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JOBS Act: Proposed Rules for Crowdfunding
- 1. JOBS Act Update: Crowdfunding Benjamin M. Hron Bhron@mccarter.com 617.449.6584 @HronEsq Twitter #mecic 12.18.13
- 2. Overview of Proposed Rules ♦ ♦ ♦ ♦ ♦ Crowdfunding Exemption Requirements on Issuers Requirements on Intermediaries Additional Requirements on Funding Portals Miscellaneous Provisions
- 3. Crowdfunding Exemption ♦ Limitation on Capital Raised – $1 million aggregate amount limitation in any 12-month period – Maximum limit only applies to amounts raised under Section 4(a)(6)
- 4. Crowdfunding Exemption ♦ Investment Limitation – Amount sold to any investor by an issuer in any 12-month period cannot exceed: The greater of $2,000 or 5% of the annual income or net worth of the investor if both the annual income and net worth of the investor are less than $100,000, and The lesser of $100,000 or 10% of the annual income or net worth of such investor, whichever is greater, if either the annual income or net worth of the investor exceeds $100,000
- 5. Crowdfunding Exemption ♦ Transaction Conducted Through an Intermediary – A transaction in reliance on Section 4(a)(6) must be conducted through a broker or funding portal – Issuers are prohibited from using more than one intermediary to conduct an offering or concurrent offerings made in reliance on Section 4(a)(6) – Transaction is required to be conducted exclusively through a platform “online-only”
- 6. Crowdfunding Exemption ♦ Exclusion of Certain Issuers from Eligibility under Section 4(a)(6) – Non-U.S. issuers – Issuers subject to Exchange Act reporting requirements – Investment companies as defined in the „40 Act or companies exempt under 3(b) or 3(c) of the definition – “Bad actors” – Issuers that have not filed required ongoing annual reports during the previous two years – Issuers with no specific business plan or with a plan to engage in M&A activity with unidentified companies
- 7. Requirements on Issuers ♦ Disclosure Requirements - New Form C – XML-based, fillable form – Certain disclosures would be presented in a specified format while allowing the issuer to customize the presentation of other disclosures – Proposed rules do not mandate specific disclosure requirements for most items – Form C will be used for initial filing, amendments, progress updates and ongoing annual reporting obligations
- 8. Requirements on Issuers ♦ Disclosure Requirements – Company Info – Name, legal status, address, website – Directors and officers; 20% beneficial owners – Description of the business and anticipated business plan
- 9. Requirements on Issuers ♦ Disclosure Requirements – Offering Info – Stated purpose and use of proceeds of offering – Target offering amount and deadline to reach target – Process for canceling an investment commitment or to complete the transaction when target is met – Price per share or method for determining the price – Progress updates
- 10. Requirements on Issuers ♦ Disclosure Requirements – Ownership and Capital Structure – Capitalization – Terms of securities being offered and each other class of security of the issuer – Description of how exercise rights of principal shareholders could affect new investors – Name and ownership level of 20 percent beneficial owners – How the offered securities are being valued – Risks relating to minority ownership – Description of restrictions on transfer
- 11. Requirements on Issuers ♦ Disclosure Requirements – Additional Items – Information about intermediary (name, CRD #, etc.) – Compensation and referral fees to intermediary – Legends – Number of employees of issuer – Material risk factors – Material terms of any indebtedness – Disclosure of exempt offerings in last three years – Disclosure of certain related-party transactions
- 12. Requirements on Issuers ♦ Disclosure Requirements – Financial Info – Tiered financial statement disclosures < $100K – tax returns $100K - $500K – CPA reviewed > $500K – audited financials – Narrative discussion of financial condition – Company financial statements for last two years or since date of inception – Updates about any material changes
- 13. Requirements on Issuers ♦ Ongoing Reporting Requirements – Annual reports filed on EDGAR and company‟s website no later than 120 days after fiscal year end – Report would be similar to the information required in the offering statement If multiple offerings with different requirements, then the report would need to meet the highest standard previously provided – Reporting obligation continues until one of the following occurs: Issuer becomes a reporting company Issuer or another party purchases all 4(a)(6) securities Issuer liquidates or dissolves
- 14. Requirements on Issuers ♦ Promotion/Advertising – Advertising is generally prohibited – Issuers may publish a notice advertising the terms of an offering relying on Section 4(a)(6), provided that the notice includes the address of the intermediary‟s platform
- 15. Requirements on Issuers ♦ Promotion/Advertising (cont.) – Notices advertising terms may include no more than the following: Existence of offering and name of intermediary with a link to intermediary‟s platform Amount of securities offered Nature of the securities Price of the securities Closing date of the offering period Contact info for the issuer
