JOBS Act: Proposed Rules for Crowdfunding

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Information about JOBS Act: Proposed Rules for Crowdfunding
Business & Mgmt

Published on December 19, 2013

Author: bhron



Review of the rules proposed by the Securities Exchange Commission to effect crowdfunding under Title III of the JOBS Act.

JOBS Act Update: Crowdfunding Benjamin M. Hron 617.449.6584 @HronEsq Twitter #mecic 12.18.13

Overview of Proposed Rules ♦ ♦ ♦ ♦ ♦ Crowdfunding Exemption Requirements on Issuers Requirements on Intermediaries Additional Requirements on Funding Portals Miscellaneous Provisions

Crowdfunding Exemption ♦ Limitation on Capital Raised – $1 million aggregate amount limitation in any 12-month period – Maximum limit only applies to amounts raised under Section 4(a)(6)

Crowdfunding Exemption ♦ Investment Limitation – Amount sold to any investor by an issuer in any 12-month period cannot exceed:  The greater of $2,000 or 5% of the annual income or net worth of the investor if both the annual income and net worth of the investor are less than $100,000, and  The lesser of $100,000 or 10% of the annual income or net worth of such investor, whichever is greater, if either the annual income or net worth of the investor exceeds $100,000

Crowdfunding Exemption ♦ Transaction Conducted Through an Intermediary – A transaction in reliance on Section 4(a)(6) must be conducted through a broker or funding portal – Issuers are prohibited from using more than one intermediary to conduct an offering or concurrent offerings made in reliance on Section 4(a)(6) – Transaction is required to be conducted exclusively through a platform  “online-only”

Crowdfunding Exemption ♦ Exclusion of Certain Issuers from Eligibility under Section 4(a)(6) – Non-U.S. issuers – Issuers subject to Exchange Act reporting requirements – Investment companies as defined in the „40 Act or companies exempt under 3(b) or 3(c) of the definition – “Bad actors” – Issuers that have not filed required ongoing annual reports during the previous two years – Issuers with no specific business plan or with a plan to engage in M&A activity with unidentified companies

Requirements on Issuers ♦ Disclosure Requirements - New Form C – XML-based, fillable form – Certain disclosures would be presented in a specified format while allowing the issuer to customize the presentation of other disclosures – Proposed rules do not mandate specific disclosure requirements for most items – Form C will be used for initial filing, amendments, progress updates and ongoing annual reporting obligations

Requirements on Issuers ♦ Disclosure Requirements – Company Info – Name, legal status, address, website – Directors and officers; 20% beneficial owners – Description of the business and anticipated business plan

Requirements on Issuers ♦ Disclosure Requirements – Offering Info – Stated purpose and use of proceeds of offering – Target offering amount and deadline to reach target – Process for canceling an investment commitment or to complete the transaction when target is met – Price per share or method for determining the price – Progress updates

Requirements on Issuers ♦ Disclosure Requirements – Ownership and Capital Structure – Capitalization – Terms of securities being offered and each other class of security of the issuer – Description of how exercise rights of principal shareholders could affect new investors – Name and ownership level of 20 percent beneficial owners – How the offered securities are being valued – Risks relating to minority ownership – Description of restrictions on transfer

Requirements on Issuers ♦ Disclosure Requirements – Additional Items – Information about intermediary (name, CRD #, etc.) – Compensation and referral fees to intermediary – Legends – Number of employees of issuer – Material risk factors – Material terms of any indebtedness – Disclosure of exempt offerings in last three years – Disclosure of certain related-party transactions

Requirements on Issuers ♦ Disclosure Requirements – Financial Info – Tiered financial statement disclosures  < $100K – tax returns  $100K - $500K – CPA reviewed  > $500K – audited financials – Narrative discussion of financial condition – Company financial statements for last two years or since date of inception – Updates about any material changes

Requirements on Issuers ♦ Ongoing Reporting Requirements – Annual reports filed on EDGAR and company‟s website no later than 120 days after fiscal year end – Report would be similar to the information required in the offering statement  If multiple offerings with different requirements, then the report would need to meet the highest standard previously provided – Reporting obligation continues until one of the following occurs:  Issuer becomes a reporting company  Issuer or another party purchases all 4(a)(6) securities  Issuer liquidates or dissolves

