On October 23, 2013 the SEC proposed rules that if adopted would permit startups and small businesses to raise capital by publicly offering and selling securities through crowdfunding without registering the transactions with the SEC or a state securities regulator. Under the proposed crowdfunding rules:
- Small businesses would be able to raise up to $1 million per year from accredited or non-accredited investors.
- The SEC imposed various requirements on companies and investors that wish to participate in a crowdfunding offering, such as eligible investors would need to meet certain income or net worth thresholds, and those investors would be limited in the total amount they may invest in all crowdfunding offerings. In addition, companies would be required to file certain written information with the SEC as part of the offering (including financial statements), disclose that information to prospective investors, and after completion of the offering file annual reports with the SEC.
- A crowdfunding offering would be required to take place exclusively through an SEC-registered intermediary (either a broker-dealer or a funding portal), which would be subject to certain obligations and restrictions, including being:
- required to provide investors with educational materials and communication channels to discuss offerings on the intermediary's platforms; and
- prohibited from providing investment advice or engaging in certain other related activities.
There is a 90 day period in which persons may submit comments on the proposed crowdfunding rules. If adopted, the final rules will likely not be effective until the late spring or summer of 2014. Until the SEC adopts final crowdfunding rules, and those rules become effective, issuers and intermediaries may not rely on the proposed crowdfunding exemptions.
We are working on a more detailed client alert that will explain the proposed new rules and their potential implications in greater detail. Please watch for our alert in the coming days. In the meantime, if you have any questions regarding these new rules or the securities laws in general, please do not hesitate to contact us.