SEC on Proposed Rules for Crowdfunding
AT
TODAY’S SECURITIES AND EXCHANGE COMMISSION (SEC) Open Meeting, regulators
unanimously approved proposing rules that would implement Title III of the
Jumpstart our Business Startups (JOBS) Act to permit companies to offer and
sell securities through crowdfunding.
·
Commissioners agree that the proposed
rules will create greater opportunities for capital formation, but must strike
a balance to ensure proper investor protection.
·
SEC staff explain that the rules would
require offerings to go through an intermediary, in the form of a broker-dealer
or funding portal, to act as a “gate-keeper” to minimize fraud and provide
information.
·
Investors and issuers would be limited
in the amounts of money they can raise and invest through crowdfunding.
Opening
Remarks
SEC
Chair Mary Jo White, in her opening remarks, stated that the
crowdfunding platforms in place up until this point have not allowed investors
to share in returns or profits of small businesses, as this would have
triggered the application of Federal securities laws. She noted that the JOBS
Act created an exemption from this requirement for crowdfunding venues and that
the proposed rules from the SEC seek to create a regulatory structure
foundation for these funding methods.
White
continued that the proposed rules contain certain parameters including: the
amount of money that can be raised and invested; disclosure requirements;
conditions for re-sale of securities; and a mandate that transactions be
conducted through a broker-dealer or a funding portal.
White
also mentioned that the SEC staff is developing a comprehensive work plan to
monitor the impact of the new rules to determine: the types of issuers using
the exemption; how issuers and intermediaries are complying with the rules; and
how the rules affect capital formation.
Staff
Explanation
Keith
Higgins,
Director of Division of Corporation Finance, explained that members of a
crowdfunding platform share information with one another about ventures looking
for funding and decide to invest “based on collective wisdom.”
Higgins
noted that the proposed rules would limit the amount of money that an issuer
can raise and that an investor can invest over a 12 month period. He also said
issuers would be required to make certain information, including financial
statements, available to investors and must file this information with the
Commission on an annual basis.
John
Ramsay,
Director of Division of Trading and Markets, said that the key investor
protection provision of the rules is that offers must be conducted through
intermediaries that are subject to SEC and self-regulatory organization (SRO)
oversight. He also recommended that the Commission propose for comment a rule governing
these intermediaries and added that the Financial Industry Regulatory Authority
(FINRA) will be filing a notice of its own rules in this space.
Sebastian
Gomez,
Division of Corporation Finance, explained that under the proposed rules, “a
company would be able to raise a maximum aggregate amount of $1 million through
crowdfunding offerings in a 12 month period.” He also noted that investors
would be permitted to invest up to $2,000 or 5 percent of their annual income
or net worth, if both their annual income and net worth are less than $100,000
or 10 percent of their annual income or net worth, if either their annual
income or net worth is more than $100,000. He added that the latter investors
would not be able to purchase more than $100,000 of securities through
crowdfunding during the 12-month period.
Gomez
noted that certain companies would be excluded from this exemption including:
1) non-U.S. companies; 2) companies that already are SEC reporting companies;
3) certain investment companies, 4) companies that are disqualified under the
proposed disqualification rules; 5) companies that have failed to comply with
the annual reporting requirements in the proposed rules; and 6) companies that
have no specific business plan or plan to engage in a merger or acquisition
with an unidentified company or companies.
On
disclosure requirements, he said that companies would be required to provide:
1) information about officers and directors; 2) a description of the business
and the use of the proceeds; 3) terms of the offering; and 4) the company’s
financial statements.
Leila
Bham,
Division of Trading and Markets, further explained that intermediaries must: 1)
provide investors with education material; 2) take measures to reduce the risk
of fraud; 3) obtain information about investor income and net-worth; 4) make
information about the issuer and offering available on the platform; 5) ensure
the proper transfer of funds and securities; 6) provide channels of
communication for discussion on the offerings; and 7) comply with anti-money
laundering and privacy requirements.
