The SEC Proposed Crowdfunding Regulations: Funding Portal's Transaction Responsibilities
Posting of Issuer Disclosures. In prior blog posts, we described the disclosure obligations imposed on the issuer (the company that is raising capital) under the SEC's proposed crowdfunding regulations. (Read: The SEC Crowdfunding Proposed Regulations: Overview of Offering Statement & Non-Financial Disclosure Requirements and The SEC Crowdfunding Proposed Regulations: Overview of Issuer Financial & Disclosure Requirements). The proposed regulations impose certain requirements on the funding portal to make sure that these issuer disclosure obligations are met. Specifically:
- The issuer disclosures must be posted on the funding portal site a minimum of 21 days before a sale of the security may be completed. The funding portal may accept investment commitments during this waiting period, but the sale cannot be closed until the 21 days has lapsed.
- The issuer disclosures must be posted on the funding platform in a manner that permits a person to save, download or otherwise store the posted information.
- All disclosure information provided by the issuer must remain publicly available on the funding portal site until the offering and sale of the securities is completed.
- The funding portal is not allowed to require a person to establish an account in order to see the disclosure materials. The account opening requirement doesn't apply until a prospective investor is ready to make a commitment to buy securities through the funding portal.
Enforcement of Investment Limits. In a prior blog post, we described the limits imposed on how much each investor may invest in securities relying on the crowdfunding exemption. (Read: The SEC Crowdfunding Proposed Regulations: Investor Maximum Investment Amount). The JOBS Act places responsibility on the funding portal to assure that these investment limits are not exceeded. The proposed crowdfunding regulations generally allow the funding portal to rely upon a representation from the investor as to the investor's annual income, net worth and the amount of other investments made in reliance on the crowdfunding exemption as a means for determining that the investment amount limits are satisfied. However, this reliance must be reasonable, and at the very least, the funding portal must check its own records for other investments made by the same investor through the funding portal.
Confirmation of Investor Understanding of Risk. In a prior blog post, we described the investor educational materials that a funding platform is required to make available to investors. (Read: The SEC Proposed Crowdfunding Regulations: Investor Accounts for Platforms). The JOBS Act further places an obligation on the funding portal to assure that each investor reviews the educational materials, that each investor positively affirms that the investor is risking the loss of the entire investment, and that each investor answers questions demonstrating an understanding of certain risks associated with the investment. The proposed crowdfunding regulations provide the specific elements of the questionnaire that have to be completed by the investor. However, the SEC has declined to provide a model form for the questionnaire or the acknowledgement of the risks or review of the educational materials, opting instead to defer to the funding portals to customize their approach based on their own business models.
Execution of Trades. Under the proposed crowdfunding regulations, upon receipt of an investor commitment, the funding platform is required to provide an electronic confirmation that includes certain specified information. The funding portal must instruct investors to send funds to the bank that has agreed to act as escrow agent for the offering. The SEC has declined to permit or proscribe any specific method of payment, but has stated that a funding portal may decline certain payment methods, such as credit cards, if it so desires. The funding portal is the party who is responsible for instructing the bank when and whether to release the funds to the issuer, or alternatively, to return the funds to investors if the minimum funding level is not achieved within the specified timeframe or if an investment commitment is canceled. Upon completion of a sales transaction, the funding portal is required to electronically deliver to investors a confirmation notification that includes certain specified information.
Investor Right to Cancel. The proposed crowdfunding regulations give investors the unconditional right to cancel an investment commitment for any reason until 48 hours before the cancellation deadline identified in the issuer's offering materials. During the 48 hours prior to the deadline, the investor may cancel only if there has been a material change to the terms of the offering or to the information provided by the issuer. If a material change has occurred at any time, the funding portal must send a notice to all investors who have made commitments, requiring each investor to reconfirm the commitment within five business days of receiving the notice. In the absence of a timely reconfirmation, the funding portal must cancel the commitment.
If an issuer reaches the target offering amount before the deadline specified in the offering materials, the issuer may move up the closing date, so long as the offering has been open for a minimum of 21 days. In this case, the funding portal must post the revised offering deadline, notify previously committed investors of the new deadline, and provide an opportunity for committed investors to cancel their commitments for any reason until 48 hours before the new deadline. The new offering deadline cannot be any earlier than five business days after the funding portal sends out the required notices.
This article concludes our series on the SEC proposed crowdfunding rules. We hope you have found this series helpful. Please keep in mind that these are the rules as initially proposed. The final rules as adopted could vary significantly from the proposed rules, based on the comments the SEC receives. We would be delighted to work with you on any crowdfunding initiatives you decide to undertake once the SEC issues final regulations.
Please contact Iris Linder (517-371-8127 or firstname.lastname@example.org) for more information.
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