Each time before accepting any investment commitment, an intermediary must have a reasonable basis for believing that the investor satisfies the investment limitations discussed above; in doing so, an intermediary may rely on an investor’s representations concerning the investor’s annual income, net worth, and the amount of the investor’s other investments made under the crowdfunding exemption, unless the intermediary has reason to question the reliability of such representation. An intermediary must also obtain from the investor: (i) a representation that the investor has reviewed the intermediary’s educational materials discussed above, understand that the entire amount of his or her investment may be lost, and is in a financial condition to bear the loss; and (ii) a questionnaire completed by the investor demonstrating the investor’s understanding regarding restrictions on the investor’s ability to cancel an investment commitment, resale restrictions, and risks of loss.
An intermediary must provide on its platform communication channels by which persons can communicate with one another and with representatives of the issuer about offerings made available on the intermediary’s platform, which should be open to the public for viewing only, and require that any commenter clearly disclose with each posting whether he or she is engaging in promotional activities on behalf of an issuer or is otherwise compensated for such activities. An intermediary must also send to the investor a prompt notification, upon receipt of an investment commitment, disclosing the dollar amount of the investment commitment, the price of the securities, if known, the name of the issuer, and the date and time by which the investor may cancel the commitment.
Maintenance and Transmission of Funds
A funding portal must use certain qualified third parties to hold investor funds in an escrow account until the aggregate amount of investment commitments from all investors is equal to or greater than the target amount of the offering and the cancellation period has elapsed, and in no event earlier than 21 days after the date on which the intermediary makes publicly available the information required to be provided by the issuer on its platform. A funding portal should direct the third party to return funds to investors when an investment commitment has been canceled or when an issuer does not complete the offering.
Additionally, an intermediary must, at or before the completion of a transaction, give each investor a notification disclosing the date of the transaction, the type of security being purchased, the identity, price, and number of securities purchased by the investor, as well as the number of securities sold by the issuer in the transaction and the price(s) at which the securities were sold, and the source, form, and amount of any remuneration received by the intermediary in connection with the transaction, among other things.
Completion of Offerings, Cancellations, and Reconfirmations
Generally speaking, an investor may cancel an investment commitment for any reason until 48 hours prior to the deadline identified in the offering materials. An issuer that reaches the target amount prior to the deadline may close the offering on an earlier date, provided that the offering remains open for a minimum of 21 days, the intermediary provides notice to any potential investors and sends notice to investors that have made commitments that contain certain specified information. If there is a material change to the terms of the offering or to the information provided by the issuer, the intermediary must send notice to any committed investor of such change and that the investor’s investment commitment will be canceled unless the investor reconfirms their commitment within five business days. If an issuer does not complete an offering, an intermediary must, within five business days, send each investor a notification of the cancellation, direct the refund of investor funds, and prevent investor from making further commitments for that offering on its platform.
While it’s good news that the rules will finally allow smaller companies to raise capital through crowdfunding, their practicality remain to be seen, given the significant and ongoing regulatory and financial burdens on issuers and intermediaries alike. We think it best to consult with experienced securities law counsel to evaluate whether federal crowdfunding is right for your business and to discuss other available options, e.g., the new Rule 506(c) offerings, which some commentators go so far as to claim to be the “real” crowdfunding exemption (for more information on Rule 506(c), visit our previous blog “Raising Capital Through Exempt Offerings”).
This post was a part of a multi-part series on the SEC final rules on the crowdfunding exemption. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. If you have any questions about the content of this blog or other securities law issues not discussed here, 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.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. R. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
 17 C.F.R. § 227.303(b).
 Id. § 227.303(c).
 Id. § 227.303(d).
 Id. § 227.303(e).
 Id. § 227.303(f).
 Id. § 227.304(a).
 Id. § 227.304(b).
 Id. § 227.304(c).
 Id. § 227.304(d).