- 16. Requirements on Issuers ♦ Promotion/Advertising (cont.) – Issuer may not compensate or commit to compensate anyone for promotional activities outside of the channels provided by the intermediary Unless the issuer takes reasonable steps to ensure that the person clearly discloses the receipt of compensation each time a promotional communication is made Communications may only include information permitted by the advertising requirements
- 17. Requirements on Intermediaries ♦ General Requirements – Must register with SEC and join FINRA Broker Funding Portal – Prohibited from facilitating secondary trading through the crowdfunding platform
- 18. Requirements on Intermediaries ♦ Active role in policing issuers and offerings – Must have “reasonable basis” for believing: Issuer is in compliance with relevant regulations Issuer has established means to keep required records – May “reasonably rely” on issuer reps – Must conduct background and securities enforcement history check on each issuer (incl. officers, directors and 20%+ owners) – Must terminate offerings where it suspects fraud
- 19. Requirements on Intermediaries ♦ Obligations vis-à-vis Investors – Must deliver educational materials Investor must rep to receipt and review Must be updated as-needed – Must clearly disclose manner in which it will be compensated
- 20. Requirements on Intermediaries ♦ Requirements with Respect to Transactions – Must make available to SEC and potential investors information provided by issuer at least 21 days prior to first sale – Must have “reasonable belief” an investor has satisfied the applicable investment limitations prior to permitting the investment May rely on investor reps absent “reason to question” – Must notify investors of any material change in offering; investor must re-confirm investment within five business days
- 21. Requirements on Intermediaries ♦ Communication Channels – Intended to promote open exchange of information about offering – All communication between issuers and investors must take place through channels – Must be visible to anyone, but must require registration with intermediary platform to post – Agents of issuer and any paid promoters of an offering must disclose nature of compensation arrangement
- 22. Additional Requirements on Funding Portals ♦ SEC Registration – Effective 30 days after later of Submission of completed Form Funding Portal Membership with FINRA effective – Required to file amended registration within 30 days of change in relevant information – Registration is transferrable, but successor must re-file application for registration within 30 days – Multiple sites may be covered by one registration – $100K Fidelity Bond required
- 23. Additional Requirements on Funding Portals ♦ Prohibited Activities: – Offering investment advice or making recommendations – Soliciting purchases, sales or offers – Compensating persons for solicitation or based on sale of securities – Handling investor funds or securities
- 24. Additional Requirements on Funding Portals ♦ Safe Harbors – Limiting offerings on site – Highlighting and displaying offerings – Providing search/sorting functions – Providing communication channels – Advising on structure or content of offerings – Compensating others for referrals – Advertising portal‟s existence
- 25. Additional Requirements on Funding Portals ♦ Compliance – Must implement written policies and procedures designed to achieve compliance with applicable securities laws and regulations. Ex. Provisions of the Bank Secrecy Act: Anti-money laundering requirements Customer Identification Program Suspicious Activity Reporting Requirements Financial Crimes Enforcement Network Requirements – Must take steps to protect privacy of investor information (Reg. S-P, S-AM & S-ID)
- 26. Additional Requirements on Funding Portals ♦ Record Keeping: – Required to maintain specific records for five yrs Issuers, investors and potential investors on platform educational materials investment commitments and reconfirmations communications on or through the platform notices provided by the portal written agreements relating to portal‟s business log of each offerings – May utilize third-party service
- 27. Miscellaneous Provisions ♦ ♦ ♦ ♦ ♦ ♦ Insignificant deviations Restrictions on resales Information available to states Exemption from 12(g) Scope of Statutory Liability Disqualification
- 28. McCarter & English LLP Questions? Benjamin M. Hron bhron@mccarter.com 617.449.6584 @HronEsq
Hinweis der Redaktion
- Amounts sold by entities controlled by the issuer or under common control with the issuer, as well as any amounts sold by a predecessor of the of issuer;No definition of “controlled by the issuer or under common control with” the issuer, but proposal states “control” is defined in Rule 405An issuer conducting a concurrent exempt offering for which general solicitation is not permitted, would need to be satisfied that purchasers in that offering were not solicited by means of the offering made in reliance on Section 4(a)(6). Similarly, any concurrent exempt offering for which general solicitation is permitted could not include an advertisement of the terms of the offering made in reliance on Section 4(a)(6) that would not be permitted under Section 4(a)(6) and the proposed rules.
