As discussed in the Crowdfunding alert we
issued late last year, Congress has passed the Jumpstart Our Business Startups
Act (JOBS Act), which President Obama recently signed into law.
While there are many
provisions within the JOBS Act that will help relax the current securities
regulations framework for private companies looking for investment, the JOBS
Act also amended federal securities laws, and now permits eligible companies to
raise money through Crowdfunding (i.e., allowing a large group of people to
make limited investments in a company, usually via the internet) without
triggering any registration or filing requirements under federal or state laws.
Under this new exemption,
Crowdfunding offerings will now be permitted if: (a) the issuer is a U.S.
company that is neither subject to certain reporting requirements, nor
considered an investment company, and (b) the aggregate amount of securities
sold to all investors (not just those sold under the Crowdfunding exemption) by
the issuer during the preceding 12 months is not more than $1 million.
The $1 million cap
applies to the aggregate amount of all securities sold to any investor (no
matter what exemption is relied upon) by the issuer during the preceding 12
months. The amount sold to each investor depends on that investor's net worth.
If the investor's net worth is less than $100,000, the investment must not
exceed the greater of $2,000 or five percent of the investor's annual income or
net worth. If the investor's net worth is greater than $100,000, the investment
is capped at either $100,000 or 10 percent of the investor's annual income or
net worth, whichever is less.
Any transaction under
the Crowdfunding exemption cannot be conducted directly between the issuer and
investor. It must be conducted through an intermediary -- either a registered
broker or a person registered as a "funding portal". Brokers and funding
portals must register and comply with a number of requirements under the JOBS
Act, offering investors some general protections to reduce the risk of fraud
and to ensure that they have all the pertinent information necessary before
making an investment.
The intermediary is
also tasked with ensuring that investors do not exceed the aggregate numbers
mentioned above.
In addition to the
requirements for intermediaries, issuers seeking to rely on the Crowdfunding
exemption will also need to register with the SEC, disclose a good deal of
information related to the issuer and the offering, and also comply with
ongoing reporting requirements.
The Crowdfunding law
provides that any securities issued under the exemption are considered
"covered securities" for purposes of exempting those issuances from
state securities registration and offering requirements. The states will
continue to have jurisdiction over certain fraudulent, deceitful, or illegal
conduct.
Securities purchased
under the Crowdfunding exemption will be subject to a one- year resale
restriction from the purchase date, unless the securities are transferred to
eligible persons.
The JOBS Act sets a
270-day deadline (from the date of enactment) for the SEC to issue and
implement some of the rules it determines necessary or appropriate for the
protection of investors to carry out the new Crowdfunding exemption. However,
it remains to be seen whether the SEC will meet this deadline, especially given
the opposition expressed to the JOBS Act generally, and the Crowdfunding
exemption in particular, by some members of the SEC.
For more technical
details or questions about any of the information presented here, please
contact the author of this Alert, Darren L. Braham. You
can reach Darren at 617 456 8014 or dbraham@PrinceLobel.com. For questions or for assistance with any of
your corporate law needs, please contact Robert P. Maloney, Chair
of Prince Lobel's Corporate Practice Group.
You can reach Bob at 617 456 8008 or rmaloney@PrinceLobel.com.
