SEC’s Equity Crowdfunding Rules Finally Kick In

Eight portals had registered as of Monday to start crowdfunding

SEC Chairwoman Mary Jo White. SEC Chairwoman Mary Jo White.

Investors of any wealth level could start investing in startup ventures Monday as the Securities and Exchange Commission’s equity crowdfunding rules under the Jumpstart Our Business Startups (JOBS) Act officially took hold.

SEC Chairwoman Mary Jo White stated in a Thursday speech to the International Organization of Securities Commissions that per the agency’s final rules, which were issued last October and go into full effect Monday, companies will now be able to start raising capital through this “new regime” that's been “anxiously awaited by many small entrepreneurs and the advisors who help them.”

Crowdfunding intermediaries must be registered with the SEC as a broker or a funding portal and become a member of the Financial Industry Regulatory Authority. As of Monday, eight companies had registered as funding portals — Crowdboarders LLC, Indie Crowd Funder LLC, Jumpstart Micro Inc., NextSeed US LLC, SI Portal LLC, StartEngine Capital LLC, UFP LLC and Wefunder LLC.

The North American Securities Administrators Association issued for public comment the same day a proposed model rule requiring a notice filing for issuers conducting a federal crowdfunding offering in those states where either the issuer has its principal place of business or where 50% or greater of the aggregate amount of the offering has been purchased by residents.

The proposed uniform notice filing form simplifies the filing process for issuers by incorporating documents filed on the SEC’s EDGAR and including consent to service of process language within the form.

Comments are due to NASAA by June 17.

White said at the IOSCO event in Lima, Peru, that the SEC’s crowdfunding rules seek “to maintain strong investor protections, while also streamlining capital formation for smaller issuers,” but noted that as the market for securities-based crowdfunding “begins to develop this year,” the agency will “no doubt receive important input from investors and companies about how the requirements could be improved.”

White noted that investor protections around crowdfunding include requirements for SEC-registered intermediaries – broker‑dealers and funding portals – “to serve as gatekeepers to protect investors.”

The Regulation Crowdfunding rules allows sales of up to $1 million during a 12-month period, imposes investment limits for investors, and requires the offering to be made through either a registered broker or funding portal.

Companies also must comply with initial and ongoing disclosure requirements regarding their business and the securities offering and requirements for financial statements. 

The equity crowdfunding rules were the last of the SEC’s four capital raising measures the agency has introduced under the JOBS Act.

In 2013, the SEC created a new exemption that allows companies to engage in general solicitation of the public for certain unregistered securities offerings, provided that all purchasers are “accredited investors” and that issuers take reasonable steps to verify that status. 

The SEC plans to discuss on May 18 during its meeting of the Advisory Committee on Small and Emerging Companies the agency’s recently released report on ways to “modernize” the accredited investor definition as well as unregistered securities offerings under Regulation D.

In 2015, the SEC updated its rules for smaller offerings that allow companies to raise capital through the sale of securities to the general public without incurring the full cost of registration and reporting, via Regulation A+, which allows issuers to raise up to $50 million over a 12-month period. 

Since Reg A+ became effective last March, issuers have publicly filed more than 85 offering statements, while others have taken advantage of provisions in the rules that allow for nonpublic staff review of draft offering statements before publicly filing, White said at the IOSCO event.

The SEC has also qualified more than 30 offering statements from companies seeking to raise approximately $500 million, she said. 

The SEC also implemented statutory enhancements to the registration and reporting process for initial public offerings of common equity securities, known as the “IPO on-ramp.”

--- Check out SEC to Discuss Accredited Investor Definition, Reg D Offerings on ThinkAdvisor.

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