Today, at a very upbeat and aspirational meeting,  the Securities Exchange Commission voted unanimously (unlike Title II) to approve proposed Regulation Crowdfunding to implement Title III of the JOBS Act.  This a huge step toward making equity crowdfunding a reality.

Commission Gallager stated, “the law is a game-changer.”

Commission Piwowar looks forward to “unleashing the wisdom of the crowd.”

Commission Stein stated that “we’ve done bold experiments before, some work and some didn’t.”

Commissioner Aguilar hopes that fraud is minimized by disclosure rules, wisdom of the crowd, maximum investment thresholds and the “gate-keeping role of the intermediary.”

As background, the SEC just released this Fact Sheet giving a good overview of the statute and some additional color on the proposed rules.  While we await issuance of the full rule proposal (typically released within 1-2 todays), here are some notable items discussed during today’s meetings:

  1. Commissioner Gallager states that they did not introduce unnecessary frictions in the process – which hints at a friendlier set of rules (and perhaps easier income/net worth verification requirements than Title II)
  2. There are safe harbors for funding portal activities, which may include guidance on what is and is not investment advice and holding investor fund and securities.
  3. Crowdfund securities will be exempt from the shareholder limits triggering public reporting requirements, potentially clearing the way for a secondary market of crowdfund securities
  4. Funding portals must be online/internet platforms and available to all.
  5. There are bad actor disqualification provisions similar to the Reg D provisions
  6. There will be recordkeeping requirements for issuers regarding their shareholders.  This may require a registered transfer agent or similar process.
  7. Foreign portals will be allowed, subject to certain requirements
  8. Funding portals will be required to watch for fraud and to conduct Anti-Money Laundering (AML) checks
  9. FINRA will release proposed rules for funding portals shortly
  10. There are 295 questions on which the SEC is seeking comment
  11. There will be a 90 day comment period.  Even if final rules were implemented immediately following the comment period (unlikely), it would be another 60 days before effectiveness of the rules.  This means the earliest possible effective date is around early April, but more likely we are looking at early Summer 2014.

Key questions for the Rule Proposal:

  1. What steps will be required to verify investor income or net worth?  We’ve seen previous reports that this may be self-certification.
  2. What are the safe harbors for portal activities?
  3. Will funding portals be able to recommend or screen issuers on their site without this being considered giving investment advice?
  4. Will the SEC confirm that funding portals can take transactions based compensation (i.e. percentage raise)?
  5. What are the details of the issuer disclosure requirements?  How burdensome will these be?
  6. Can an issuer conduct simultaneous Reg D and Crowdfund offerings?  What about a 506(c)?
  7. Will holding companies be allowed to pool Crowdfund investors into a special purpose vehicle?
  8. Will investment limits apply to accredited investors?
  9. Rules surrounding paid promoters / sharing compensation
  10. Liability Issues – will directors and officers be personally liable?

In general it sounds like the SEC may have stayed pretty close to the statute and has at least sought to make the rules workable.

Stay tuned for coverage of the upcoming rules release and ongoing analysis.

game changer

This post was written by James Han on September 6, 2016

Equity Crowdfunding Rules Unanimously Approved – It Begins


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