Bham
added that funding portals should have no interest in the offerings and would
be prohibited from: 1) offering investment advice; 2) soliciting offers on its
website; 3) imposing restrictions on compensation for solicitations; and 4)
holding, possessing, or handling investor funds or securities.
She
also recommended that the Commission provide conditional safe harbors for
funding portals and issuers for certain activities consistent with the
regulations.
Commissioner
Comments
Commissioner
Luis Aguilar
stated his support for the proposed rules but expressed concern about the risks
involved in investing in small companies, noting that the majority of new
businesses fail. He said that a crowdfunding investor must be willing to
hold the security and the risk associated with it indefinitely.
Aguilar
hoped that risk would be minimized through disclosure requirements, investor
limits, and the “gate-keeper” role of the intermediaries.
Commissioner
Daniel Gallagher
supported the proposed rules and said he was “glad the President and Congress
forced” the SEC to focus on small businesses through the JOBS Act. He
said that the proposal is “generally careful not to add additional frictions to
the marketplace” and that he looks forward to hearing comments on the 295
questions posed in the proposal.
Commissioner
Kara Stein
supported the proposal, saying that it would allow the “wisdom of the crowd to
identify and reward with capital good ideas.” She stated that she is
looking for guidance from the commenters on 1) the ambiguity in the statute on
how much a single investor is permitted to invest, and which test should apply;
2) whether to permit funding portals not based in the U.S. to register and
operate; and 3) the issue of record keeping and possible third party solutions
to track who owns the securities.
Commissioner
Michael Piwowar
also supported the proposal and stated that it presents a number of challenges
as well as opportunities. He noted that with the proposed rule, all investors,
not just accredited ones, would have the opportunity to invest in startups at
an earlier stage than ever before. He added that he looked forward to
“unleashing the wisdom of the crowd” on the proposal during the comment period.
To
view the full text of the proposed rules, please click here.
For
more information on this meeting, please click here.
To
view a webcast of this meeting, please click here.
AT
TODAY’S SECURITIES AND EXCHANGE COMMISSION (SEC) Open Meeting, regulators
unanimously approved proposing rules that would implement Title III of the
Jumpstart our Business Startups (JOBS) Act to permit companies to offer and
sell securities through crowdfunding.
·
Commissioners agree that the proposed
rules will create greater opportunities for capital formation, but must strike
a balance to ensure proper investor protection.
·
SEC staff explain that the rules would
require offerings to go through an intermediary, in the form of a broker-dealer
or funding portal, to act as a “gate-keeper” to minimize fraud and provide
information.
·
Investors and issuers would be limited
in the amounts of money they can raise and invest through crowdfunding.
Opening
Remarks
SEC
Chair Mary Jo White, in her opening remarks, stated that the
crowdfunding platforms in place up until this point have not allowed investors
to share in returns or profits of small businesses, as this would have
triggered the application of Federal securities laws. She noted that the JOBS
Act created an exemption from this requirement for crowdfunding venues and that
the proposed rules from the SEC seek to create a regulatory structure
foundation for these funding methods.
White
continued that the proposed rules contain certain parameters including: the
amount of money that can be raised and invested; disclosure requirements;
conditions for re-sale of securities; and a mandate that transactions be
conducted through a broker-dealer or a funding portal.
White
also mentioned that the SEC staff is developing a comprehensive work plan to
monitor the impact of the new rules to determine: the types of issuers using
the exemption; how issuers and intermediaries are complying with the rules; and
how the rules affect capital formation.
Staff
Explanation
Keith
Higgins,
Director of Division of Corporation Finance, explained that members of a
crowdfunding platform share information with one another about ventures looking
for funding and decide to invest “based on collective wisdom.”
Higgins
noted that the proposed rules would limit the amount of money that an issuer
can raise and that an investor can invest over a 12 month period. He also said
issuers would be required to make certain information, including financial
statements, available to investors and must file this information with the
Commission on an annual basis.
