The JOBS Act: Crowdfunding - Morrison & Foerster ?· Crowdfunding •Crowdfunding permits...
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The JOBS Act: Crowdfunding
Agenda We will address:
The background that led to a call for an offering exemption for crowdfunding;
The JOBS Act Title III provisions;
The SECs proposed rules; and
Crowdfunding permits entrepreneurs to pool money from individuals
who have a common interest and are willing to contribute to a
Crowdfunding may or may not involve the sale of securities.
To the extent the effort involves the sale of securities then the offering
must be registered or must rely on an exemption.
Prior to the enactment of the JOBS Act, crowdfunding advocates had
called on the SEC to consider implementing a new exemption from
registration under the federal securities laws for crowdfunding efforts.
For example, it was suggested that the SEC exempt crowdfunding
offerings of up to $100,000, with a cap on individual investments not
to exceed $100.
Funding Portal or Broker
An all or none offering.
No limits on the number or sophistication of investors.
Issuer information (including financial information) required.
All offering activities must be conducted through an intermediary.
This is MoFo. 6
Title III of the JOBS Act
Title III provides an exemption that could apply to crowdfunding offerings, to be implemented by SEC rules adopted within 270 days.
The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000.
The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, does not exceed:
the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or
10 percent of the annual income or net worth of an 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.
The transaction must be conducted through a broker or funding
Information will be filed and provided to investors regarding the
issuer and offering, including financial information based on the
target amount offered.
The provision would prohibit issuers from advertising the terms of the
exempt offering, other than to provide notices directing investors to
the funding portal or broker, and would require disclosure of amounts
paid to compensate solicitors promoting the offering through the
channels of the broker or funding portal.
Issuers relying on the exemption would need to file with the SEC and
provide to investors, no less than annually, reports of the results of
operations and financial statements.
A purchaser in a crowdfunding offering could bring an action against
an issuer for rescission in accordance with Section 12(b) and Section
13 of the Securities Act, as if liability were created under Section
12(a)(2) of the Securities Act, in the event that there are material
misstatements or omissions in connection with the offering.
Securities sold on an exempt basis under this provision would not be
transferrable by the purchaser for a one-year period beginning on the
date of purchase, except in certain limited circumstances.
The exemption would only be available for domestic issuers that are
not reporting companies under the Exchange Act and that are not
investment companies, or as the SEC otherwise determines is
Bad actor disqualification provisions similar to those required under
Regulation A would also be required for exempt crowdfunding
Funding portals would not be subject to registration as a broker-
dealer, but would be subject to an alternative regulatory regime,
subject to SEC and SRO authority, to be determined by rulemaking
by the SEC and SRO.
A funding portal is defined as an intermediary for exempt crowdfunding
offerings that does not: offer investment advice or recommendations;
solicit purchases, sales, or offers to buy 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
engage in other activities as the SEC may determine by rulemaking.
The provision preempts state securities laws by making exempt crowdfunding securities covered securities, however, some state enforcement authority and notice filing requirements would be retained.
State regulation of funding portals would also be preempted, subject to limited enforcement and examination authority.
This is MoFo. 12
The SECs Proposed Rules
SEC Proposed Rules
The SEC voted to release proposed rules on October 23, 2013, and
these rules are subject to a 90-day comment period.
As we will discuss, the SECs proposed rules track the statute
This is MoFo. 14
The ability to engage in crowdfunding is not available to all issuers.
The proposal excludes:
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;
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.
An issuer may only engage in an offering through a registered
broker-dealer or through a funding portal.
The issuer can only use one intermediary
This seems to be based on practical considerations
Using one intermediary makes it easier to track the $1 million issuer offering limit
The offering will be conducted online only so that the crowd has
access to information. A platform is defined as an Internet website
or similar electronic medium through which a broker-dealer or a
funding portal conducts a Section 4(a)(6) offering.
Restrictions on Advertising and Promotion
An issuer cannot advertise a Section 4(a)(6) offering, except for
releasing an offering notice that contains only the following
A statement that the issuer is conducting an offering, the name of the intermediary,
and a link to the intermediarys offering;
The amount of securities offered, the nature of the securities, the price of the
securities, and the closing date for the offering; and
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 issuers
The issuer can communicate with potential crowdfunding investors if
the communications occur through the platform, and it should be
clear which communications are being made by the issuer
The issuer can continue to engage in regular business.
communications so long as it does not disclose information about the
offering, except as permitted in an offering notice.
An issuer cannot compensate a person for advertising or promoting
a Section 4(a)(6) offering other than through the intermediarys
platform unless the promotion is limited to distributing permitted
An issuer may compensate a person for promoting the offering
through the intermediarys platform if the issuer takes reasonable
steps to ensure that such person discloses past and prospective
compensation from the issuer. This applies to intermediaries, but