- Calculation of income and net worth are calculated in accordance with the Commission’s rules regarding the calculation of income and net worth of an accredited investor.Limits are subject to adjustment by the Commission at least every 5 years based on Consumer Price IndexInstructions make clear investment amounts are aggregated across all issuers in which a person invests in a 12 month period, but issuer may rely on information about investors other investments gathered by intermediary, provided the issuer does not have knowledge the investor has or would exceed the applicable limits as a result of an investment in the issuer
- Information about the requirements for intermediaries will be covered later in the presentation.Intermediary may perform back office and other administrative functions offline.Internet or other similar electronic medium would allow for easier sharing of information by the crowd.More than one intermediary would diminish the ability of the members of the crowd to effectively share information, because there would essentially be multiple “crowds”.
- Hedge funds excluded as a company exempt from the definition of investment company under Section 3(c) of the definition in the ‘40 Act.What constitutes a specific business plan may be a bit fluid depending on the industry and it may not require a formal document prepared by management.
- The proposed rules do not mandate specific disclosure formats.Issuers will be required to file disclosures on a new Form C in XML format with some items filled out in text boxes and others included as attachments.Proposal requires disclosure of business experience of directors and officers during the past three years (as opposed to five year requirement for reporting companies).20% owners overall on the basis of voting power; would not require 20% owners of each class.
- Description of use of proceeds should include description of any payments to intermediaries or employees; may want to discuss runway provided by funds; if plan is more general, should describe some of the probable uses and factors impacting selection of a particular use.If issuer is willing to accept oversubscriptions, it must separately describe the uses for the additional funds and the method for allocating to investors.Specific requirements for canceling and completing transaction:May cancel until 48 hours prior to identified deadlineIntermediary will notify investors when target offering amount has been metIf an issuer reaches the target before the deadline it may close the offering early if it provides notice of the new deadline at least five days prior to new deadlineIf an investor does not cancel before the 48-hour period, funds are released to the issuer and investor receives securitiesIf an investor does not reconfirm his or her investment after a material change is made to the offering, the investor’s commitment is cancelled.If target is not met by deadline, then offering is cancelled.
- The proposed rules do not mandate specific disclosure formats.Issuers will be required to file disclosures on a new Form C in XML format with some items filled out in text boxes and others included as attachments.Proposal requires disclosure of business experience of directors and officers during the past three years (as opposed to five year requirement for reporting companies).20% owners overall on the basis of voting power; would not require 20% owners of each class.Description of use of proceeds should include description of any payments to intermediaries or employees; may want to discuss runway provided by funds; if plan is more general, should describe some of the probable uses and factors impacting selection of a particular use.If issuer is willing to accept oversubscriptions, it must separately describe the uses for the additional funds and the method for allocating to investors.Specific requirements for canceling and completing transaction:May cancel until 48 hours prior to identified deadlineIntermediary will notify investors when target offering amount has been metIf an issuer reaches the target before the deadline it may close the offering early if it provides notice of the new deadline at least five days prior to new deadlineIf an investor does not cancel before the 48-hour period, funds are released to the issuer and investor receives securitiesIf an investor does not reconfirm his or her investment after a material change is made to the offering, the investor’s commitment is cancelled.If target is not met by deadline, then offering is cancelled.
