SEC Proposes Rules for “Crowdfunding”

In these days of Facebook, LinkedIn, Twitter and large numbers of contacts it may seem natural to use this means to publicize your business launch and perhaps invite investment.  Beware!

In general, federal and state securities laws do not permit businesses to offer or sell interests in that business without “registration” of the securities or an exemption.  There are piecemeal exemptions that have various limitations and requirements – such as, that all of your investors are financially sophisticated and able to bear the loss of their entire investment; that they have been provided access to the type of information that would be included in a registration statement; and so on.  Other exemptions apply only to offerings within a certain state.

In proposed rules published on October 23, 2013, the United States Securities and Exchange Commission is opening up the possibility of raising capital from investors through a process known as “crowdfunding.”  This describes raising small amounts of money from broad groups via the Internet.  There would be a limit of $1 million raised within a 12 month period, and caps on how much each investor could invest depending on their financial situation.  Certain facts about the company and its management and owners would have to be provided to the SEC, and the offering would have to be done through a registered “portal”.   President Obama in 2012 signed into law the “JOBS Act” which, among other things, ordered the SEC to propose rules for this practice.  The rules are now subject to a 90-day comment period, then will likely be revised.

The accompanying press release states in part: Washington D.C., Oct. 23, 2013 —

The Securities and Exchange Commission today voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.

Crowdfunding describes an evolving method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a variety of projects ranging from innovative product ideas to artistic endeavors like movies or music.  Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can be easily used to offer and sell securities as well.  The JOBS Act also established the foundation for a regulatory structure for this funding method. SEC Chair Mary Jo White noted that the intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.

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