The SEC has proposed new Regulation Crowdfunding to implement the requirements of Title III of the JOBS Act. Regulation Crowdfunding would prescribe rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act of 1933. The proposal also provides a framework for the regulation of registered funding portals and brokers that issuers are required to use as intermediaries in the offer and sale of securities in reliance on Section 4(a)(6).
I. CROWDFUNDING EXEMPTION
Limitation on Capital Raised
The exemption from registration provided by Section 4(a)(6) is available to a U.S. issuer provided that “the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under [Section 4(a)(6)] during the 12-month period preceding the date of such transaction, is not more than $1,000,000. Capital raised through means other than the crowdfunding exemption is not counted towards the $1,000,000 maximum.
The SEC believes that an offering made in reliance on Section 4(a)(6) should not be integrated with another exempt offering made by the issuer, provided that each offering complies with the requirements of the applicable exemption that is being relied upon for the particular offering. An issuer could complete an offering made in reliance on Section 4(a)(6) that occurs simultaneously with, or is preceded or followed by, another exempt offering. An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, however, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of an offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.
Under Section 4(a)(6)(B), the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of such transaction, cannot exceed:
- the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and
- 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.
There is a glitch in the drafting of the statute because the language “if either the annual income or net worth of the investor is equal to or more than $100,000” can cause both limitations to be applicable. The SEC believes that the appropriate approach to the investment limit provision is to provide for an overall investment limit of $100,000, but within that overall limit, to provide for a “greater of” limitation based on annual income and net worth. Under the proposed rules, therefore, if both annual income and net worth are less than $100,000, then a limit of $2,000 or 5 percent of annual income or net worth, whichever is greater, would apply. If either annual income or net worth exceeds $100,000, then a limit of 10 percent of annual income or net worth, whichever is greater, but not to exceed $100,000, would apply.
The proposed rules require a natural person’s annual income and net worth to be calculated in accordance with the SEC’s rules for determining accredited investor status. The proposed rules would clarify that an investor’s annual income and net worth may be calculated jointly with the income and net worth of the investor’s spouse.
The proposal allows an issuer to rely on efforts that an intermediary takes in order to determine that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the investor limits, provided that the issuer does not have knowledge that the investor had exceeded, or would exceed, the investor limits as a result of purchasing securities in the issuer’s offering.
Transactions Conducted Through an Intermediary
Under Section 4(a)(6)(C), a transaction in reliance on Section 4(a)(6) must be “conducted through a broker or funding portal that complies with the requirements of [S]ection 4A(a).” The rules require an issuer to use only one intermediary because:
- The SEC believes a central tenet of the concept of crowdfunding is presenting members of the crowd with an idea or business so members of the crowd can share information and evaluate the idea or business. Allowing an issuer to conduct a single offering or simultaneous offerings in reliance on Section 4(a)(6) through more than one intermediary would diminish the ability of the members of the crowd to effectively share information, because essentially, there would be multiple “crowds.”
- Because practices among intermediaries may differ, were multiple intermediaries to conduct a single offering or simultaneous offerings, this could result in significant differences among such offerings.
- Allowing an issuer to conduct an offering using more than one intermediary would make it more difficult for intermediaries to determine whether an issuer is exceeding the $1 million aggregate offering limit.
Although the statute does not expressly require it, the SEC believes that in enacting Section 4(a)(6)(C), Congress contemplated that crowdfunding transactions made in reliance on Section 4(a)(6) and activities associated with these transactions would occur over the Internet or other similar electronic medium that is accessible to the public. The SEC believes that an “online-only” requirement enables the public to access offering information and share information publicly in a way that will allow members of the crowd to decide whether or not to participate in the offering and fund the business or idea. The proposed rules require that an intermediary, in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6), effect such transactions exclusively through an intermediary’s platform. The SEC proposes to define the term “platform” to mean an Internet website or other similar electronic medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6).
These following issuers are excluded from relying on the crowdfunding exemption:
- Issuers not organized under the laws of a state or territory of the United States or the District of Columbia;
- issuers that are subject to Exchange Act reporting requirements;
- investment companies as defined in the Investment Company Act or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act;
- any issuer that has sold securities in reliance on Section 4(a)(6) if the issuer has not filed with the Commission and provided to investors, to the extent required, the ongoing annual reports required by Regulation Crowdfunding during the two years immediately preceding the filing of the required new offering statement;
- issuers subject to the “bad boy” disqualifiers in Section 302(d) of the JOBS Act; and
- any issuer that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.
