United States: FinTech Alert: Securities And Exchange Commission Approves Crowdfunding Rules

The Securities and Exchange Commission adopted "Regulation Crowdfunding" on October 30, allowing companies to raise capital online through low-dollar securities offerings. Currently, crowdfunding platforms such as kickstarter.com are used to allow new businesses, projects or causes to raise money online through small, individual contributions. Contributors are often thanked with gifts or rewards associated with the project or business, but they do not receive any equity interest or other share in the financial returns of the financed business activity. Regulation Crowdfunding, however, will now permit issuers that are not subject to reporting under the Securities Exchange Act of 1934, including start-ups, to use regulated crowdfunding platforms as a way to offer and sell limited amounts of securities without registration under the Securities Act of 1933 (Securities Act).

Regulation Crowdfunding was promulgated to implement Title III of the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama in 2012. The JOBS Act was designed to reduce the burden of securities regulations on small companies seeking access to capital markets. Title III of the JOBS Act added Section 4(a)(6) to the Securities Act. This section creates an exemption from the securities registration requirements of Section 5 of the Securities Act for certain crowdfunding transactions. As a result, issuers can seek limited investments through means other than a private placement offering to accredited investors or a public registration of securities.

Limitations on Capital Raised

To qualify for the Section 4(a)(6) exemption, crowdfunding transactions by an issuer must meet specified requirements, including limits on the dollar amount of the securities that may be sold by the issuer and the total dollar amount that may be invested by an individual in a 12-month period. Specifically, an individual investor, over the course of a 12-month period, may invest up to:

(x)     if either the investor's annual income or net worth is less than $100,000, the greater of $2,000 and five percent of the lesser of his or her annual income or net worth; and

(y)     if the investor's annual income and net worth are both $100,000 or more, 10 percent of the lesser of his or her annual income or net worth, subject to a maximum aggregate amount of $100,000.

These limits apply on an aggregate basis to all of an investor's crowdfunding investments in all issuers during the relevant 12-month period. Annual net income and net worth will be calculated in the same manner as they are for determining accredited investor status under the Securities Act. In addition, an issuer (including entities controlled by, under common control with, or a predecessor of, the issuer) may not offer and sell more than $1 million under Regulation Crowdfunding in any 12-month period. Regulation Crowdfunding offerings will not be integrated with other exempt offerings, provided that each offering complies with the applicable exemption.

Issuer Eligibility

The types of issuers that are eligible for the registration exemption under Section 4(a)(6) are limited. The following companies are not permitted to rely on Section 4(a)(6):

  • Non-US companies;
  • Companies that are already subject to the reporting requirements of the Exchange Act;
  • Companies defined as investment companies under the Investment Company Act of 1940 or companies that are excluded from the investment company definition under section 3(b) or 3(c) of such Act;
  • Companies that are disqualified under Regulation Crowdfunding's disqualification rules (generally consistent with existing "bad actor" disqualifications in Securities Act Rules 262 and 506);
  • Companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies; and
  • Companies that have previously relied on Section 4(a)(6), but have not complied with applicable annual reporting requirements under Regulation Crowdfunding during the two years prior to the filing of a required new offering statement (any ongoing annual report that was due during the two years immediately preceding the currently contemplated offering must be filed before a company may rely on the Section 4(a)(6) exemption).

Disclosure Requirements

An issuer relying on Section 4(a)(6) must comply with certain disclosure requirements (on new Form C) regarding its business and finances. This information must be made available to both the crowdfunding intermediary (the broker or "funding portal" described below) and the potential investors. These required disclosures include, among others: 

