KMK Law Corporate & Securities Blog

On Wednesday October 23, 2013, the Securities and Exchange Commission (SEC) voted unanimously to propose regulations for equity crowdfunding, which will enable unaccredited U.S. investors to invest in startups and small businesses.

Crowdfunding has become a growing trend for smaller companies wishing to raise capital for a variety of projects. Title III of the JOBS Act created an exemption under the federal securities regulations so that this type of funding method can be used to offer and sell securities as well. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.

Consistent with the JOBS Act, the proposed rules would permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

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. Investors, over the course of a 12-month period, would be permitted to invest up to either:

• $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000; or
• 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000.

During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding. Companies relying on the crowdfunding exemption to offer and sell securities would be required to file a disclosure form as the initial offer is made and an annual report with the SEC and provide it to investors. The information required includes a description of the business of the issuer and its anticipated business plan; a description of its financial condition; a description of the stated purpose and intended use of the proceeds of the offering; the target offering amount; and other information. To ensure disclosure of this information, the SEC has proposed Form C, which would be used for multiple types of filings that an issuer would be required to make, including the initial disclosures required for the offering, amendments, progress updates, and annual reports.

The proposed rules will likely undergo a lengthy comment period before they go into effect.