II. FILING AND DISCLOSURE REQUIREMENTS FOR ISSUERS
Prohibitions Applicable to the Issuer
Proposed Regulation Crowdfunding places several restrictions on issuer conduct in connection with a crowdfunded offering relating to advertising and promotion of the offering and its terms.
Prohibition on Advertising Terms of the Offering
Under the proposed rules, an issuer would be prohibited from advertising an offering pursuant to Section 4(a)(6), except that the issuer would be permitted to distribute a notice that includes only the following information with respect to the offering:
- A statement that the issuer is conducting an offering, the name of the intermediary, and a link to the intermediary’s offering
- The amount of securities offered, the nature of the securities, the price of the securities, and the closing date for the offering
- The name, address, phone number, and website of the issuer, the e-mail address of a representative of the issuer, and a brief factual description of the issuer’s business.
Although the content of these notices is restricted, the proposed rules do not restrict the means by which the notices may be distributed. Further, the issuer is free to communicate with the public about other aspects of its business during the pendency of a Section 4(a)(6) offering as long as the issuer does not disclose any information about the offering other than the information permitted on notices. The rules also permit direct communication between the issuer and potential investors about the offering, including while the offering is ongoing, provided that the communications occur through the intermediary’s platform and the issuer identifies itself as the issuer in all such communications.
Disclosure of Promoter Compensation
The proposed rules prohibit issuers from agreeing to compensate any person for promoting Section 4(a)(6) other than through the communication channels associated with the intermediary’s platform unless the promotion is limited to distributing notices that merely direct the recipient to the funding platform (as discussed above). An issuer is permitted to compensate a person for promoting an offering through the communication channels of the intermediary’s platform, but only if the issuer also takes reasonable steps to ensure that, with every promotional communication, the promoter clearly discloses the past and prospective receipt of compensation from the issuer. This rule applies not only third party promoters, but also to employees or shareholders of the issuer and any other person that undertake promotional activities on behalf of the issuer through the intermediary’s platform.
Form C and Filing Requirements
The rules propose a new Form C (with several variations) that would be used by issuers in Sectyion 4(a)(6) offerings to file the required information and disclosures with the SEC and to provide the information to the applicable intermediary.
Form C: Offering Statement
The initial disclosure regarding the offering would be filed on Form C, and the issuer would fulfill its filing obligations by filing Form C: Offering Statement with the SEC, providing the intermediary with a copy of the filing, and directing investors to the filing on the intermediary’s platform through a posting on the issuer’s website or by e-mail notification. The specific disclosure requirements of Form C are discussed in detail below.
Form C-A: Amendments to the Offering Statement
Form C filings can be amended by filing Form C-A with the SEC. Issuers may amend their Form C filings to account for changes in offering information, and issuers must amend their Form C filings to reflect any material changes in the offering terms or disclosures previously provided to investors. The SEC considers a material change to be one involving information with respect to which there is a substantial likelihood that a reasonable investor would consider it important in deciding whether or not to purchase the offered securities, under the facts and circumstances. Examples of material changes include changes to the financial condition of the issuer, changes to the intended use of proceeds of the offering, and determination of the final price of the securities being offered if only the methodology for determining the final offering price has previously been disclosed.
If there is a material change, the issuer will be required to check a box on Form C-A indicating that there has been a material change and that the issuer will not accept any investment from investors who have previously committed to purchase securities in the offering unless the investors reconfirm their commitment in light of the material change.
Form C-U: Progress Updates
Under the proposed rules, issuers would be required to file with the SEC (and provide to the intermediary and potential investors) periodic updates on the progress of the offering on new Form C-U filed via the EDGAR system. Updates would be required within five days after (i) the issuer has received commitments for 50% of the offering amount, (ii) the issuer has received commitments for 100% of the offering amount; (iii) the issuer intends to accept subscriptions in excess of the offering amount; and (iv) the issuer has closed on proceeds of the offering.
