The wait and speculation is over for now. Today the SEC proposed rules under Title III of the JOBS Act that allow start-ups and small businesses to raise capital by offering and selling securities over the Internet. Title III turned the securities laws that had been in place for the past eight decades upside down. By way of background, under the existing rules, the offer and sale of securities was required to either be registered with the SEC or fall within an exemption. What that meant was that private capital raising was limited to so called “accredited” investors, i.e. high income/net worth individuals. In comes the JOBS Act. With it, Congress created another exemption to make it easier for companies to raise money from ordinary people, the “crowd.”
“Because of this bill, start-ups and small businesses will now have access to a big, new pool of investors –namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs they believe in,” President Obama remarked at the JOBS Act signing ceremony. The SEC was tasked to fill in the blanks, which it did today.
Here are the key points of the SEC proposal:
- Individuals are permitted to invest subject to caps. Investors, in 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 under $100,000; or 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth are $100,000 or more; however, investors in this category are capped at $100,000 in crowd funding investments in any 12-month period.
- There is a limit to the amount that a company can raise through crowdfunding– in a 12-month period, not more than $1 million.
- Crowdfunding transactions must be conducted through an SEC-registered intermediary on an Internet website or other similar electronic medium to help ensure that the offering is accessible to the public and that members of the crowd can share information and opinions. The intermediary can be a broker-dealer or a new type of SEC registrant, a so-called funding portal. The offering must be conducted exclusively online by the broker-dealer or portal.
- Investors must receive adequate information regarding the offer at various points in time through various electronic means, such as through filings with SEC and disclosures provided on the intermediary’s platform. The offering documents must contain financial statements that, depending on the amount sold in a 12-month period, must be accompanied by a company’s tax return or reviewed or audited by an independent public accountant or auditor.
- Securities purchased in a crowdfunding offering cannot be resold for one year.
As Senator Merkley, one of the drafters of the JOBS Act rules, stated: “[T]his law will make sure entrepeneurs can use online tools to find investors, and make sure investors can put their money into exciting projects without worrying about being ripped off.”
The SEC is obviously acutely aware that it is engaged in the high-wire act of striking the right balance between adapting to the changing financial marketplace and investor protection. The proposal is open to public comment for 90 days after publication in the Federal Register. The comment process will be an interesting one. Step by step a clearer picture will emerge as to how revolutionary the brave new world of securities laws will be in practice. I’ll undoubtedly write a number of posts regarding the intricacies of the new framework. Check in from time to time and see what’s going on.
Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz. She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.