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.

The SEC's proposed crowdfunding regulations include a number of specific steps that an intermediary is required to take in order to reduce the risk that an issuer (the company raising capital) does not use the intermediary's platform to engage in fraud. The intermediary is viewed as a check and balance on the crowdfunding marketplace. Among an intermediary's responsibilities are the following:

Reminder: The SEC public comment period is coming to a close Feb. 3, 2014.

Neither a funding portal, nor its officers, directors, partners or persons occupying a similar status with the funding portal, are allowed to:

• Have any type of financial interest in an issuer (the company raising capital) who is selling securities through the funding portal’s platform; or
• Receive a financial interest in an issuer as compensation for services provided to or for the benefit of an issuer in connection with the offer and sale of securities.

The role of a funding portal is to facilitate a crowdfunded transaction involving a sale from the issuer (the company raising capital) to the investor. A funding portal does not have the legal authority to facilitate secondary market activity, i.e., bringing together a seller and buyer in a transaction in which the seller is an investor who previously acquired the security either from the issuer or from another investor. In order to legally facilitate secondary market transactions, the intermediary would have to register as an exchange or alternative trading system. A funding portal registration does not grant this authority.

We continue our series on the proposed crowdfunding regulations issued by the SEC on Oct. 23, 2013 by turning our attention to the portion of the proposed regulations that relate to intermediaries of crowdfunding transactions.

An "intermediary" is the facilitator of a crowdfunding transaction through which issuers offer to sell securities and investors sign up to purchase securities. A registered broker may act as a crowdfunding intermediary. The activities involved in acting as an intermediary are already within the scope of the licensed activities of a registered broker.

Issuer Advertising. Because of restrictive language in the JOBS Act, the SEC's proposed crowdfunding regulations impose significant restrictions on the issuer's ability to advertise the offering. (The "issuer" is the company raising capital.) Any advertisement, other than an advertisement posted on the intermediary platform, whether provided in an e-mail blast, published on the issuer's or a third party's website, posted on a social media site, published in print media, or broadcast on television or radio, must direct prospective investors to the intermediary's platform and cannot include anything other than the following information:

• A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary, and a link to the intermediary's platform.
• The terms of the offering; i.e., the amount of securities offered, the nature of the securities, the price at which the securities are offered, and the closing date of the offering period.
• The name, address, phone number and website URL of the issuer.
• A brief description of the issuer's business.
• The e-mail address of a representative of the issuer.

The issuer may, however, communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary's platform, so long as the issuer identifies itself as the issuer. The proposed crowdfunding regulations do not restrict issuer communications other than those that refer to the terms of the offering.

Progress Updates

During the course of a crowdfunding offering, the proposed SEC crowdfunding regulations require the issuer (the company raising capital) to provide a progress update no later than five business days after the issuer reaches one-half of its targeted offering amount, and again after the issuer reaches 100 percent of its targeted offering amount.  If the issuer will accept proceeds in excess of the targeted offering amount, a third progress report will have to be filed no later than five business days after the offering deadline. 

The progress update is to be provided on Form C:  Progress Update (Form C-U).  Click here to see a copy of proposed Form C. 

The issuer will be required to file the Progress Update with the SEC on EDGAR, provide a copy to the issuer’s intermediary and investors signed up to date, and if the offering is continuing, make the Progress Update available to potential investors. 

In a crowdfunding offering, the financial information the issuer (the company that is raising capital) is required to disclose will be determined in part by specific requirements built into the JOBS Act, and in part by SEC regulation.  The proposed crowdfunding regulations include the following financial disclosure requirements: 

As is always the case, in the SEC's proposed crowdfunding regulations, the information an issuer (the company that is raising capital) is required to include in its offering statement is quite detailed. We present a high level overview below.

Deadline for Comments. The SEC's proposed crowdfunding regulations have now been published in the Federal Register. The deadline for submitting comments is February 3, 2014. As noted in our prior article, comments can be submitted electronically through the SEC's website, sec.gov, and at times, the SEC chooses to extend the comment period.

Format for Issuer Disclosures. Under the JOBS Act, the issuer (the company raising capital) must file specific disclosures with the SEC, and provide these disclosures to investors and the registered intermediary hosting the offering. The proposed regulations require the disclosures filed with the SEC to be filed through EDGAR (the SEC's Electronic Data Gathering Analysis and Retrieval System) on a new Form C.