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SEC and FINRA Propose Long-Awaited
Crowdfunding Rules
On October 23, 2013, the SEC formally issued
its proposed rules governing the "crowdfunding"
registration exemption created under Title III
of the Jumpstart Our Business Startups Act of
2012 (the "JOBS Act"), and
FINRA proposed rules for its oversight of
registered "funding portals" in connection with
crowdfunding offerings. The SEC's proposing
release is available here,
and FINRA's regulatory notice is available here.
As noted in our previous e-Alerts available here
and here,
the JOBS Act considerably alters the regulations
surrounding private security offerings and
creates a new registration exemption under
Section 4(a)(6) of the Securities Act of 1933
for issuers wishing to raise capital
through large numbers of small individual
investments.
Specifically, the crowdfunding exemption will
allow a domestic issuer to sell unregistered
securities to an investor through a broker or
through a registered "funding portal," so long
as, during the 12-month period before the sale:
(i) the issuer does not sell more than
$1,000,000 of securities under Section 4(a)(6),
and (ii) the investor does not make aggregate
investments in one or more issuers under Section
4(a)(6) exceeding certain thresholds based on
income and net worth.
The SEC's proposed
rules—which will reside within a new
"Regulation Crowdfunding"—provide additional
requirements, restrictions, and guidance
regarding:
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Classes of
issuers for which the 4(a)(6) exemption is not
available.
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Determinations
as to whether issuers have complied with the
individual and aggregate dollar limits
applicable to 4(a)(6) offerings.
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Filing and
disclosure requirements and ongoing reporting
obligations for 4(a)(6) issuers.
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Restrictions on
the nature of advertising used and fees paid to
promoters in connection with 4(a)(6)
offerings.
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Requirements
for brokers acting as intermediaries for 4(a)(6)
offerings.
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Registration
requirements and ongoing regulation of funding
portals.
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Transfer
restrictions on securities sold in 4(a)(6)
offerings.
The FINRA
regulatory notice proposes rules
governing:
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The application
process for funding portals.
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Standards of
funding portal conduct.
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Ongoing funding
portal compliance, including reporting
requirements, supervisory systems and
anti-money laundering compliance
programs.
The initial
comment period for the SEC rules will expire on
or about January 22, 2014, while the comment
period for the FINRA rules expires on February
3, 2014.
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