Fix Crowdfunding Act.
We have been blogging about federal crowdfunding in this blog series this past month or so. As you know, Title III of the JOBS Act, also referred to as the “CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012),” exempts up to $1 million crowdfunded securities from the federal registration requirement when the transaction is conducted in certain ways.[1] For a detailed analysis of the final rules, please see our previous blog series “Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules.” Even before the final rules went into effect, however, efforts to amend Title III had been underway.
On March 23, 2016, a new bill dubbed the “Fix Crowdfunding Act” was introduced and referred to the House Committee on Financial Services.[2] The full text of the bill is available here. The recording of the hearing entitled “The JOBS Act at Four: Examining Its Impact and Proposals To Further Enhance Capital Formation,” held on April 14, 2016, is available here. Among the changes proposed are:
- Increasing the maximum amount that companies can raise in reliance on the crowdfunding exemption from $1 million to $5 million per year. The increase makes sense given that most startups and early-stage companies need more than $1 million to fund their initial operations, not to mention the substantial cost of crowdfunding transactions (for a detailed discussion of the expected cost of compliance, please see our previous blog series “Crowdfunding: Is It Right for My Business”);
- Allowing funding portals to disqualify issuers that knowingly made any untrue statement of, or omitted, a material fact or engaged in a fraudulent or deceitful act; requiring funding portals to obtain a background and securities enforcement regulatory history check on issuers as a minimum to reduce the risk of fraud; and clarifying that a funding portal is not considered an issuers for liability purposes, unless it knowingly made any untrue statement, or omitted, a material fact or engaged in any fraudulent or deceitful act;
- Allowing single-purpose funds (SPFs), which would pool many small investors together and then invest in the crowdfunding issuer as a single investor. This could potentially make it easier for issuers to deal with investors and to attract future investors and allow individual investors to take advantage of the guidance of professional investors; and
- Allowing issuers to “test the waters” by permitting solicitation of non-binding indications of interest from potential investors in the same way as it otherwise would in an actual crowdfunding transaction, other than filing the required information with the SEC, as long as it does not accept any investor funds and supplies any material change in the originally provided information to those investors.
As many speakers at the hearing suggested, the overarching concern is to strike the right balance between investor protection, transparency, making capital more accessible to small companies, and allowing ordinary folks to join in exciting early investment opportunities. The Fix Crowdfunding Act seems to be an attempt to address these concerns. As there is little, if any, data available on federal and even state crowdfunding, however, it remains to be seen where the balance lies.
This post was the sixth and last part of our multi-part series on crowdfunding under the JOBS Act. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. If you have any questions regarding the contents of this blog or other securities law issues, please contact us.
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.
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] 15 U.S.C. § 77d(a)(6).
[2] See generally H.R. 4855, 114th Cong. (2016). Unless otherwise noted, all references to the bill are to this citation.