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SEC Releases Long-Standing Proposed Crowdfunding Rules

December 6, 2013   |   By Vela Wood

Finally! Ten months after they were supposed to be released, the SEC released the proposed crowdfunding rules to the general public on October 23, 2013. The proposed rules are currently in the middle of the 90-day comment period, and as a result, investors will likely have to wait until the middle of 2014 to participate in crowdfunding offerings.

However, the SEC has provided a Fact Sheet which describes some of the proposed rules. Below is a snapshot of some of the soon to be rules:

  • An Issuer can raise a maximum aggregate amount of $1M through crowdfunding offerings in a 12-month period.
  • Investors, over a 12-month period, can invest up to:
    • $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
    • 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
  • Companies who will be unable to take advantage of the crowdfunding exemption include:
    • non-U.S. companies
    • companies that already are SEC reporting companies
    • certain investment companies
    • companies that have been disqualified under the disqualification rules
    • companies that have failed to comply with the annual reporting requirements
    • companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
  • Securities purchased in a crowdfunding transaction can not be resold for a period of 1 year.
  • Companies would be required to disclose:
    • Information about officers, directors, and owners of 20% or more of the company
    • A description of the company’s business and the use of the proceeds from the offering
    • The price of the securities offered to the public
    • The target offering amount
    • Deadline to reach target offering amount
    • Whether company will accept investment in excess of target amount
    • Related party transactions
    • Financial statements of company

The full text of the proposed rules can be found on the SEC website.

Kevin’s blog, Early Thoughts on Crowdfunding, was written right after the JOBS Act passed, and it discussed some of the concerns and costs that the rules might pose. Interesting enough, I think issuers and investors continue to have the same concerns they had prior to the release of the proposed rules, if not more – due to the extensive reporting requirements and the regulations of portals.  As a result, it is likely that we won’t know whether crowdfunding is a true viable option for small local companies until some of these companies try to engage in a crowdfunding offering.

On the same day that the proposed rules were released, the Financial Industry Regulatory Authority (FINRA) released their proposed rules for the funding portals. I will provide an overview of the FINRA proposed rules in my next blog so stay tuned!

Ashley Robertson is an associate at Vela Wood and focuses her practice in the areas of corporate law, startups and small businesses. You may reach Ashley at arobertson@velakeller.com.


Posted in Crowdfunding, Securities, Startups
Vela Wood
Vela | Wood is a boutique corporate law firm that focuses on small businesses, entrepreneurs, and startups.