Form C-AR: Ongoing Annual Reporting Obligations
An issuer that sells securities in a crowdfunded offering will be required to file an annual report with the SEC on Form C-AR and to make that annual report available to investors by posting the report on the issuer’s website. The annual report will be due no later than 120 days after the end of the most recent fiscal year, and must include information similar to the information provided in the initial Form C filing for a crowdfunded offering (including financial statements meeting the requirements of a Section 4(a)(6) offering), except that the annual report will not include information that is specific to an offering of securities.
Form C-TR: Termination of Reporting
The annual report obligation would continue until (i) the issuer becomes an Exchange Act reporting company, (ii) all of the securities issued in crowdfunded transactions are redeemed or purchased by another party, or (iii) the issuer liquidates or dissolves its business.
When an issuer is no longer subject to the ongoing reporting obligations, it will be required to file a Form C-TR: Termination of Reporting, which will serve as a notice to the SEC and investors that it is no longer required to provide the annual reports on Form C-AR.
Required Disclosures of Offering Information
The following sections discuss information that would be required to be disclosed by an issuer on Form C pursuant to the proposed rules.
Basic Issuer Information; Officers and Directors
The issuer would be required to disclose basic information about its identify and status, including its name, legal status, form of organization, date and jurisdiction of organization, and physical and website addresses, the current number of employees of the issuer, and the SEC file number and CRD number of the intermediary being used for the Section 4(a)(6) offering and the amount being paid to that intermediary in connection with the offering (including any referral or other fees).
The issuer would also be required to disclose information about its directors and officers,
defined to include the president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officers, and any person who routinely performs corresponding functions for the issuer.
For officers and directors, the issuer would need to disclose each individual’s name, positions held with the issuer, duration in those positions, and business experience (including principal occupation) during the last three years. For officers, the issuer would need to disclose whether the officer has been employed by another employer and the name and principal business of that employer. Since similar disclosures by issuers are required for the prior five years in connection with registered offerings and offerings under Regulation A, the SEC sees this disclosure relating to only the prior three years as an accommodation to startups relying on the crowdfunding rules.
Certain 20% Beneficial Owners
The issuer would be required to disclose the names of each shareholder who owns 20% or more of the issuer’s outstanding voting equity securities, calculated by voting power as of the most recent practicable date. In coming up with this formulation, the SEC is resolving some ambiguity in the JOBS Act in favor of startups; the JOBS Act arguably could require disclosure of holders of 20% or more of each class of an issuer’s securities. The SEC also believes that making the date of calculation flexible (“as of the most recent practicable date”) is to the benefit of issuers and ensures that issuers are not subject to more stringent calculation requirements than those applicable to issuers in registered offerings.
Business Plan and Use of Proceeds
The SEC is proposing a flexible approach to the required disclosures of a business plan and intended use of offering proceeds. While a business plan is required, the form and content of the business plan has not been prescribed, and the SEC has indicated that the business plan can be tailored to fit the stage of the business. In the use of proceeds disclosure, the SEC is requiring disclosure that is reasonably detailed under the circumstances. The proposing release provides several examples of the type of disclosure that would be appropriate under the circumstances, stating, for example, that “If an issuer does not have definitive plans for the proceeds, but instead has identified a range of possible uses, then the issuer should identify and describe each probable use and factors impacting the selection of each particular use.”
Target offering Amount and Deadlines
If an issuer will accept investments beyond the targeted offering amount, under the proposed rules it must disclose this fact in its Form C filing, along with a statement of the maximum amount the issuer will accept under any circumstances and a description of how the oversubscribed securities would be allocated among investors.
Form C would also require clear disclosures regarding offering closing procedures, the circumstances under which an investor could cancel their investment, and the circumstances under which the issuer could close the offering early. These disclosures must include the following required information:
- Investors can cancel their investment up to 48 hours prior to the deadline identified in the offering materials, but if an investor does not cancel the investment, then their funds will be released to the issuer upon closing;
- The intermediary will notify investors when the target offering amount has been met, and if the target offering amount is not met then no securities will be sold and all funds will be returned to investors;
- If the target offering amount is met prior to the deadline identified in the offering materials, the issuer must provide five days advance notice before closing the offering early; and
- If an investor does not reconfirm the investment commitment after a material change is made to the offering and disclosed on Form C-A, the investment will be cancelled and the issuer must return the funds to the investor.
