BizTech Law Blog
In the release accompanying the proposed crowdfunding regulations, the SEC explains its view that Congress anticipated that crowdfunding would occur exclusively through electronic media. The SEC's proposed rules are intended to facilitate the exclusive use of electronic media.
Under the proposed rules, before an investment commitment may be accepted by an intermediary, the intermediary must require the investor to:
- Open an account with the intermediary; and
- Provide a consent to the electronic delivery of materials.
At the time an investor opens an account, the intermediary is required to deliver to the investor educational materials written in plain language that describe:
- The process for the offer, purchase and issuance of securities through the intermediary.
- The types of securities offered and sold on the platform.
- The risks associated with purchasing securities offered and sold in reliance on the crowdfunding exemption.
- The risks associated with the types of securities offered and sold on the platform, including the risk of having limited voting power as a result of dilution.
- The restrictions on resale required for securities offered and sold in reliance on the crowdfunding exemption.
- The types of information the issuer is required to provide in annual reports, the frequency of delivery of that information, and the possibility that issuer's obligation to file annual reports may terminate in the future.
- The limitations on the amount an investor may invest.
- The circumstances in which the issuer may cancel an investment commitment.
- The limitations on an investor's right to cancel an investment commitment.
- The need for an investor to consider whether investing in a security that is offered and sold pursuant to the crowdfunding exemption is appropriate for the investor.
- That following the completion of an offering, there may or may not be an ongoing relationship between the issuer and the intermediary.
The intermediary is also required to keep the most current version of its investor educational materials posted on the intermediary's platform, and deliver any updated educational materials to account holders before they make their next investment through the platform.
At the time a new account is opened, the intermediary must also inform the investor that any person who promotes an issuer's offering must disclose on the platform the receipt of compensation for engaging in promotional activities on the issuer's behalf, and disclose the manner in which the intermediary is compensated in connection with offerings and sale of securities on the platform.
The SEC is not proposing any specific format for these disclosures other than they are provided electronically. We do not believe that these proposed disclosure requirements are unduly burdensome to intermediaries. The intermediaries should be able to develop standard "boilerplate" disclosures, and then update them only periodically based upon new developments.
Please contact Iris Linder (517-371-8127 or ilinder@fosterswift.com) for more information.
