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All crowdfunding transactions under the JOBS Act must be conducted either through a registered broker or a new type of regulated entity called a funding portal.  While we discuss these obligations in detail below, we have a few preliminary observations based on those obligations and our recent blog post on issuer obligations:

  • Brokers and funding portals apparently will have a role in making risk based disclosures and other fraud minimizing activities.  While the JOBS Act places liability akin to Section 12(a)(2) on issuers, it is silent with respect to liability for brokers and funding portals.  We surmise brokers and funding portals will therefore be subject to at least Rule 10b-5 liability.  The JOBS Act also does not specify the liability of auditors who certify financial statements used in crowdfunding transactions.
  • The Jobs Act places limits not only on aggregate sales by issuers to individual investors during a 12-month period, but also an equivalent aggregate limit for all purchases by individual crowdfunding investors in all crowdfunding issuers during the 12-month period.  Brokers and funding portals must police this limit.
  • Brokers and funding portals may not solicit offers to purchase crowdfunded securities when they are acting as an intermediary.  It is unclear from the JOBS Act who may do so, although there is a reference in new Exchange Act Section 4A(b)(3) to permissible compensation being paid to persons promoting an offering if certain disclosures are made.

The duties of brokers and funding portals under the JOBS Act include:

  • registering with the SEC and self-regulatory organizations, which will most likely be FINRA;
  • providing disclosures, including disclosures related to risks and other investor education materials, as the SEC deems appropriate;
  • ensuring that each investor:
    • reviews investor-education information, in accordance with standards established by the SEC,
    • positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
    • answers questions demonstrating
      • an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;
      • an understanding of the risk of illiquidity; and
      • an understanding of other matters as the SEC determines is appropriate;
  • taking such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;
  • not later than 21 days prior to the first day on which securities are sold to any investor, making available to  potential investors any information the issuer is obligated to file with the SEC and provide to prospective investors;
  • ensuring that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, in a manner determined by the SEC;
  • making such efforts designated by the SEC to ensure that no investor in a 12-month period has purchased securities offered pursuant to the crowdfunding exemption that, in the aggregate, from all issuers, exceed the investment limits permitted under the JOBS Act;
  • taking such steps to protect the privacy of information collected from investors as specified by the SEC;
  • not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor;
  • prohibiting the intermediary’s directors, officers, or partners from having any financial interest in an issuer using the intermediary’s services; and
  • such other matters as the SEC may determine.

The JOBS Act also specifies what brokers and funding portals cannot do in crowdfunding transactions:

  • offer investment advice or recommendations;
  • solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
  • compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
  • hold, manage, possess, or otherwise handle investor funds or securities; or
  • other matters the SEC may determine.

Check frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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