Ownership and Capital Structure
Under the proposed rules, issuers would be required to include detailed information regarding the issuer’s ownership and capital structure in the Form C filing, including:
- Descriptions of the characteristics of each class of securities of the issuer, including the securities being offered, and a description of the difference between the different classes of securities, with an emphasis on voting rights and the way the rights of the securities being offered can be modified or limited;
- Descriptions of the material terms of any indebtedness of the issuer;
- A description of how the exercise of the rights held by principal shareholders could affect purchasers of the offered securities;
- The name and ownership level of 20% beneficial holders
- Descriptions of certain related party transactions among the issuer and any officer, director, promoter, or 20% beneficial owner, or any immediate family member of any of the foregoing, if the related party transaction was in excess of five percent of the amount the issuer has raised through crowdfunded offerings in the trailing twelve months including the amount proposed to be raised in the current offering;
- Disclosure of all exempt offerings conducted by the issuer within the last three years, including the date of each offering, the exemption relied upon, the amount raised, the type and amount of securities sold, and the use of proceeds;
- A description of how the offered securities are being valued and examples of how securities may be valued in the future, including in subsequent corporate actions;
- Disclosure of the risks associated with minority ownership and corporate actions such as additional issuances of shares, repurchases by the issuer, transactions with related parties, and a stock or asset sale by the issuer;
- Legends regarding the risks of investing in a crowdfunding transaction generally and the ongoing reporting obligations of the issuer, including details about how those reports can be obtained
- Discussion of risk factors that make an investment in the issuer risky or speculative; and
- A description of the restrictions on transfer of the offered securities.
Discussion of Financial Condition and Financial Disclosures
Discussion of Financial Condition
All issuers would be required to submit to the SEC, the relevant intermediary, and potential investors a description of their financial condition under the proposed rules. The description of financial condition would be similar to the MD&A discussion required of Exchange Act reporting companies under Item 303 of Regulation S-K. The description of the issuer’s financial condition would need to include a discussion of historical results of operation, liquidity and capital resources, the proceeds of the offering and other pending sources of capital, and how the current available and anticipated capital relates to the viability of the issuer’s business.
In all cases, the required financial disclosure under the proposed rules must include a complete set of financial statements (balance sheet, income statement, statement of cash flows, and statement of changes in owners’ equity) prepared in accordance with GAAP and a discussion of any material changes to the issuer’s financial condition since the date of the financial statements. The level of certification or review required of the financial statements varies depending on the aggregate amount (i) offered by the issuer in the current offering (including any oversubscriptions that will be accepted by the issuer), and (ii) offered and sold by the issuer in a crowdfunded offering in the prior twelve months (referred to here as the “aggregate offering amount”).
If the aggregate offering amount is $100,000 or less, the issuer would only need to provide tax returns (with personal information such as social security numbers redacted) for the most recently completed year and financial statements that are certified by the issuer’s principal executive officer as true and complete in all material respects on a form proposed by the SEC.
If the aggregate offering amount is greater than $100,000 but not more than $500,000, the issuer would need to provide financial statements that have been reviewed by an independent public accountant, using the independence standards set forth in Rule 2-01 of Regulation S-X. The review would need to be based on the American Institute of Certified Public Accountants (AICPA) standards. A copy the independent public accountant’s review report would be included in the disclosures to the SEC, the intermediary, and potential investors.
If the aggregate offering amount is more than $500,000, the issuer would be required to provide financial statements that have been audited by an independent public accountant (again, using the Regulation S-X independence standards). The audit could be conducted either using the AICPA standards or the Public Company Accounting Oversight Board (PCAOB) standards. A copy of the audit report would need to be included in the disclosures to the SEC, the intermediary, and potential investors. An issuer that received an adverse audit opinion or a disclaimer of opinion would be disqualified from engaging in a Section 4(a)(6) offering.
III. REQUIREMENTS FOR CROWDFUNDING INTERMEDIARIES
As mentioned above, Section 4(a)(6)(C) requires crowdfunding offerings to be conducted through a broker or funding portal that complies with Section 4A(a). A funding portal is defined as any broker acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to Securities Act Section 4(a)(6), that does not: (1) offer investment advice or recommendations; (2) solicit purchases, sales or offers to buy the securities offered or displayed on its platform or portal; (3) compensate employees, agents or other person for such solicitation or based on the sale of securities displayed or referenced on its platform or portal; (4) hold, manage, possess or otherwise handle investor funds or securities; or (5) engage in such other activities as the Commission, by rule, determines appropriate. In addition to the foregoing limitations, below is a summary of various requirements placed upon these crowdfunding intermediaries under Section 4A(a) and the proposed rules.
