Member Article

On October 23, 2013, the Securities and Exchange Commission (the “SEC”) issued proposed rules to effect Title III of the Jumpstart Our Business Startup (JOBS) Act, enacted on April 5, 2012. Title III and the proposed rules provide the framework for companies to raise capital through securities offerings using crowdfunding. Below is a summary of the proposed rules.

OVERVIEW

New proposed Section 4(a)(6) of the Securities Act of 1933 allows certain issuers to sell up to $1 million of securities within a twelve-month period using crowdfunding, if such securities are sold through an “intermediary.” Securities sold through other exemptions would not count toward the $1 million limit, but issuers relying on simultaneous or nearly simultaneous offerings using other exemptions must be careful that all the rules for each offering are followed (e.g., a Rule 506(b) offering cannot be subsequently made to investors who learned of the issuer or investment opportunity through the issuer’s previous Section 4(a)(6) offering because it would violate the non-solicitation rules of the Rule 506(b) offering). In addition, when calculating the amount of securities an issuer has sold, the issuer must include securities sold by entities controlled by, or under common control with, the issuer, as well as any securities sold by a predecessor of the issuer in a Section 4(a)(6) offering. Amounts received from friends and family, gifts, grants or loans, and donations received from traditional non-securities-based crowdfunding would not be included in the calculation.

Securities sold in a Section 4(a)(6) offering must be sold through a “platform” hosted by an intermediary - either a registered broker or a “funding portal,” a new type of regulated entity that would register with the SEC. A funding portal would host a platform on which the terms of the offering will be displayed, investors comment on and discuss the offering, issuers respond to investors’ inquiries regarding the company and/or the offering, and investment commitments are made by investors. Funding portals would only be permitted to host offerings of crowdfunded securities under the new proposed rules but broker-dealers could continue to assist issuers with all types of equity offerings, including crowdfunded offerings.

To read the full alert, click on the PDF linked below.

PDF - Crowdfunding-Proposed-Rules.pdf

If you have any questions about this topic, please contact a member of our Venture Capital/Emerging Company Practice Group.