======= STILL ABOUT JOB ACTS =============== Crowdfunding Title III of the JOBS Act creates a new exemption from the registration requirements under the Securities Act. So called “crowdfunding” allows U.S. private companies to raise up to $1 million dollars over a 12-month period from an unlimited number of investors, including “unsophisticated investors.” Crowdfunding, which has become popular in recent years with the growth in Internet usage and social media, typically involves raising funds for a common cause or venture through small contributions from many investors that are pooled together, usually through Internet solicitation. Crowdfunding may provide a way for issuers to raise small amounts of capital from a wide array of disparate sources. However, Congress also saw crowdfunding as a potential tool to commit fraud on unsophisticated investors. Before embarking on a crowdfunding campaign, companies should understand that the JOBS Act imposes a significant number of restrictions on crowdfunding capital raising activities including: the aggregate amount of securities sold to all investors within any 12-month period cannot exceed $1 million, however, an issuer can raise additional capital pursuant to other exemptions or registered offerings the aggregate amount of securities sold to an investor with annual income or net worth less than $100,000 cannot exceed the greater of $2,000 or 5 percent of annual income or net worth the aggregate amount of securities sold to an investor whose annual income or net worth exceeds $100,000 is limited to 10 percent of the investor’s annual income or net worth, up to a maximum of $100,000 the issuer may not be a foreign private issuer, a reporting company already subject to Section 13 or 15(d) of the Exchange Act or an investment company the issuer must file with the SEC and provide to investors and intermediaries, basic corporate information, including information about its officers, directors, 20 percent shareholders, risks related to the offering and financial statements the securities will be restricted for one year, and during such period, may only be transferred (1) to the issuer, (2) pursuant to a registered offering, (3) to an accredited investor, or (4) to family members in the case of a death or divorce of the purchase, or similar circumstances companies must use either a registered broker dealer or entity registered with the SEC as a “funding portal” that will act as a platform for investors to review the company information and handle investments; a “funding portal” is a newly-defined entity that cannot solicit purchases or sales of the securities offered or displayed on its website or portal, or offer investment advice or recommendations; registered broker-dealers are not subject to these same restrictions issuers would be prohibited from advertising the offering except for providing general notice to investors of funding portals or brokers issuers will be subject to liability to purchasers of the securities comparable to that under Section 12(a)(2) of the Securities Act for material misstatements or omissions issuers would be required to file annual reports with the SEC describing their results of operations and financial condition Broker-dealers and funding portals participating in crowdfunding offerings will be subject to certain requirements, including the following: registration with the SEC and any applicable self-regulatory organization as a broker or funding portal providing disclosures and questionnaires to investors as the SEC may determine, which include risks and other investor education materials ensuring that investors have reviewed the disclosure information provided and have answered questionnaires confirming their understanding of the information and have affirmed their risk of loss making certain information provided by the issuer available to investors and the SEC at least 21 days before the day the securities are sold ensuring that offering proceeds are provided to the issuer only when the target offering amount has been achieved performing background checks on the issuer’s officers, directors and significant shareholders protecting the privacy of investor information not compensating generators, promoters or finders for providing the intermediary with personal identifying information about potential investors ensuring that no investor has exceeded the aggregate investment level allowed under the crowdfunding exemption prohibiting insiders from obtaining a financial interest in an issuer using that intermediary’s service Title III also directs the SEC to establish “bad actor” disqualification provisions for issuers, brokers and funding portals similar to what has been proposed under Rule 506 of Regulation D and the current regulations under Regulation A. Title III also amends Section 12(g) of the Exchange Act and directs the SEC to promulgate rules to exclude crowfunded securities from the newly proposed 2,000 shareholder limit for private companies. Nevertheless, issuers should also take into account the administrative burdens and costs imposed on companies needing to communicate with a large number of shareholders and consider the challenges involved in selling a company with a lengthy shareholder register. Issuers participating in crowdfunding offerings will be required to file with the SEC and disseminate information to investors and intermediaries. The information includes: annual reports and financial statements, reviewed or audited depending on the total offering size names and information of officers, directors and shareholders owning more than 20 percent risks related to offering and issuer use of proceeds from offering target amount of offering deadline to meet target of offering updates of progress in reaching target disclosure of compensation to solicitors Crowdfunding offerings meeting the requirements of the exemption under the JOBS Act will be exempt from state blue sky regulations relating to registration, documentation and offering requirements. States will retain jurisdiction over claims arising from fraudulent, deceitful and unlawful conduct in connection with a crowdfunding offering. Effective Date The crowdfunding exemption is effective immediately upon adoption of the JOBS Act. The SEC must adopt rules by December 31, 2012, implementing various rules under the crowdfunding exemption. What Crowdfunding Means for Companies This exemption will provide start-up companies with access to capital from unsophisticated investors who otherwise are not be able to participate in private placements, which are traditionally made only to accredited investors. However, the crowdfunding exemption is very limited in that it is available only to U.S. private companies raising no more than $1 million over a 12-month period. Since the securities can be offered to unsophisticated investors, the crowdfunding exemption contains very detailed issuer and intermediary disclosure requirements, SEC filing requirements and annual disclosure requirements. Further, the securities can only be offered through a broker or a funding portal. The broker-dealers and funding portals will need to comply with significant regulatory restrictions to offer crowdfunding services, which will increase the cost and slow the pace of a crowdfunding capital raise. These restrictions may create practical limitations and challenges for issuers seeking to use this exemption, and founders may need to pay for these regulatory requirements through additional dilution. https://facebook/groups/1377242045869845/
Posted on: Sat, 01 Mar 2014 03:16:21 +0000
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