The Securities and Exchange Commission on Wednesday released its long-awaited proposed rules governing the practice of equity-based crowdfunding that allows startups to sell securities directly to the public.
Legislation from the JOBS Act, signed into law by President Obama in January of 2012, directed the SEC to propose the rules by last October. But that date passed without any action. So nearly a year later, the SEC has published its proposed rules, which now await a 90 day comment period from the public before they become adopted.
For years, artists, game developers, filmmakers, authors, entrepreneurs and others have been using Kickstarter, Rockethub, IndieGoGo and other crowdfund raising platforms to support their projects.
The difference is that those platforms allow for perk-based crowdfunding. People give money to the various projects in exchange for a good or service or some other kind of perk. They do not take an ownership stake in the company.
Online sites like Angellist.com already allow companies to raise money from accredited investors or high networth individuals.
But under the JOBS Act, a section called “Title III” allows startups and small businesses to offer and sell securities on equity-based crowdfunding portals to anyone. And the SEC is tasked with regulating the practice.
The SEC has delayed releasing its rules to make sure that they can protect the interest of investors in these news opportunities.
“There is a great deal of excitement in the marketplace about the crowdfunding exemption, and I’m pleased that we’re in a position to seek public comment on a proposal to permit crowdfunding,” SEC Chair Mary Jo White said in a news statement. “We want this market to thrive in a safe manner for investors.”
The legislation has also created a “new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.”
The proposed rules allow a company to raise a maximum of $1 million through crowdfunding in 12 months from investors who can spend $2,000 or up to 5 percent of their annual income or net worth. “During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding,” according to the SEC.
The following are not allowed to use equity-based crowdfunding: non-U.S. companies, companies that already report to the SEC, “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.”
And any securities bought through a crowdfunding portal cannot be resold for a year.
Businesses looking to crowdfund would be required to file information with the SEC and provide it to potential investors. The companies would be required to disclose information about officers and director and others that own 20 percent or more of a company.
They are also required to provide a description of the company’s business and what they plan to spend the money on. The price for the securities being offered and the deadline to meet its goals and whether it will accept investments in excess of the target offering amount.
The companies also have to provide financial statements and other information on the financial condition of the company along with tax returns and an audit by a public accountant or auditor. Companies would also be required to amend the documents to reflect any changes in its business.
“Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.”
The proposed rules also cover the crowdfunding platforms, the new entity set up online to sell the securities to the public. These portals would be required to provide investors with educational materials and take measures to reduce fraud.
The portals cannot offer investment advice or make recommendations. They cannot solicit “purchases, sales or offers to buy securities offered or displayed on its website.”