Yesterday the Securities and Exchange Commission voted to approve its first rules under Title III of the 2012 JOBS Act governing crowdfunding. Experts Jilliene Helman of Realty Mogul, a crowdfunding site for real estate investments, Doug Ellenoff, a securities lawyer specializing in crowdfunding law, Ryan Feit of SeedInvest, and Bill Clark of MicroVentures will join me for a live discussion and instant reaction to the proposed rules at 11:00 AM Eastern today, October 24, 2013.
(Disclosure: Doug Ellenoff's firm, Ellenoff Grossman and Schole, recently sponsored the Social Enterprise and Crowdfunding Conference which I organized. I have no ongoing business relationship with the firm nor with any of the other participants in the panel.)
Chance Barnett, Forbes Contributor and CEO of Crowdfunder, posted his thoughts on the draft regulations here.
Now, you can watch the live discussion here.
You can download an audio podcast here or subscribe via iTunes.
The following is my summary of Title III of the JOBS Act adapted from my book, Crowdfunding for Social Good.
The law limits businesses that raise money through crowdfunding to $1 million of crowdfunded investments per twelve month period. The SEC is likely to clarify when such periods start and end, though such limits may not be part of the rules issued today.
Limits are set by the Act on the amount of money non-accredited (those without a million-dollar net worth excluding their home or without a $200,000 personal income) investors may invest.
- For those with both income and net worth less than $100,000, they will be allowed to invest the greater of $2,000 or 5 percent of the greater of their annual income or net worth.
- For those with either net worth or income greater than $100,000 they will be allowed to invest up to 10 percent of the greater of their annual income or net worth.
The Act requires that all crowdfunded transactions be completed using a registered portal or broker-dealer. You are not allowed to set up your own website to conduct your offering or to use a website like Kickstarter or Indigogo that are not registered with the SEC or FINRA. (FINRA is expected to issues rules soon that will govern the registration and conduct of portals and broker-dealers conducting crowdfunding.)
The Act also provides some specific rules for intermediaries (portals and broker-dealers). The Act requires that Intermediaries:
- Register with the SEC and FINRA as either a portal or a broker-dealer.
- Provide all of the disclosure of risk that the SEC may require.
- Ensure that investors complete investor education requirements established by the SEC and understand the risks of investing in crowdfunded securities, including the fact that they can lose their entire investment.
- Deter fraud by conducting background checks and taking other measures as required by the SEC.
- Protect the privacy of investors.
- Ensure that investors are not violating their individual investment limits across all of the crowdfunded investments. (The SEC is rumored to have decided not to enforce this provision.)
- Shall not pay “finders” or “affiliates” of any sort for bringing investors to the opportunities.
- Prohibit its own directors and officers from investing in companies issuing securities on their platforms.
Issuers, that is to say the companies raising money by issuing the new securities, are required by law to disclose the following information (note that the SEC has rulemaking authority to expand and clarify this list):
- Directory information for the company so that people can find and verify its existence.
- Officers, directors and large shareholders (those holding more than 20 percent of the ownership) are required to be disclosed.
- A complete business plan will also be required.
- A description of the financial condition of the company, including tax returns and financial statements.
- Those raising less than $100,000, the financial statements needn’t be reviewed or audited.
- Those raising between $100,000 and $500,000 are required to have their financial statements reviewed.
- Finally, those raising more than $500,000 are required to have their financial statements audited.
- Companies must explain the use of “proceeds” or the money raised.
- The price of the securities offered must be disclosed, or, in the event the platform uses an auction or other process to determine a price, the process for setting the price must be disclosed and the price must be made available to investors prior to making a final commitment to participate.
- The ownership structure of the entity must be explained, including the rights of each class of stock so that investors understand how their new shares of ownership (in the case of an equity offering) will compare to the rights of other shareholders.
Please be sure to tune in to the discussion to learn more about today's newly issued rules; the summary above pertains to the law as passed in 2012 and not to today's announcements and is provided only for context.
Please help me continue this conversation on Twitter at @devindthorpe, Google+ and at my personal website yourmarkontheworld.com.
