On April 5, 2012, the President signed into law the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), which is intended to ease capital raising for smaller businesses by relaxing regulatory requirements. This update is the first segment in a three-part series outlining the new law. First, we look at the "crowdfunding" exemption, a new registration exemption for the offer or sale of securities by an issuer where the amount sold does not exceed $1 million in a 12-month period. In the next installments of the series, we will look at the regulations streamlining initial public offerings and public offering improvements for "emerging growth companies," and other capital-raising measures contained in the JOBS Act.
The Crowdfunding Exemption
In this age of social media, many companies have considered using the internet and social networking sites to raise capital through small contributions from a large number of individuals, known as crowdfunding. Until now, a crowdfunding offering was unlawful without registration with the Securities and Exchange Commission because traditional registration exemptions were not available. The JOBS Act added a new Section 4(6) to the Securities Act of 1933 to exempt crowdfunding sales and offerings from SEC registration requirements (as well as from state blue sky laws), subject to certain conditions. The new crowdfunding exemption will not be available until the SEC adopts final rules implementing the new law. The SEC has 270 days from the date of enactment to adopt final regulations.
Who is eligible for the new crowdfunding exemption? The exemption will be available to companies that:
- Utilize the exemption to sell an aggregate amount of shares not to exceed $1 million in a 12-month period;
- Sell - relying on the crowdfunding exemption or otherwise - to any individual investor in a 12-month period shares worth no more than:
- The greater of $2,000 or 5 percent of the investor's net worth or annual income, if the investor's net worth or annual income is less than $100,000; or
- 10 percent of the investor's net worth or annual income, if the investor's net worth or annual income is $100,000 or more (but no more than $100,000 per investor);
- These annual limits apply to the amount sold to an investor from all issuers relying on the crowdfunding exemption, not the amount sold to an investor by each issuing company;
- Use a broker or "funding portal" to conduct the sales according to certain requirements; and
- Comply with disclosure and other requirements in connection with the offering.
Who is excluded from the new crowdfunding exemption? The crowdfunding exemption is not available to:
- Issuers not organized under the laws of a U.S. state or territory or the District of Columbia;
- Reporting companies;
- Investment companies; and
- Issuers and intermediaries with a poor disciplinary history at either the state or federal level, with standards to be established by SEC rule.
Requirements and Restrictions
What are the issuer disclosure requirements? A crowdfunding issuer must make a number of disclosures. The issuer must file with the SEC, provide to the broker or funding portal, and make available to potential investors, the following:
- Its name, legal status, physical address, and website address;
- The names of its directors, officers, and 20-percent shareholders;
- A description of its business and anticipated business plan;
- A description of its financial condition, including its financial information, as follows:
- For issuers with aggregate crowdfunding offering targets in the preceding 12 months of $100,000 or less, its filed tax returns for the most recently completed year and its financial statements certified to be true and complete by the issuer's principal executive officer; or
- For issuers with aggegate crowdfunding offering targets in the preceding 12 months over $100,000 but not over $500,000, its financial statements reviewed by an independent pub