the jobs act: crowdfunding - morrison & foerster .crowdfunding •crowdfunding permits entrepreneurs

2013 M

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The JOBS Act: Crowdfunding

NY2 708187

Agenda We will address:

The background that led to a call for an offering exemption for crowdfunding;

The JOBS Act Title III provisions;

The SECs proposed rules; and

FINRAs proposal.

Background

Crowdfunding

Crowdfunding permits entrepreneurs to pool money from individuals

who have a common interest and are willing to contribute to a

venture.

Crowdfunding may or may not involve the sale of securities.

To the extent the effort involves the sale of securities then the offering

must be registered or must rely on an exemption.

Prior to the enactment of the JOBS Act, crowdfunding advocates had

called on the SEC to consider implementing a new exemption from

registration under the federal securities laws for crowdfunding efforts.

For example, it was suggested that the SEC exempt crowdfunding

offerings of up to $100,000, with a cap on individual investments not

to exceed $100.

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Crowdfunding

Funding Portal or Broker

Crowdfunding

Entrepreneur

$$$ $$$

The Crowd

An all or none offering.

No limits on the number or sophistication of investors.

Issuer information (including financial information) required.

All offering activities must be conducted through an intermediary.

This is MoFo. 6

Title III of the JOBS Act

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Crowdfunding

Title III provides an exemption that could apply to crowdfunding offerings, to be implemented by SEC rules adopted within 270 days.

The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000.

The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, does not exceed:

the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or

10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000.

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Crowdfunding

The transaction must be conducted through a broker or funding

portal.

Information will be filed and provided to investors regarding the

issuer and offering, including financial information based on the

target amount offered.

The provision would prohibit issuers from advertising the terms of the

exempt offering, other than to provide notices directing investors to

the funding portal or broker, and would require disclosure of amounts

paid to compensate solicitors promoting the offering through the

channels of the broker or funding portal.

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Crowdfunding

Issuers relying on the exemption would need to file with the SEC and

provide to investors, no less than annually, reports of the results of

operations and financial statements.

A purchaser in a crowdfunding offering could bring an action against

an issuer for rescission in accordance with Section 12(b) and Section

13 of the Securities Act, as if liability were created under Section

12(a)(2) of the Securities Act, in the event that there are material

misstatements or omissions in connection with the offering.

Securities sold on an exempt basis under this provision would not be

transferrable by the purchaser for a one-year period beginning on the

date of purchase, except in certain limited circumstances.

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Crowdfunding

The exemption would only be available for domestic issuers that are

not reporting companies under the Exchange Act and that are not

investment companies, or as the SEC otherwise determines is

appropriate.

Bad actor disqualification provisions similar to those required under

Regulation A would also be required for exempt crowdfunding

offerings.

Funding portals would not be subject to registration as a broker-

dealer, but would be subject to an alternative regulatory regime,

subject to SEC and SRO authority, to be determined by rulemaking

by the SEC and SRO.

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Crowdfunding

A funding portal is defined as an intermediary for exempt crowdfunding

offerings that does not: offer investment advice or recommendations;

solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal;

compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

hold, manage, possess, or otherwise handle investor funds or securities; or

engage in other activities as the SEC may determine by rulemaking.

The provision preempts state securities laws by making exempt crowdfunding securities covered securities, however, some state enforcement authority and notice filing requirements would be retained.

State regulation of funding portals would also be preempted, subject to limited enforcement and examination authority.

This is MoFo. 12

The SECs Proposed Rules

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SEC Proposed Rules

The SEC voted to release proposed rules on October 23, 2013, and

these rules are subject to a 90-day comment period.

As we will discuss, the SECs proposed rules track the statute

closely.

This is MoFo. 14

Issuer Provisions

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Eligible Issuers

The ability to engage in crowdfunding is not available to all issuers.

The proposal excludes:

Issuers not organized under the laws of a state or territory of the United States or

the District of Columbia;

Issuers that are subject to Exchange Act reporting requirements;

Investment companies as defined in the Investment Company Act or companies

that are excluded from the definition of investment company under Section 3(b) or

3(c) of the Investment Company Act;

Any issuer that has sold securities in reliance on Section 4(a)(6) if the issuer has

not filed with the Commission and provided to investors, to the extent required, the

ongoing annual reports required by Regulation Crowdfunding during the two years

immediately preceding the filing of the required new offering statement;

Issuers subject to the bad boy disqualifiers in Section 302(d) of the JOBS Act;

and

Any issuer that has no specific business plan or has indicated that its business plan

is to engage in a merger or acquisition with an unidentified company or companies.

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Process

An issuer may only engage in an offering through a registered

broker-dealer or through a funding portal.

The issuer can only use one intermediary

This seems to be based on practical considerations

Using one intermediary makes it easier to track the $1 million issuer offering limit

for example

The offering will be conducted online only so that the crowd has

access to information. A platform is defined as an Internet website

or similar electronic medium through which a broker-dealer or a

funding portal conducts a Section 4(a)(6) offering.

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Restrictions on Advertising and Promotion

An issuer cannot advertise a Section 4(a)(6) offering, except for

releasing an offering notice that contains only the following

information:

A statement that the issuer is conducting an offering, the name of the intermediary,

and a link to the intermediarys offering;

The amount of securities offered, the nature of the securities, the price of the

securities, and the closing date for the offering; and

The name, address, phone number, and website of the issuer, the e-mail address

of a representative of the issuer, and a brief factual description of the issuers

business.

The issuer can communicate with potential crowdfunding investors if

the communications occur through the platform, and it should be

clear which communications are being made by the issuer

The issuer can continue to engage in regular business.

communications so long as it does not disclose information about the

offering, except as permitted in an offering notice.

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Promoter Compensation

An issuer cannot compensate a person for advertising or promoting

a Section 4(a)(6) offering other than through the intermediarys

platform unless the promotion is limited to distributing permitted

notices.

An issuer may compensate a person for promoting the offering

through the intermediarys platform if the issuer takes reasonable

steps to ensure that such person discloses past and prospective

compensation from the issuer. This applies to intermediaries, but

also to