Proposes Amendments to Existing Rules to Facilitate
Intrastate and Regional Securities Offerings
Washington D.C., Oct. 30, 2015 — The Securities and Exchange Commission today adopted final rules to permit
companies to offer and sell securities through crowdfunding. The
Commission also voted to propose amendments to existing Securities Act rules to
facilitate intrastate and regional securities offerings. The new rules
and proposed amendments are designed to assist smaller companies with capital
formation and provide investors with additional protections.
Crowdfunding is an evolving method of raising capital that has been used to
raise funds through the Internet for a variety of projects. Title III of
the JOBS Act created a federal exemption under the securities laws so that this
type of funding method can be used to offer and sell securities.
“There is a great deal of enthusiasm in the marketplace for crowdfunding,
and I believe these rules and proposed amendments provide smaller companies
with innovative ways to raise capital and give investors the protections they
need,” said SEC Chair Mary Jo White. “With these rules, the Commission has
completed all of the major rulemaking mandated under the JOBS Act.”
The final rules, Regulation Crowdfunding, permit individuals to invest in
securities-based crowdfunding transactions subject to certain investment
limits. The rules also limit the amount of money an issuer can raise
using the crowdfunding exemption, impose disclosure requirements on issuers for
certain information about their business and securities offering, and create a
regulatory framework for the broker-dealers and funding portals that facilitate
the crowdfunding transactions.
The new crowdfunding rules and forms will be effective 180 days after they
are published in the Federal Register. The forms enabling funding portals to
register with the Commission will be effective Jan. 29, 2016.
The Commission also proposed amendments to existing Securities Act Rule 147
to modernize the rule for intrastate offerings to further facilitate capital
formation, including through intrastate crowdfunding provisions. The
proposal also would amend Securities Act Rule 504 to increase the aggregate
amount of money that may be offered and sold pursuant to the rule from $1 million
to $5 million and apply bad actor disqualifications to Rule 504 offerings to
provide additional investor protection.
The SEC is seeking public comment on the proposed rule amendments for a
60-day period following their publication in the Federal Register.
# # #
FACT SHEET
Regulation Crowdfunding
SEC Open Meeting
Oct. 30, 2015
Oct. 30, 2015
Action
The Securities and Exchange Commission will consider whether to adopt final
rules that would allow the offer and sale of securities through
crowdfunding. The recommended rules would give small businesses an
additional avenue to raise capital and provide investors with important
protections. If adopted, this would complete the Commission’s major
rulemaking mandated under the JOBS Act.
Highlights of the Recommended
Final Rules
The recommended rules would, among other things, enable individuals to
purchase securities in crowdfunding offerings subject to certain limits,
require companies to disclose certain information about their business and
securities offering, and create a regulatory framework for the intermediaries
facilitating crowdfunding transactions. More
specifically, the recommended rules would:
·
Permit a company to raise a maximum aggregate amount
of $1 million through crowdfunding offerings in a 12-month period;
·
Permit individual investors, over a 12-month period,
to invest in the aggregate across all crowdfunding offerings up to:
o
If either their annual income or net worth is less
than $100,000, than the greater of:
§
$2,000 or
§ 5 percent of the lesser of
their annual income or net worth.
o
If both their annual income and net worth are equal to
or more than $100,000, 10 percent of the lesser of their annual income or net
worth; and
·
During the 12-month period, the aggregate amount of
securities sold to an investor through all crowdfunding offerings may not
exceed $100,000.
Under the recommended rules, certain companies would not be eligible to use
the exemption. Ineligible companies would include non-U.S. companies,
Exchange Act reporting companies, certain investment companies, companies that
are subject to disqualification under Regulation Crowdfunding, companies that
have failed to comply with the annual reporting requirements under Regulation
Crowdfunding during the two years immediately preceding the filing of the
offering statement, and 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.
Securities purchased in a crowdfunding transaction generally could not be
resold for one year. Holders of these securities would not count toward
the threshold that requires a company to register its securities under Exchange
Act Section 12(g) if the company is current in its annual reporting
obligations, retains the services of a registered transfer agent and has less
than $25 million in total assets as of the end of its most recently completed
fiscal year.
In addition, all transactions relying on the new rules would be required to
take place through an SEC-registered intermediary, either a broker-dealer or a
funding portal.
Disclosure by Companies
Companies that rely on the recommended rules to conduct a crowdfunding
offering must file certain information with the Commission and provide this
information to investors and the intermediary facilitating the offering,
including among other things, to disclose:
·
The price to the public of the securities or the
method for determining the price, the target offering amount, the deadline to
reach the target offering amount, and whether the company will accept
investments in excess of the target offering amount;
·
A discussion of the company’s financial condition;
·
Financial statements of the company that, depending on
the amount offered and sold during a 12-month period, are accompanied by
information from the company’s tax returns, reviewed by an independent public
accountant, or audited by an independent auditor. A company offering more
than $500,000 but not more than $1 million of securities relying on these rules
for the first time would be permitted to provide reviewed rather than audited
financial statements, unless financial statements of the company are available
that have been audited by an independent auditor;
·
A description of the business and the use of proceeds
from the offering;
·
Information about officers and directors as well as
owners of 20 percent or more of the company; and
·
Certain related-party transactions.
In addition, companies relying on the crowdfunding exemption would be
required to file an annual report with the Commission and provide it to
investors.
