United States: Regulation Crowdfunding

Today, the SEC voted to adopt final rules permitting crowdfunding.  Regulation Crowdfunding allows issuers to engage in securities-based crowdfunding through the internet pursuant to Section 4(a)(6) of the Securities Act.  The final rules reflect an effort to address some of the concerns raised during the comment process, and appear to provide some greater flexibility for issuers.

As required by statute, the Regulation allows an issuer to raise up to $1 million in any 12-month period.  An individual who invests in crowdfunded offerings is subject to an investment limitation; if the individual's annual income or net worth is less than $100,000, then the greater of $2000 or 5% of the lesser of their annual income or net worth, but not to exceed $100,000.   If both annual income and net worth are over $100,000, then 10% of the lesser of the individual's annual income or net worth.  This limit applies to crowdfunded offerings generally, not a specific crowdfunded offering.

An issuer is required to use an intermediary, which is registered as either a broker-dealer or a funding portal, as discussed below.

As noted above, although the final rules are quite complex, the final rules do appear to have taken into account some of the issues raised by commenters.  An issuer must prepare certain disclosures in connection with any crowdfunded offering.  There will be a new optional Q&A option for disclosure requirements, which may help reduce costs for an issuer and perhaps may be easier to navigate for a first-time issuer.

The final rules also appear to provide some relief with respect to the financial statement requirement, which had been a concern raised by commenters.  The final rules would require financial statements prepared in accordance with US GAAP for the issuer's two most recently completed fiscal years (assuming the issuer has been in operation for such period).  The financial statement requirements are phased depending on the amount being raised.  If the issuer proposes to offer $100,000 or less, then the financial statements must be reviewed and certified by the issuer's chief financial officer.  If the issuer is raising more than $100,000 and less than $500,000, the financial statements must be reviewed by an independent accountant.  For amounts in excess of $500,000, financial statements must be audited.  There will also be an accommodation for first-time issuers allowing financial statements to be reviewed rather than audited (unless audited statements are otherwise available).  The financial statement requirement for the annual report also appears to have been revised from the proposed rule.

The final rules also appear to provide some relief in relation to the requirement to file annual reports following the completion of a crowdfunded offering.

The securities sold in a crowdfunded offering will be transfer-restricted for one year and will be exempt from the Exchange Act 12(g) threshold provided that the issuer satisfies certain conditions, including, among other things, a requirement to retain a registered transfer agent and not exceed $25 million in assets.

Final rules also are adopted relating to the registration and regulation of intermediaries.  A funding portal must file a Form Funding Portal with the SEC and become a FINRA member firm.  Our earlier post discussed FINRA's rule filing for the final rules regulating funding portals.  The intermediary in a crowdfunded offering serves an important gatekeeper and educational function.  An intermediary must, among other things, open an account for each investor before an investor makes an investment commitment, provide educational materials to prospective investors, make issuer information available throughout offering period and for the required 21-day public offering period, and obtain information from each investor sufficient to provide a reasonable basis for compliance with the individual investor investment limitation.

Effective date:  the new rules and the forms will become effective 180 days following Federal Register publication.  Forms permitting registration with the SEC by funding portals will be effective January 29, 2016.

We will be supplementing this very preliminary summary with the materials released by the SEC, as well as by a detailed client alert detailing and analyzing the final rules.

Chair Mary Jo White's statement may be accessed here:
http://www.sec.gov/news/statement/white-regulation-crowdfunding-147-504.html

Commissioner Stein's remarks on the proposed amendments to Rule 147 and Rule 504:
https://www.sec.gov/news/statement/statement-rules-147-and-504-stein.html

Commissioner Stein's statement on final crowdfunding rules:
https://www.sec.gov/news/statement/statement-on-adoption-of-regulation-crowdfunding-stein.html

Commissioner Aguilar's comments on final crowdfunding rules and on the proposed amendments to Rule 147 and Rule 504:
https://www.sec.gov/news/statement/aguilar-regulation-crowdfunding-147-504.html

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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