SEC Investor Bulletin: Crowdfunding for Investors.
Crowdfunding under federal law became legal on May 16, 2016, but efforts to prep potential investors and intermediaries have been in the works for much longer. On February 16, 2016, the Office of Investor Education and Advocacy of the Securities and Exchange Commission (“SEC”) issued “Investor Bulletin: Crowdfunding for Investors” [1] to educate investors about what it means to make a crowdfunding investment, what to keep in mind, and how. The full text of the investor bulletin is available here.
As you know, Title III of the JOBS Act (also referred to as the CROWDFUND Act) exempts up to $1 million crowdfunded securities from the federal registration requirement when the transaction is conducted in certain ways. [2] We won’t reiterate the details of the law in this post, as we already did in our previous series “Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules.” The investor bulletin explains how the rules work in practice in plain English. Of note, the bulletin explains how to calculate net worth, which, in part, determines how much an individual can invest during any 12-month period. Calculating net worth involves adding up all assets and subtracting all liabilities. Easy enough, right? But what counts as assets or liabilities? The SEC explains that the value of the primary residence is excluded in net worth calculation. In other words, for purposes of crowdfunding, your home does not count as an asset. In addition, any mortgage or other loan on the home does not count as a liability, except any amount over the fair market value of the home (i.e., mortgage is underwater) and any increase in the loan amount in the 60 days prior to the individual’s purchase of the crowdfunded securities (even if the loan amount does not exceed the value of the home). Still with us? Fortunately, the bulletin comes with a table of helpful examples of calculations to determine crowdfunding investment limits.
The investor bulletin also reminds investors of important things to keep in mind when making a crowdfunding investment. For example, crowdfunding under federal law must be done through an intermediary that is either a broker-dealer or a funding portal, registered with the SEC, and a member of the Financial Industry Regulatory Authority (“FINRA”). The bulletin informs that information about a broker can be obtained by visiting FINRA’s BrokerCheck or calling FINRA’s toll-free BrokerCheck hotline at (800) 289-9999 and information about a funding portal by visiting the SEC’s EDGAR website.
The bulletin also warns investors that early-stage investments may involve very high risks, including the speculative nature of startups and early-stage ventures, difficulty in valuating such companies, restrictions on cancellation and resale, and limited disclosure about the issuer, its business plan, and the offering, among other things. For investors to stay informed, the SEC recommends taking advantage of the educational materials offered by intermediaries to understand the risks of making crowdfunding investments and to determine whether a particular investment is appropriate for the investor. Importantly, the SEC warns that, as with any investments, and particularly in light of the relative ease with which early-stage companies can raise funds through crowdfunding, there is no guarantee that crowdfunding investments will be immune from fraud (for an example of fraudulent crowdfunding scheme, see our previous blog “Crowdfunding Gone Wrong: Some Points of Caution” here).
This post was the second part of a multi-part series on crowdfunding under the JOBS Act. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss the SEC’s small entity compliance guide on registration of funding portals.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] SEC, Investor Bulletin: Crowdfunding for Investors (Feb. 16, 2016), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html. Unless otherwise noted, all references to the investor bulletin are from this citation.
[2] 15 U.S.C. § 77d(a)(6).