BizTech Law Blog
The JOBS Act, which became law on April 5, 2012, included for the first time in the U.S., a legal structure that will permit the use of general solicitation in connection with small, non-registered investment offerings in the context of crowdfunding. The SEC still needs to adopt implementing regulations before this funding vehicle becomes available and the market decides if it is viable.
The title of the JOBS Act dealing with crowdfunding sets out a framework, but requires the SEC to fill in the details by adopting regulations. There are far too many topics for which the SEC is required to adopt regulations to provide a complete list in this article. But examples include regulations that:
- specify the disclosures an intermediary must provide to investors;
- create a registration structure for intermediaries;
- specify the type of background check an intermediary is required to perform;
- set up standards for escrow of funds based upon minimum total investment requirements;
- establish standards to be followed by intermediaries to protect investor privacy;
- establish reporting requirements to the SEC by the company raising capital, etc. etc.
Suffice it to say, the SEC has a lot of work to do.
The JOBS Act has set a deadline of December 31, 2012 for the SEC to issue the required rules. This is not a realistic deadline, and most surely it will not be met. The SEC is still working on the rules it was required to issue under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed a couple of years ago, notwithstanding the expiration of the deadlines contained in that Act. Although it is impossible to say with certainty when the SEC will promulgate the rules required by the crowdfunding title of the JOBS Act, our best guess is that it is likely to be no earlier than the end of the first quarter of 2013.
Once the SEC rules have been issued, the prospective intermediaries will have to evaluate the rules to determine if they can profitably operate an investment crowdfunding portal. If the SEC rules are too onerous, there may be few intermediaries who decide to operate in this space.
Once an intermediary decides to move forward with an investment crowdfunding portal, it will need to develop the required technology and systems and register as an intermediary with the SEC and FINRA or whatever other self-regulatory agency has jurisdiction over crowdfunding intermediaries. We understand that some prospective intermediaries are already working on their technology and systems, so that they can be ready to act quickly once the SEC rules are issued. But they will still have to go through the registration process.
In our opinion, realistically, investment crowdfunding will not be available until the second quarter of 2013, if not later. In the meantime, you should evaluate whether non-investment crowdfunding might be a good fit, or whether a traditional private placement of investment securities would work for you.
For more information, please contact Iris Linder at 517-371-8127 or by using the form below.