SEC Registration and FINRA Membership
Each crowdfunding intermediary must be registered with the SEC as a broker or funding portal. Under the proposal, a crowdfunding intermediary must register as a broker under Section 15(b) of the Exchange Act or as a funding portal under Securities Act Section 4A(a)(1) and proposed Rule 400 of Regulation Crowdfunding. The proposal sets out a process and form (Form Funding Portal) for funding portal registration. Additionally, each intermediary will be required to be a member of FINRA (or any subsequent national securities association) before acting as an intermediary.
The directors, officers and partners of an intermediary are prohibited from having any financial interest in an issuer using their services. The proposal extends this prohibition to the intermediary itself, and also prohibits any of these parties from receiving a financial interest in an issuer as compensation for services related to an offering of the issuer’s securities. The proposed rules interpret “any financial interest in an issuer,” to mean a direct or indirect ownership of, or economic interest in, any class of the issuer’s securities.
Fraud Reduction Measures
Under the proposed rules, the intermediary must take measures to reduce the risk of fraud in crowdfunding offerings, by requiring intermediaries to:
- have a reasonable basis to believe a crowdfunding issuer is in compliance with relevant regulations (the proposed rules would permit intermediaries to reasonably rely on representations of the issuer, absent knowledge or other information or indications that the representations are not true)
- have a reasonable basis to believe the issuer has established a means to keep accurate records of the holders of its securities (for example, use of a direct registration system, legends on certificates or use of a registered transfer agent, although none of these are required); the intermediary may rely on an issuer’s representations concerning the means it has established to satisfy this requirement, unless the intermediary has reason to question the reliability of the representations.
- deny access to an issuer or offering if the intermediary believes it presents a potential risk of fraud or if the issuer or any of its officers, director or 20% beneficial owners is subject to disqualification under the proposed rules. The proposal requires an intermediary to conduct certain background and regulatory checks on issuers and such related parties.
- If such disqualifying information becomes known to the intermediary after the fact, the intermediary must promptly remove the offering from its platform, cancel the offering and return all funds to investors.
The proposed rules would require the intermediary to deliver to investors, at account opening, educational materials that are in plain language and otherwise designed to communicate effectively specified information. The proposed rules would require the materials to include:
- the process for the offer, purchase and issuance of securities through the intermediary;
- the risks associated with investing in securities offered and sold in reliance on Section 4(a)(6);
- the types of securities that may be offered on the intermediary’s platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution;
- the restrictions on the resale of securities offered and sold in reliance on Section 4(a)(6);
- the types of information that an issuer is required to provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future;
- the limitations on the amounts investors may invest, as set forth in Section 4(a)(6)(B);
- the circumstances in which the issuer may cancel an investment commitment;
- the limitations on an investor’s right to cancel an investment commitment;
- the need for the investor to consider whether investing in a security offered and sold in reliance on Section 4(a)(6) is appropriate for him or her; and
- that following completion of an offering, there may or may not be any ongoing relationship between the issuer and intermediary.
Each intermediary will be required to ensure no investor exceeds the investment limits. The proposed rules would allow an intermediary to rely on an investor’s representations about its income and net worth and total crowdfunding investments made in the last 12 months.
Investor’s Right to Cancel
The intermediary must allow investors to cancel their investment commitments. Under the proposed rules, investors must be given an unconditional right to cancel their commitment for any reason until 48 hours before the deadline identified in the issuer’s offering materials. The proposed rules set forth a procedure for issuers to close an offering earlier than the deadline when it reaches its target funding amount before that time, subject to detailed conditions and notice periods. Upon making material changes to an offering or terminating an offering, additional notice and reconfirmation or cancellation requirements would apply.
The proposed rules will require intermediaries to provide communication channels to permit discussions among investors and between investors and the issuer about offerings on the platform, with detailed requirements of these channels set forth in the rules.
