United States: SEC And Florida Move On Crowdfunding Proposals

Companies now have an additional option for raising capital in private offerings that does not require registration with the Securities and Exchange Commission (SEC). Since September 2013, issuers have been able to rely on an exemption from registration (the Rule 506(c) exemption) which permits companies to use general solicitation and advertising (including internet based advertising) in their unregistered offerings of securities as long as they take "reasonable" steps to verify that all purchasers are accredited investors, as defined in the exemption. Many issuers have taken advantage of this exemption, particularly real estate developers. Several offering platforms are now available to facilitate Rule 506(c) offerings to the public. According to Crowdfund Insider, five real estate crowdfunding platforms jointly acquired Tycoon Real Estate, a crowdfunding platform that offers residential and commercial real estate investment opportunities to the public. Tycoon Real Estate had appeared on an episode of the television show 'Shark Tank', but none of the sharks on the show invested. However, the show brought attention to Tycoon and crowdfunding, resulting in the acquisition.

In addition to crowdfunding limited to accredited investors under Rule 506(c) offerings, non-accredited investors may now participate in certain crowdfunded equity offerings. On October 30, 2015, the SEC finally adopted Regulation Crowdfunding. Under Regulation Crowdfunding, a company may now raise up to a maximum of $1 million in a 12-month period through offerings conducted on crowdfunding platforms. Unlike current Rule 506(c) offerings, purchasers in Regulation Crowdfunding offerings are not required to be accredited. However, the amount that any investor may invest in Regulation Crowdfunding offerings is limited based on the investor's annual income or net worth and an investor may not invest more than a total of $100,000 in all Regulation Crowdfunding offerings in a 12 month period.

The Regulation Crowdfunding exemption has many requirements and restrictions. Offerings must be conducted through SEC – registered and FINRA member Form Funding Portals or brokers-dealers. There are significant requirements imposed upon these offering intermediaries that are designed to prevent fraud and ensure that investors are fully informed about offerings and their risks. Issuers must disclose certain information about their businesses and about the securities offered. This includes the price of the securities, the intended use of the offering proceeds, the issuers' financial condition, and information about the issuers' officers, directors and 20% owners. Certain issuers are restricted from using the Regulation Crowdfunding exemption. Finally, securities purchased through a Regulation Crowdfunding offering generally may not be resold for one year after purchase.

Regulation Crowdfunding will become effective in May 2016. Whether Regulation Crowdfunding will actually make it easier for small businesses to raise capital remains to be seen. As SEC commissioner Michael Piwowar noted in questioning the "usefulness and workability" of the new rules, "while the new rules are 'intended' to be a treat for the smallest and least sophisticated companies seeking to raise capital, [the] rules are full of tricks," with many restrictions and requirements embedded in the rules.

At the same time as Regulation Crowdfunding was adopted, the SEC also proposed amendments to Rule 147, the federal intrastate offering exemption, to better facilitate intrastate crowdfunded offerings. More than 25 states, including Florida, have now adopted intrastate crowdfunding exemptions, which generally are modeled after Regulation Crowdfunding. The proposed amendments to Rule 147 would permit general advertising of offerings, including advertising through the internet outside the state, but require that actual sales be made only to residents of the state of the issuer's principal operations. The proposed amendments also would base eligibility on the issuer's principal place of business (not state of organization), determined by meeting one of four available thresholds (which are based on revenues, assets or use of offering proceeds or location of employees). Rule 147, as amended, would be available only for offerings registered in the state where offered or conducted under an exemption from that state's securities laws that limits the amount the issuer may sell to no more than $5 million in a 12-month period and would impose certain investment limits on investors.

The current Rule 147 would no longer function as a safe harbor under Section 3(a)(11) of the Securities Act, the current basis for the rule, but would be a new stand-alone exemption. Section 3(a)(11) is available only for securities that are both "offered and sold" to persons resident within a single state or territory, unlike the proposed amendments to Rule 147.

In July 2015, Florida adopted the Florida Crowdfunding Act, which permits issuers to raise up to $1 million in a 12-month period in offerings that comply with the federal Section 3(a)(11) intrastate exemption. Like Regulation Crowdfunding, the Florida Crowdfunding Act imposes limits on how much an investor may invest, based on the investor's income or net worth, but unlike Regulation Crowdfunding, these limits do not apply to accredited investors. Offerings must be conducted through a Florida registered securities dealer or intermediary who has obligations similar to that imposed under Regulation Crowdfunding. Under the Florida exemption, the issuer must be a for-profit entity that maintains its principal place of business and primarily derives its revenues from operations in Florida. Additionally, investors must be given a three day rescission right.

The utility of the Florida Crowdfunding Act is uncertain for many of the same reasons as the utility of Regulation Crowdfunding is uncertain, given its numerous requirements and restrictions. Also, unlike proposed new Rule 147, offerings under the Florida Crowdfunding Act must meet the requirements of Section 3(a)(11) of the Securities Act, which applies to offerings where offers, and not just sales, must be made only to residents within the issuer's state of residence, limiting issuers' use of many forms of internet-based social media. The availability of the federal Regulation Crowdfunding, which preempts state law, may be a more useful alternative to the Florida Crowdfunding Act, although both will be available to issuers. The Florida Crowdfunding Act exemption will not be available until implementing rules are adopted.

The Florida Crowdfunding Act can be found at: http://www.flsenate.gov/Laws/Statutes/2015/517.0611.

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.

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Rebecca H. Forest
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