Crowdfunding Platforms
A funding portal would be required to register with the Commission on new
Form Funding Portal, and become a member of a national securities association
(currently, FINRA). A company relying on the rules would be required to
conduct its offering exclusively through one intermediary platform at a
time.
The recommended rules would require intermediaries to, among other things:
·
Provide investors with educational materials that
explain, among other things, the process for investing on the platform, the
types of securities being offered and information a company must provide to
investors, resale restrictions, and investment limits;
·
Take certain measures to reduce the risk of fraud,
including having a reasonable basis for believing that a company complies with
Regulation Crowdfunding and that the company has established means to keep
accurate records of securities holders;
·
Make information that a company is required to
disclose available to the public on its platform throughout the offering period
and for a minimum of 21 days before any security may be sold in the offering;
·
Provide communication channels to permit discussions
about offerings on the platform;
·
Provide disclosure to investors about the compensation
the intermediary receives;
·
Accept an investment commitment from an investor only
after that investor has opened an account;
·
Have a reasonable basis for believing an investor
complies with the investment limitations;
·
Provide investors notices once they have made
investment commitments and confirmations at or before completion of a
transaction;
·
Comply with maintenance and transmission of funds
requirements; and
·
Comply with completion, cancellation and
reconfirmation of offerings requirements.
The rules also would prohibit intermediaries from engaging in certain
activities, such as:
·
Providing access to their platforms to companies that
they have a reasonable basis for believing have the potential for fraud or
other investor protection concerns;
·
Having a financial interest in a company that is
offering or selling securities on its platform unless the intermediary receives
the financial interest as compensation for the services, subject to certain
conditions; and
·
Compensating any person for providing the intermediary
with personally identifiable information of any investor or potential investor.
Regulation Crowdfunding would contain certain rules that are specific to
registered funding portals consistent with their more limited activities than
that of a registered broker-dealer. The rules would prohibit funding
portals from, among other things: offering investment advice or making
recommendations; soliciting purchases, sales or offers to buy securities;
compensating promoters and other persons for solicitations or based on the sale
of securities; and holding, possessing, or handling investor funds or
securities.
The rules would provide a safe harbor under which funding portals could
engage in certain activities consistent with these restrictions. The
rules also would require funding portals to maintain certain books and records
related to their transactions and business.
Background
Crowdfunding is an evolving method of raising money through the Internet,
but it has generally not been used to offer and sell securities. That is
because offering a share of the financial returns or profits from business
activities could trigger the application of the federal securities laws, and an
offer or sale of securities must be registered with the SEC unless an exemption
is available.
The JOBS Act included an exemption to permit securities-based crowdfunding
and established the foundation for a regulatory structure for these
transactions. It also created a new entity – a funding portal – and
allows these Internet-based platforms or intermediaries to facilitate the offer
and sale of securities without having to register with the SEC as
brokers. The SEC was tasked with adopting rules to implement these
provisions, which are intended to facilitate capital raising by small
businesses while providing significant investor protections.
Staff Report
The staff would undertake to study and submit a report to the Commission no
later than three years following the effective date of Regulation Crowdfunding
on the impact of the regulation on capital formation and investor
protection.
What’s Next?
The new rules and forms would be effective 180 days after they are
published in the Federal Register, except that the forms enabling funding
portals to register with the Commission would be effective January 29,
2016.
FACT SHEET
Proposed Amendments to
Facilitate Intrastate and Regional Securities Offerings
SEC Open Meeting
Oct. 30, 2015
Oct. 30, 2015
Action
The Securities and Exchange Commission is considering whether to propose
amendments to Securities Act Rule 147 and Rule 504 of Regulation D. The
proposed amendments would be part of the Commission’s efforts to assist smaller
companies with capital formation consistent with its investor protection
mission.
Highlights of the Proposed
Amendments
Proposed Amendments to Rule
147
The proposed amendments would modernize Rule 147 to permit companies to
raise money from investors within their state without concurrently registering
the offers and sales at the federal level. The
proposed amendments to Rule 147 would, among other things:
·
Eliminate the restriction on offers, while continuing
to require that sales be made only to residents of the issuer’s state or
territory.
·
Refine what it means to be an intrastate offering and
ease some of the issuer eligibility requirements in the current rule.
·
Limit the availability of the exemption to offerings
that are registered in-state or conducted under an exemption from state law registration
that limits the amount of securities an issuer may sell to no more than $5
million in a 12-month period and imposes an investment limitation on investors.
Proposed Amendments to Rule
504
The proposed amendments to Rule 504 of Regulation D would increase the
aggregate amount of securities that may be offered and sold under Rule 504
in any 12-month period from $1 million to $5 million and disqualify certain bad
actors from participation in Rule 504 offerings. The proposed rules
would facilitate capital formation and increase investor protection in such
offerings.
Background
The Commission adopted Rule 147 in 1974 as a safe harbor to a statutory
intrastate exemption – Section 3(a)(11) – that was included in the Securities
Act upon its adoption in 1933. Market participants and state regulators
have indicated that the combined effect of the statutory limitation on offers
to persons residing in the same state or territory as the issuer and the
prescriptive eligibility requirements of Rule 147 limit the availability of the
exemption for companies that would otherwise conduct intrastate
offerings.
What’s Next?
The Commission will seek public comment on the proposed rules for 60
days. The Commission will then review the comments and determine whether
to adopt the proposed rules.
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