The Securities and Exchange Commission has released its proposed equity crowdfunding rules under the U.S. Jobs Act. The intent of the proposed rules is to increase access to capital for smaller companies and startups by allowing them to raise money online by issuing securities in exchange for smaller pooled investments.
The proposed crowdfunding exemption would allow qualified U.S. issuers to raise up to US$1 million annually. Over the course of a 12-month period investors whose net worth and annual income are less than US$100,000 would be permitted to invest the greater of US$2,000 or 5% of their annual income or net worth, whereas investors whose net worth or annual income exceeds US$100,000 would be permitted to invest the greater of US$100,000 or 10% of their annual income.
Importantly for Canadian companies, non-U.S. companies would be prohibited from relying on the proposed crowdfunding exemption. However, non-U.S. companies will still be able to raise capital in the U.S. exempt market through certain applicable private placement exemptions. For information on a potential Canadian equity crowdfunding framework, please see our prior bulletin here.
The proposed rules would require issuers conducting an offering under the crowdfunding exemption to file an offering document with the SEC, provide it to the relevant broker or funding portal and make it available to potential investors. The required disclosures in the document would include, but would not be limited to:
- Information on directors, officers and holders of 20% of the shares of the issuer.
- A description of the issuer's business.
- A description of the issuer's financial position and proposed use of proceeds.
- Tiered financial disclosure based on the aggregate target offering amounts within the preceding 12-month period.
Advertisement of an offering would be permitted under the proposed rules, which would be limited to a published notice containing only the following:
- a statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link to the intermediary's platform;
- the terms of the offering; and
- factual information about the legal identity and business location of the issuer, limited to the name, address, phone number and website of the issuer, contact information for the issuer's representative and a brief description of the issuer's area of business.
The proposed rules would require intermediaries, both online portals and broker-dealers, to register with the SEC and would restrict intermediaries from offering investment advice or recommendations and from soliciting purchases, sales or offers to buy securities offered or displayed on their platform or portal.
Intermediaries would also be required to take certain measures to reduce the risk of fraud, such as obtaining background and securities enforcement regulatory history checks on certain individuals connected to the issuer.
The SEC is seeking public comment on the proposed rules for a period expiring on January 21, 2014. It is anticipated that final rules will be enacted in the latter part of 2014.
In Canada, the move towards an equity crowdfunding exemption continues.
On October 7, 2013 the Saskatchewan Financial and Consumer Affairs Authority published for public comment a crowdfunding exemption proposal. The proposed exemption would be restricted to Saskatchewan investors and issuers, it would cap individual investments in any offering at CAN$1,500 and would limit issuers to two offerings annually of CAN$150,000 each.
On August 28, 2013 the Ontario Securities Commission released a progress report on its review of several prospectus exemptions designed to increase access to capital. The progress report discussed the OSC's review of four potential prospectus exemptions including, i) an equity crowdfunding exemption; ii) a friends, family and business associates exemption; iii) an offering memorandum exemption; and iv) an amended rights offering exemption. We would anticipate that any crowdfunding rules eventually proposed by the OSC would reflect many of those proposed, and eventually enacted, by the SEC.
On a related note, the Canada Revenue Agency was recently asked to provide a technical interpretation on its treatment of funds raised from non-equity-based crowdfunding, which is a form of crowdfunding that does not involve the issue of shares or securities. Instead, in this crowdfunding model, individuals contribute funds to a company, project or otherwise and generally receive an incentive for their contribution, including physical rewards or pre-purchase opportunities. The CRA noted that funds raised from this type of crowdfunding would generally be considered business income under the Income Tax Act. However, the CRA did not touch on the potential GST/HST implications on the supply of incentive products and/or services sometimes given in exchange for contributions in the non-equity-based crowdfunding context. This aspect has been forwarded to the GST/HST Rulings Directorate for clarification.
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