the issuer;

♦ a description of the issuer’s business, anticipated business plan, planned use of proceeds from the offering and financial condition;

♦ disclosure of the current number of employees, material terms of any indebtedness of the issuer and any exempt offerings conducted within the past three years;

♦ the proposed public offering price, target offering amount, deadline to reach the target amount and whether the company will accept investments in excess of the target amount;

♦ disclosure of related-party transactions;

♦ a description of ownership of the issuer and its capital structure;

♦ financial statements of the issuer;

♦ information about the intermediary (broker-dealer or funding portal), including its compensation;

♦ disclosure of the material risks associated with the offering; and

♦ mandatory legends.

The intermediary must make available these issuer disclosures for at least 21 days prior to the first securities being sold, but the intermediary may accept indications of interest during this period.  While it is unclear whether the issuer can make changes to its disclosures during this 21-day period, the issuer must timely amend its offering document(s) to reflect material changes and provide updates on its progress toward reaching the target offering amount.  A final update to investors disclosing the total amount of securities sold in the offering must occur no later than five days after the closing.

In addition to disclosures during the offering, issuers of successful crowdfunding offerings would be required to file an annual report with the SEC and provide it to investors.  These annual reports require similar disclosures to the information provided in connection with the offering, but much less than is required of a public company.  The SEC expects the issuer to determine how best to convey the information.

Regulation Crowdfund would require that issuers meet their SEC filing requirements by submitting newly created Form C through EDGAR. Form C is designed to be flexible enough to meet the different disclosure and filing requirements by checking appropriate boxes and only filling in the applicable information.

The SEC has proposed a safe harbor for issuers for, among other things, insignificant failures to comply with Regulation Crowdfund and good faith attempts to comply that fall short.  While the safe harbor protects the offering (i.e., the issuer would not be required to become a public company), an enforcement action may nevertheless be commenced.

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 [email protected] 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.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855