John
Ramsay,
Director of Division of Trading and Markets, said that the key investor
protection provision of the rules is that offers must be conducted through
intermediaries that are subject to SEC and self-regulatory organization (SRO)
oversight. He also recommended that the Commission propose for comment a rule governing
these intermediaries and added that the Financial Industry Regulatory Authority
(FINRA) will be filing a notice of its own rules in this space.
Sebastian
Gomez,
Division of Corporation Finance, explained that under the proposed rules, “a
company would be able to raise a maximum aggregate amount of $1 million through
crowdfunding offerings in a 12 month period.” He also noted that investors
would be permitted to invest up to $2,000 or 5 percent of their annual income
or net worth, if both their annual income and net worth are less than $100,000
or 10 percent of their annual income or net worth, if either their annual
income or net worth is more than $100,000. He added that the latter investors
would not be able to purchase more than $100,000 of securities through
crowdfunding during the 12-month period.
Gomez
noted that certain companies would be excluded from this exemption including:
1) non-U.S. companies; 2) companies that already are SEC reporting companies;
3) certain investment companies, 4) companies that are disqualified under the
proposed disqualification rules; 5) companies that have failed to comply with
the annual reporting requirements in the proposed rules; and 6) companies that
have no specific business plan or plan to engage in a merger or acquisition
with an unidentified company or companies.
On
disclosure requirements, he said that companies would be required to provide:
1) information about officers and directors; 2) a description of the business
and the use of the proceeds; 3) terms of the offering; and 4) the company’s
financial statements.
Leila
Bham,
Division of Trading and Markets, further explained that intermediaries must: 1)
provide investors with education material; 2) take measures to reduce the risk
of fraud; 3) obtain information about investor income and net-worth; 4) make
information about the issuer and offering available on the platform; 5) ensure
the proper transfer of funds and securities; 6) provide channels of
communication for discussion on the offerings; and 7) comply with anti-money
laundering and privacy requirements.
Bham
added that funding portals should have no interest in the offerings and would
be prohibited from: 1) offering investment advice; 2) soliciting offers on its
website; 3) imposing restrictions on compensation for solicitations; and 4)
holding, possessing, or handling investor funds or securities.
She
also recommended that the Commission provide conditional safe harbors for
funding portals and issuers for certain activities consistent with the
regulations.
Commissioner
Comments
Commissioner
Luis Aguilar
stated his support for the proposed rules but expressed concern about the risks
involved in investing in small companies, noting that the majority of new
businesses fail. He said that a crowdfunding investor must be willing to
hold the security and the risk associated with it indefinitely.
Aguilar
hoped that risk would be minimized through disclosure requirements, investor
limits, and the “gate-keeper” role of the intermediaries.
Commissioner
Daniel Gallagher
supported the proposed rules and said he was “glad the President and Congress
forced” the SEC to focus on small businesses through the JOBS Act. He
said that the proposal is “generally careful not to add additional frictions to
the marketplace” and that he looks forward to hearing comments on the 295
questions posed in the proposal.
Commissioner
Kara Stein
supported the proposal, saying that it would allow the “wisdom of the crowd to
identify and reward with capital good ideas.” She stated that she is
looking for guidance from the commenters on 1) the ambiguity in the statute on
how much a single investor is permitted to invest, and which test should apply;
2) whether to permit funding portals not based in the U.S. to register and
operate; and 3) the issue of record keeping and possible third party solutions
to track who owns the securities.
Commissioner
Michael Piwowar
also supported the proposal and stated that it presents a number of challenges
as well as opportunities. He noted that with the proposed rule, all investors,
not just accredited ones, would have the opportunity to invest in startups at
an earlier stage than ever before. He added that he looked forward to
“unleashing the wisdom of the crowd” on the proposal during the comment period.
To
view the full text of the proposed rules, please click here.
For
more information on this meeting, please click here.
To
view a webcast of this meeting, please click here.