Requirements on Issuers ♦ Promotion/Advertising – Advertising is generally prohibited – Issuers may publish a notice advertising the terms of an offering relying on Section 4(a)(6), provided that the notice includes the address of the intermediary‟s platform

Requirements on Issuers ♦ Promotion/Advertising (cont.) – Notices advertising terms may include no more than the following:  Existence of offering and name of intermediary with a link to intermediary‟s platform  Amount of securities offered  Nature of the securities  Price of the securities  Closing date of the offering period  Contact info for the issuer

Requirements on Issuers ♦ Promotion/Advertising (cont.) – Issuer may not compensate or commit to compensate anyone for promotional activities outside of the channels provided by the intermediary  Unless the issuer takes reasonable steps to ensure that the person clearly discloses the receipt of compensation each time a promotional communication is made  Communications may only include information permitted by the advertising requirements

Requirements on Intermediaries ♦ General Requirements – Must register with SEC and join FINRA  Broker  Funding Portal – Prohibited from facilitating secondary trading through the crowdfunding platform

Requirements on Intermediaries ♦ Active role in policing issuers and offerings – Must have “reasonable basis” for believing:  Issuer is in compliance with relevant regulations  Issuer has established means to keep required records – May “reasonably rely” on issuer reps – Must conduct background and securities enforcement history check on each issuer (incl. officers, directors and 20%+ owners) – Must terminate offerings where it suspects fraud

Requirements on Intermediaries ♦ Obligations vis-à-vis Investors – Must deliver educational materials  Investor must rep to receipt and review  Must be updated as-needed – Must clearly disclose manner in which it will be compensated

Requirements on Intermediaries ♦ Requirements with Respect to Transactions – Must make available to SEC and potential investors information provided by issuer at least 21 days prior to first sale – Must have “reasonable belief” an investor has satisfied the applicable investment limitations prior to permitting the investment  May rely on investor reps absent “reason to question” – Must notify investors of any material change in offering; investor must re-confirm investment within five business days

Requirements on Intermediaries ♦ Communication Channels – Intended to promote open exchange of information about offering – All communication between issuers and investors must take place through channels – Must be visible to anyone, but must require registration with intermediary platform to post – Agents of issuer and any paid promoters of an offering must disclose nature of compensation arrangement

Additional Requirements on Funding Portals ♦ SEC Registration – Effective 30 days after later of  Submission of completed Form Funding Portal  Membership with FINRA effective – Required to file amended registration within 30 days of change in relevant information – Registration is transferrable, but successor must re-file application for registration within 30 days – Multiple sites may be covered by one registration – $100K Fidelity Bond required

Additional Requirements on Funding Portals ♦ Prohibited Activities: – Offering investment advice or making recommendations – Soliciting purchases, sales or offers – Compensating persons for solicitation or based on sale of securities – Handling investor funds or securities

Additional Requirements on Funding Portals ♦ Safe Harbors – Limiting offerings on site – Highlighting and displaying offerings – Providing search/sorting functions – Providing communication channels – Advising on structure or content of offerings – Compensating others for referrals – Advertising portal‟s existence

Additional Requirements on Funding Portals ♦ Compliance – Must implement written policies and procedures designed to achieve compliance with applicable securities laws and regulations. Ex. Provisions of the Bank Secrecy Act:  Anti-money laundering requirements  Customer Identification Program  Suspicious Activity Reporting Requirements  Financial Crimes Enforcement Network Requirements – Must take steps to protect privacy of investor information (Reg. S-P, S-AM & S-ID)

Additional Requirements on Funding Portals ♦ Record Keeping: – Required to maintain specific records for five yrs  Issuers, investors and potential investors on platform  educational materials  investment commitments and reconfirmations  communications on or through the platform  notices provided by the portal  written agreements relating to portal‟s business  log of each offerings – May utilize third-party service

Miscellaneous Provisions ♦ ♦ ♦ ♦ ♦ ♦ Insignificant deviations Restrictions on resales Information available to states Exemption from 12(g) Scope of Statutory Liability Disqualification

McCarter & English LLP Questions? Benjamin M. Hron 617.449.6584 @HronEsq

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