The SEC has released answers to frequently asked questions about the use of intermediaries pursuant to Title III of the JOBS Act, which can be individually cited as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012, or the CROWDFUND Act. The CROWDFUND Act creates a new exemption from Section 5 of the Securities Act for so-called “crowdfunded” offerings, provided that the offerings meet certain requirements. Before heading to the SEC’s FAQs, here are some more basic FAQs about the CROWDFUND Act for the uninitiated:
What are “intermediaries” and why do they matter?
In order to take advantage of the new exemption, an offering must comply with several requirements. One of those requirements is that the offering must be conducted through an “intermediary” that is either a registered broker or a registered funding portal.
What do the terms “crowdfunded” and “crowdfunding” mean?
A crowdfunded offering, for purposes of the CROWDFUND Act, means a transaction in which (1) an issuer raises no more than $1 million in the aggregate from sales of securities (including securities sold in the preceding 12 months), (2) investors are subject to limitations on their maximum investment, and (3) the issuer complies with a number of other more technical requirements that we won’t discuss here. Investments by individuals with less than $100,000 in annual income or net worth are limited to the greater of $2,000 or 5 percent of income or net worth. For individuals with greater than $100,000 in income or net worth, the limit is 10% of income or net worth, with a ceiling of $100,000.
What is a “funding portal”?
A “funding portal” is defined as a crowdfunding intermediary that does not (1) offer investment advice, (2) solicit sales or offers, (3) pay compensation based on sales of securities, (4) hold or handle investor funds, or (5) engage in other activities that the SEC may prohibit by rule. In other words, a funding portal is limited to facilitating the matching of investors with issuers. Funding portals will still need to register with both the SEC and FINRA and must comply with a number of other requirements discussed in the SEC’s FAQs, but funding portals need not register as brokers.
When will the crowdfunding exemption become available to issuers?
The SEC is directed to adopt rules implementing the CROWDFUND Act within 270 days of its enactment, which would be January 1, 2013. However, as we’ve seen, the SEC doesn’t always meet statutory deadlines.
Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.
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