Crowdfunding Rules Proposed by SEC

The rules would ‘permit crowdfunding to begin,’ said SEC Chairwoman Mary Jo White

More On Legal & Compliance

from The Advisor's Professional Library
  • Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors.  When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
  • Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIA’s failure to stay within the scope of the Section 28(e) safe harbor may violate the advisor’s fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients’ transactions.

The Securities and Exchange Commission voted unanimously Wednesday to publish for public comment its congressionally mandated rules under Title III of the JOBS Act that would permit startups and small businesses to raise capital by offering and selling securities through crowdfunding.

The rules would “permit crowdfunding to begin,” said SEC Chairwoman Mary Jo White. “We want this market to thrive, in a safe manner for investors.”

The rules would limit the amount of money a company can raise and the amount an individual can invest, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

The Financial Industry Regulatory Authority released a regulatory notice the same day seeking comments on its rules specific to crowdfunding portals.

As the SEC explains, one of the key investor protections Title III provides for crowdfunding is the requirement that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. 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.

When Congress passed the JOBS Act, it directed the SEC to adopt rules to implement the new regulatory structure for crowdfunding, which as White noted, is a term that has come to describe an evolving method of raising money using the Internet.

The proposed parameters for companies and investors are as follows:

  • 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:
  • $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.
  • 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.

White said at the open meeting to announce the proposed rules that “the provisions among others are intended to help protect those looking to invest.” The JOBS Act also required the agency to propose a “bad actor” provision to bar certain issuers from taking advantage of the crowdfunding exemption. “This provision, which is designed to protect investors, is substantially similar to the bad actor rule for Regulation D offerings we adopted in July,” she said.

Because of the impact that this rule could have on the market, White also said that SEC staff has been directed to develop a "comprehensive work plan to review and monitor the use of the crowdfunding exemption" under the JOBS Act. "If the proposal is adopted, the staff will proceed under the work plan to evaluate the types of issuers using the new crowdfunding exemption, how issuers and intermediaries are complying with the rule, and whether the exemption is promoting capital formation and effectively protecting investors."

The proposal is out for a 90-day comment period.

---

Check out Top 10 Threats Facing Investors, Small Businesses on ThinkAdvisor.

Reprints Discuss this story
This is where the comments go.