ATS / Secondary Market Transactions
Under the proposed rules, facilitating crowdfunded transactions alone would not require an intermediary to register as an exchange or as an alternative trading system (i.e., registration as a broker-dealer subject to Regulation ATS). To the extent that an intermediary facilitates secondary market activity in securities issued in reliance on Section 4(a)(6), the intermediary would be required to register as an exchange or as an alternative trading system if it met the criteria in Exchange Act Rule 3b-16. The SEC noted that a funding portal, by definition, is limited to acting as an intermediary in transactions involving the offer or sale of securities for the account of others solely pursuant to Section 4(a)(6), which are primary issuances of securities. Thus, a funding portal could not effect secondary market transactions in securities.
The proposed rules apply to the associated persons of funding portals as well in many instances, and would define the term “person associated with a funding portal or associated person of a funding portal” to mean any partner, officer, director or manager of a funding portal (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling or controlled by a funding portal, or any employee of a funding portal, but would exclude any persons whose functions are solely clerical or ministerial. FINRA currently provides licensing and qualification requirements for associated persons of brokers. While the SEC is not proposing any such requirement for persons associated with a funding portal, FINRA (or any other registered national securities association) could propose such requirements, as well as requirements dealing with supervision of funding portal personnel and appropriate compliance structures.
IV. ADDITIONAL REQUIREMENTS ON FUNDING PORTALS
Securities Act Section 4A(a)(1) requires that an intermediary facilitating a transaction made in reliance on Section 4(a)(6) register with the SEC as a broker or a funding portal. A funding portal would register with the Commission by filing a form with information consistent with, but less extensive than, the information required for broker-dealers on Form BD. The new form will be called Form Funding Portal.
The funding portal’s registration would become effective the later of:
- 30 calendar days after the date that the registration is received by the Commission; or
- the date the funding portal is approved for membership in FINRA or any other registered national securities association.
The proposed rules would require, as a condition of registration, that a funding portal have in place, and thereafter maintain for the duration of such registration, a fidelity bond that:
- has a minimum coverage of $100,000;
- covers any associated person of the funding portal unless otherwise excepted in the rules set forth by FINRA or any other registered national securities association of which it is a member; and
- meets any other applicable requirements, as set forth by FINRA or any other registered national securities association of which it is a member.
Exemption from Broker Dealer Registration
The JOBS Act directs the SEC to exempt a registered funding portal from the requirement to register as a broker or dealer under Exchange Act Section 15(a), subject to certain conditions. But for the exemption from registration Congress directed, a funding portal would be required to register as a broker under the Exchange Act. The obligations imposed under the JOBS Act on an entity acting as an intermediary in a crowdfunding transaction would bring that entity within the definition of “broker” under Exchange Act Section 3(a)(4). A funding portal would be “effecting transactions in securities for the account of others” by, among other things, ensuring that investors comply with the conditions of Securities Act Section 4A(a)(4) and (8), making the securities available for purchase through the funding portal, and ensuring the proper transfer of funds and securities as required by Securities Act Section 4A(a)(7). In addition, a funding portal’s receipt of compensation linked to the successful completion of the offering also would be indicative of acting as a broker in connection with these transactions.
The proposed rule exempts an intermediary that is registered as a funding portal from the requirement to register as a broker-dealer. However the proposed rules require that a funding portal permit the examination and inspection of all of its business and business operations that relate to its activities as a funding portal, such as its premises, systems, platforms and records, by representatives of the SEC, and of the national securities association of which the funding portal is a member.
V. OTHER PROVISIONS
Restrictions on Resales
The proposed rules track the JOBS Act and provide that securities issued in reliance on Section 4(a)(6) may not be transferred by the purchaser for one year after the date of purchase, except when transferred:
- to the issuer of the securities;
- to an accredited investor;
- as part of an offering registered with the SEC;
- to a family member of the purchaser or the equivalent, or
- in connection with the death or divorce of the purchaser.
Exemption from Section 12(g)
The JOBS Act requires the SEC to exempt securities issued under Section 4(a)(6) from the registration requirements of the Exchange Act. Proposed Rule 12g-6 provides that securities issued pursuant to an offering made under Section 4(a)(6) would be permanently exempted from the record holder count under Section 12(g). An issuer seeking to exclude a person from the record holder count would have the responsibility for demonstrating that the securities held by the person were initially issued in an offering made under Section 4(a)(6).
For other information on the JOBS Act, see JOBS Act and Other Securities Law Essentials for Growing Companies.
Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.