  • Information regarding the issuer's legal status, business and business plan, as well as information about its officers, directors, 20 percent shareholders, and related party transactions.
  • Information on the terms of the securities offered and the issuer's capital structure.
  • Information regarding the offering, including the price to the public (or the method of determining the price), the target and maximum amount of securities offered, the use of proceeds (or range of uses), and the deadline for the offering. If an issuer indicates that it will accept proceeds in excess of the target offering amount, it must provide a reasonably detailed description of the purpose, method for allocating oversubscriptions, and intended use of any excess proceeds.
  • Financial statements of the issuer for the most recently completed two fiscal years that have been reviewed by an independent public accountant or audited by an independent auditor, as well as a narrative of the issuer's financial condition and financial history (if the aggregate amount offered and sold over a 12-month period does not exceed $100,000 and reviewed or audited financial statements are not available, the issuer may instead disclose financial statements certified by its principal executive officer and specified information from its tax return).
  • Disclosure of the identity of, compensation to be paid to, and interests in the issuer held by, the intermediary.
  • Legend requirements and risk factor disclosures.

Issuers will be required to amend or supplement the required disclosures, to the extent any material change occurs (including to its financial condition or the intended use of proceeds, or a determination of the final price where only a method has been disclosed), and to provide updates on the issuer's progress toward reaching the target offering amount. In addition, issuers relying on Regulation Crowdfunding are required to file an annual report including specified information with the SEC (no later than 120 days after the end of the fiscal year covered by the report) and provide such annual report to their investors (through website posting). Filing of annual reports will continue to be required until the earliest of the following events: (i) the issuer is required to file reports under Exchange Act Section 13(a) or 15(d); (ii) the issuer has filed at least one annual report and has fewer than 300 holders of record; (iii) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million; (iv) the issuer or another party purchases or repurchases all securities issued pursuant to Section 4(a)(6); or (v) the issuer liquidates or dissolves in accordance with state law.

Restrictions on Intermediaries

Regulation Crowdfunding transactions must take place exclusively through intermediaries or "crowdfunding platforms," which are required to register with the SEC either as a broker or a funding portal and become a member of a registered national securities association (currently, the Financial Industry Regulatory Authority (FINRA) is the only such association). An issuer may not use more than one intermediary when conducting an offering (including concurrent offerings under Section 4(a)(6)).

Under Regulation Crowdfunding, intermediaries are required to follow certain rules, which include, among others:

  • Providing materials to educate investors, including relevant issuer disclosure documentation and information regarding the process of and risks involved in purchasing and issuing securities on the crowdfunding platform.
  • Having a reasonable basis to believe that each issuer they work with is, at all times, in compliance with applicable SEC regulations. The purpose of this rule is to reduce fraud; however, it does not excuse the issuer's independent obligation to ensure compliance.
  • Displaying required issuer disclosures on their platform a minimum of 21 days prior to the first day any security is sold in the offering.
  • Prohibiting its directors or officers from having or obtaining a financial interest in any issuer that uses its platform.

The rules prohibit funding portals from:

  • Offering investment advice or making recommendations.
  • Soliciting purchases, sales or offers to buy securities offered or displayed on its platform.
  • Compensating promotors and others for solicitations or based on the sale of securities.
  • Holding, possessing or handling investor funds or securities.

Other Restrictions/Provisions

Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year (other than to the issuer, to an accredited investor, as part of a registered offering, or to certain specified family members). Holders of these securities do not count toward the threshold that requires an issuer to register its securities with the SEC under Section 12(g) of the Exchange Act if the issuer is current in its annual reporting obligations, retains the services of a registered transfer agent, and has less than $25 million in assets.

Any advertising notice that includes the terms of the offering can include no more than: (i) a statement that the issuer is conducting an offering along with the name of the intermediary through which the offering is being conducted and a link to the platform; (ii) the terms of the offering, and (iii) factual information about the legal identity and business location of the issuer.

Regulation Crowdfunding will become effective 180 days after it is published in the Federal Register. The forms that allow funding portals to register with the SEC will be effective on January 29, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
McDermott Will & Emery
Frankfurt Kurnit Klein & Selz
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Strasburger & Price, L.L.P.
McDermott Will & Emery
Frankfurt Kurnit Klein & Selz
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions