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Proposed Crowdfunding Rules – Part II

As required by Title III of the JOBS Act, on October 23, 2013, the SEC has published proposed crowdfunding rules.  The SEC has dubbed the new rules “Regulation Crowdfunding.” The entire text of the rule release is available on the SEC website.


Crowdfunding generally is where an entity or individual raises funds by seeking small contributions from a large number of people.  The crowdfunder sets a goal amount to be raised from the crowd with the funds to be used for a specific business purpose.  In addition, a crowdfunding campaign allows the crowd to communicate with each other, thus adding the benefit of the “wisdom of the crowd.”  Small businesses can particularly benefit from crowdfunding as they are not limited by restrictions on general solicitation and advertising or purchaser qualification requirements. 

Title III of the JOBS Act, called the Crowdfund Act, amends Section 4 of the Securities Act of 1933 (the Securities Act), adding new Section 4(a)(6), to create a new exemption to the registration requirements of Section 5 of the Securities Act.  The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities in any 12-month period, as long as no individual investment exceeds certain threshold amounts.  The proposed rules provide for an overall investment ceiling of $100,000 with “greater than” limitations based on annual income and net worth.  That is, if both annual income and net worth are less than $100,000, then a limit of $2,000 or 5% of annual income or net worth, whichever is greater, would apply.  If either annual income or net worth exceeds $100,000, then a limit of 10% of annual income or net worth, whichever is greater, not to exceed $100,000 would apply.

The Crowdfund Act requires that all crowdfunding offerings be conducted through an intermediary that is a broker-dealer or funding portal that is registered with the SEC and a member of a registered self-regulatory organization (SRO).  Currently that SRO is the Financial Industry Regulatory Authority (FINRA).  Although funding portals will have to register with the SEC and become a member of FINRA, they will not have to register as a broker-dealer.  FINRA has already published proposed rules to regulate funding portals.

In addition, the Crowdfund Act requires that Issuers and intermediaries provide certain information to investors, potential investors and the SEC. The ability to utilize crowdfunding will be subject to bad boy restrictions and other disqualifying events.  All crowdfunding Issuers must be United States entities.  Crowdfunding Issuers cannot be subject to the reporting requirements of the Securities Exchange Act of 1934 or an investment company as defined by the Investment Company Act of 1940. 

The JOBS Act required the SEC to draft rules implementing the provisions of the Act.  On October 23, 2013, the SEC issued a 585-page rule release.  This is the second part in my summary of the proposed rules.

Summary Breakdown of Proposed New Rules – Requirements on Issuers

Disclosure Requirements

Pursuant to the Crowdfund Act as set forth in the JOBS Act, an Issuer who offers or sells securities in a crowdfunding offering must file with the SEC and provide investors and the funding intermediary (whether a funding portal or broker-dealer) and make available to potential investors:

(a) The name, legal status, physical address, and website address of the Issuer;

(b)  The names of the directors and officers, and each person holding more than 20% of the shares of the Issuer;

(c)  A description of the business of the Issuer and the anticipated business plan of the Issuer;

(d)  A description of the financial condition of the Issuer, including (i) for offerings of $100,000 or less, income tax returns for the most recently completed year and financial statements certified by the principal executive officer as true and correct; (ii) for offerings of more than $100,000 but less than $500,000, financial statements reviewed by an independent public accountant in accordance with SEC standards and rules for such review; and (iii) for offerings more than $500,000, audited financial statements (note that the offering amount is determined by totaling all Section 4(6) offerings within the preceding 12-month period) ;

(e)  A description of the stated purpose and intended use of the proceeds of the offering;

(f)  The target offering amount and a deadline to reach the target and regular updates regarding the progress of meeting the target;

(g)  The price to the public of the securities and the method of determining the price;

(h)  A description of the ownership and capital structure of the Issuer including (i) terms of other securities offered and all other classes of securities of the Issuer including details on the differences and potential dilution that could result from a different class (for example, if preferred stock was converted); (ii) a description of how the exercise of rights held by principal shareholders could negatively impact the purchasers of the securities being offered; (iii) name and ownership levels of each existing shareholder owning 20% or more; (iv) how securities being offered are valued and examples of how they may be valued in the future; and (v) risks related to minority ownership and other capital-related risk, such as by the issuance of additional shares, sales of assets, or transactions with related parties.

Many commenters expressed concern that these requirements would be burdensome to Issuers. 

The SEC’s proposed rules on each of the disclosure requirements are discussed below.  The proposed rules do not create or mandate a specific disclosure format for information to be provided to investors, but rather will leave that to the industry working with intermediaries and counsel.  As for information required to be submitted to the SEC, the proposed rules create a new Form C.  The Form C would be a fillable form that can be submitted to the SEC with the ability to add attachments as needed.

Detailed Offering Statement Disclosure Requirements

                General Information about the Issuer, Officers and Directors

The proposed rules require an Issuer to disclose:

  • Its name and legal status, including form of organization, jurisdiction and date of organization;
  • Its physical address and website address; and
  • The names of the directors and officers, including any person holding a similar position or providing a similar function, all positions and offices held by such person, the period of time they have served such position and a description of their business experience during the past three years, including their principal occupation and employment and the name of the business entity in which such occupation or employment took place.
  • The name of persons, as of the most recent practicable date, who are the beneficial owners of 20% or more of the Issuer’s outstanding voting equity securities;

The SEC has sought comment on, among other items, whether the three-year look back and amount of disclosure on officers and directors is adequate, and whether the 20% beneficial ownership based on voting power threshold is adequate as opposed to requiring 20% based on number of shares or such other calculation. 

Part III will continue with a discussion of the detailed Issuer disclosure requirements in the proposed rules. 

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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