- Related-party transactions would include those with directors, officers, 20 percent beneficial owners and immediate family members of the foregoing.Limited to transactions in excess of 5% of the amount raised in the last 12 months in reliance on Section 4(a)(6).Descriptions of risk factors and related-party transactions is limited to those since the beginning of the last full fiscal year.
- Dollar amounts are based on target amount currently offered aggregated with amount sold under Section 4(a)(6) in the last 12 months and are subject to adjustment no less frequently than once every five years.120 day grace at the beginning of a fiscal yearNarrative discussion would be similar to the MD&A discussion required by Reg S-K, but would not need to be as lengthy or detailed.
- Dollar amounts are based on target amount currently offered aggregated with amount sold under Section 4(a)(6) in the last 12 months and are subject to adjustment no less frequently than once every five years.120 day grace at the beginning of a fiscal yearNarrative discussion would be similar to the MD&A discussion required by Reg S-K, but would not need to be as lengthy or detailed.
- Does not prevent an issuer from continuing to advertise other information that is not related to the offering.Communications by founders or employees of an issuer must include disclosure of relationship to issuer.
- Does not prevent an issuer from continuing to advertise other information that is not related to the offering.Communications by founders or employees of an issuer must include disclosure of relationship to issuer.
- Does not prevent an issuer from continuing to advertise other information that is not related to the offering.Communications by founders or employees of an issuer must include disclosure of relationship to issuer.
- Brokers register using Form B-DFunding portals register using Form Funding Portal, which requires information similar to, but less extensive than, that required on Form BD, including factual information about the issuer and certain affiliates, any disciplinary history and types of compensation the portal would receive.Additional requirements for non-U.S.-basedportalsMust arrange for agent for service of process in the U.S.Must certify and submit to SEC an opinion of counsel confirming ability of the applicant to provide SEC and FINRA with prompt access to books and records and to onsite inspection.An information sharing arrangement between SEC and relevant regulator in the jurisdiction where the portal is regulated must already exist.Required to reconfirm various information within 90 days of any relevant changes in its legal or regulatory framework, and provide an updated
- Functions needed to demonstrate a means of keeping accurate records of securities holders may include the ability to (1) monitor the issuance of the securities offered and sold through the intermediary, (2) maintain a master security holder list, (3) maintain a transfer journal, (4) effect the exchange or conversion of any applicable securities, (5) maintain a control book demonstrating the historical registration of the securities and (6) countersign or legend physical certificates.Intermediary may reasonably rely on reps by issuer absent knowledge or other information or indication that the representations are not true.
- Materials must include information on:process for offer, purchase and issuance of securities through the intermediaryrisks associated with investing in securities offered and sold in reliance on 4(a)(6)types of securities that may be offered on the platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilutionrestrictions on resaletypes of information an issuer is required to provide in annual reports, frequency of delivery of that information and the possibility that the issuer’s obligation to file annual reports may terminate in the futurelimitations on the amounts investors may invest under 4(a)(6)(B)circumstances in which the issuer may cancel an investment commitmentlimitations on an investor’s right to cancel an investment commitmentneed for investor to consider whether investing in reliance on 4(a)(6) is appropriate for him/herfact that following completion of the offering there may not be any ongoing relationship between the issuer and intermediary
- Portal may apply objective criteria to limit offerings on its platforms and to highlight certain offerings on its platform without being deemed to be providing investment advice.criteria must be reasonably designed to result in a broad selection of issuers and be applied consistently.criteria must be clearly displayed on the portal's platform.examples: type of security offered; geographic location of the issuer; industry or business segment of the issuer.
- Portals may use third parties to prepare or maintain records on its behalf, provided there is a written agreement in place wherein the third party agrees to surrender the documents to the SEC or FINRA on request. The written agreement (or at least a written undertaking by the third party to turn over documents on request) must be filed with FINRA