On October 30, 2015, the Securities and Exchange Commission (“SEC”) finally voted to adopt the final rules to implement Title III of the JOBS Act, popularly known as the “CROWDFUND Act (Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012)” (In this blog, we will just call it the Act.). See our previous blogs titled “SEC Votes To Adopt Federal Crowdfunding Rules” and “Crowdfunding: Is It Right for My Business?”. The final rules and forms will be effective May 16, 2016, and the forms enabling funding portals to register with the SEC will be effective January 29, 2016. While no one can use federal crowdfunding yet, it could be time to look at the rules and plan for its possible use in mid-2016. Intrastate crowdfunding remains an option and will be covered in our blog in the near future.
The final rules set forth requirements, at times with detailed instructions, applicable to issuers, investors, and intermediaries, in connection with crowdfunding transactions, as follows:
Limits on Capital Raised and Individual Investment
At the basic level, the Act exempts crowdfunded securities from the federal registration requirement for up to $1 million during a 12-month period when the transaction is conducted through an intermediary that is either a broker or a funding portal. For individual investors, the amount that can be invested is either the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth, or 10% of the annual income or net worth, not to exceed $100,000, if both the investor’s annual income and net worth are equal to or greater than $100,000. The final rules add, among other things, that an individual investor’s annual income and net worth will be calculated as they are for purposes of determining accredited investor status and that an issuer may rely on an intermediary to ensure that the aggregate amount of securities purchased by an investor will not cause the investor to exceed the limit, provided that the issuer does not know that the investor has exceeded or would exceed the investor limits. For more information on accredited investors, please see our previous blog “Raising Capital Through Exempt Offerings.”
The crowdfunding exemption is not available for any issuer that is a foreign/reporting/investment company, subject to a disqualification (“bad actors”), has sold securities under the exemption and is delinquent in its ongoing reports, or has no specific business plan other than engaging in a merger or acquisition with an unidentified company.
In our next post, we will discuss the disclosure and advertising requirements under the final rules.
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.
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.
 15 U.S.C. § 77d(a)(6).
 17 C.F.R. § 227.100(a) (emphasis in original).
 17 C.F.R. § 227.100(b). See also id. § 227.503.