SEC Releases Proposed Regs for Crowdfunding – Bruce E. Methven

Finally there are proposed SEC regulations for “true” crowdfunding as established by the JOBS Act!  (These are way past the deadlines set by the Act.)  We now have a much better idea how the SEC will handle crowdfunding that involves the sale of stock or promissory notes. 


The SEC released the proposed regulations on October 23.  There is a 90-day period for comments beginning when the proposed regulations appear in the Federal Register (which will be soon).  This type of crowdfunding will not be available, though, until after the SEC receives comments and issues final regulations. 


Although the JOBS Act language was ambiguous, in one bit of good news the SEC has clarified that up to $1 million may be raised by crowdfunding in a 12-month period without counting amounts raised by other exempt offerings.


On the other hand, amounts sold by entities controlled by the issuer or under common control with the issuer, as well as any amounts sold by any predecessor of the issuer, all count toward the $1 million crowdfunding limit.  In addition, an issuer cannot solicit purchasers for a concurrent separate offering by way of a crowdfunding offering or vice versa.  In a way, this may be thought of as a prohibition on a “bait and switch” with respect to simultaneous offerings.


There was also ambiguity about the two classes of investors for crowdfunding.  In another piece of good news, the SEC has clarified that under the proposed rules, only if both annual income and net worth are less than $100,000, then a limit of $2,000 or 5 percent of the investor’s annual income or net worth, whichever is greater, applies. If either annual income or net worth exceeds $100,000, then a limit of 10 percent of the investor’s annual income or net worth, whichever is greater, but not to exceed $100,000, applies.


The JOBS Act limits crowdfunding to issuers who, among other things, are organized under the laws of a state or territory of the United States or the District of Columbia (no foreign issuers), are not reporting companies (public companies required to file periodic reports with the SEC), and are not investment companies (no crowdfunding hedge funds!).


The proposed rules also exclude an issuer that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies – but this is pretty standard for offerings. 


Interestingly, the proposed regulations require issuers to disclose the amount of money the intermediary is being paid.  This may lead to some price competition among the intermediaries. 


For offerings of more than $500,000, the proposed rules require issuers to provide audited financial statements.  One question is whether this will nudge issuers who wish to raise more than $500,000 to other types of offerings that have no requirement of audited financials. 


Although a crowdfunding offering must be conducted through an intermediary, under the proposed rules an issuer could publish a notice advertising the terms of an offering provided that the notice includes the Internet address of the intermediary’s platform.  The permitted notices would be similar to a brief “tombstone ad,” but the issuer could distribute the notice by any means, including in newspapers or on social media sites.


In an intriguing approach, the SEC is not requiring issuers to set a fixed price initially – so dynamic pricing is allowed.  On the other hand, investors would have a reasonable opportunity to cancel the investment commitment after the price is fixed.


At least for the time being, crowdfunding portals will have to register both with FINRA and with the SEC.  Also, because of concerns about conflict of interest, an intermediary and its directors, officers and partners cannot have any financial interest in an issuer using its services.


The intermediary must obtain a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer. 


Because the SEC wants to encourage potential investors to compare notes, the proposed rules require an intermediary to provide channels through which investors can communicate with one another (and with representatives of the issuer) about the offering.


Along these lines, the proposed rules would give investors an unconditional right to cancel an investment commitment for any reason until 48 hours prior to the deadline identified in the issuer’s offering materials.


The proposed regs are available at and comments may be submitted at


It will be very interesting to see the resulting public comments – and the SEC’s final regulations.


Bruce E. Methven





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