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Crowdfunding Lawyer: Summary of SEC’s Proposed Crowdfunding Rules

By Eric Misterovich

On October 23, 2013 the Securities and Exchange Commission (“SEC”) issued proposed regulations (“proposed rules”) to permit companies to offer and sell securities through crowdfunding as contemplated by Title III of the JOBS Act (“JOBS Act”). In sum, the purpose of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors. The SEC will seek public comment on the proposed rules for 90 days, which it will review and determine whether to adopt into the proposed rules.


Following is a summary of the proposed rules.


Investment Restrictions


  • An eligible company may raise a maximum aggregate amount of $1 million through crowdfunded offerings in a 1-year period.
  • Investors are allowed to invest, over a 1-year period, up to:
    • $2,000 or 5 percent 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 percent 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 1-year period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
  • As mandated by Title III of the JOBS Act, securities purchased in a crowdfunding transaction cannot be resold for a period of 1 year.
  • Moreover, certain companies would not be eligible to use the crowdfunding exemption, including, non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.


Disclosures Required


Companies engaged in a crowdfunding offering will be required to file certain information with the SEC, provide it to investors and the intermediary that is facilitating the crowdfunding offering, and make it available to potential investors.


  • Information about officers, directors, and owners of 20 percent or more of the company;
  • A description of the company’s business and the use of proceeds from the offering;
  • The price to the public of the securities being offered, 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;
  • Certain related-party transactions;
  • A description of the company’s financial condition; and
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, must be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.


The company will be required to amend its offering document to reflect any material changes and to provide updates on the company’s progress toward reaching the target offering amount. Additionally, the company will be required to file an annual report with the SEC and provide copies to investors.


Online Crowdfuning Platforms


All crowdfunding transactions must take place exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant. The proposed rules require these intermediaries to:


  •  Provide investors with educational materials;
  • Undertake measures to reduce the risk of fraud;
  • Make available information about the issuer and the offering;
  • Provide communication channels to allow discussions about offerings on the platform; and
  • Facilitate the offer and sale of crowdfunded securities.


Moreover, a funding portal would be prohibited from:


  • Offering investment advice or making recommendations;
  • Soliciting offers to buy, purchases, or sales of securities offered or displayed on its website;
  • Imposing certain restrictions on compensating people for solicitations; or
  • Holding or handling funds or securities belonging to investors.


Lastly, the proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions. If you seek a crowdfunding lawyer, contact Revision Legal today at 855-473-8474.

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