SEC adopts crowdfunding rules

By Ken Tysiac

In separate votes Friday, the SEC adopted new rules and proposed amendments designed to give small businesses more access to capital while providing protection for investors.

Companies will be permitted to offer and sell securities through crowdfunding under rules the SEC adopted Friday. In addition, the SEC voted to propose amendments to existing rules to facilitate intrastate and regional offerings of securities.

The vote on crowdfunding completed the SEC’s major rulemaking mandated under the Jumpstart Our Business Startups (JOBS) Act, P.L. 112-106, according to SEC Chairman Mary Jo White.

The new crowdfunding rules, which will take effect 180 days after they are published in the Federal Register, give individuals the ability to invest a limited amount of capital in securities-based crowdfunding transactions.

The rules limit the amount of money an issuer can raise through crowdfunding and require issuers of securities through crowdfunding to make certain disclosures about their businesses and securities offerings.

In addition, the rules create a regulatory framework for the funding portals that facilitate the crowdfunding transactions.

Under the rules the SEC adopted:

  • Companies will be permitted to raise a total of $1 million through crowdfunding in a 12-month period.
  • Individual investors will be permitted to invest in a 12-month period in total crowdfunding offerings up to:
    • The greater of $2,000 or 5% of the lesser of their annual income or net worth if either their annual income or net worth is less than $100,000.
    • 10% of the lesser of their annual income or net worth if both their annual income and net worth are at least $100,000.
  • During the 12-month period, the total securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Companies offering securities through crowdfunding would be required to make numerous disclosures, including a discussion of the company’s financial condition; a description of the business and use of proceeds from the offering; and information about officers, directors, and owners of 20% or more of the company.

These companies also would be required to file financial statements with the SEC that may be required to be reviewed by an independent public accountant or audited by an independent auditor, depending on the amount offered and sold during a 12-month period. The audit requirement would be softened to a review requirement for certain companies offering securities through crowdfunding for the first time.

“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” White said in a news release.

SEC Commissioner Michael Piwowar, in a dissenting opinion, objected to what he called “a complex web of provisions and requirements for compliance” that he said would limit the workability of the rules.

“While crowdfunding was intended to be a treat for the smallest and least sophisticated companies seeking to raise capital, today’s rules are full of tricks,” Piwowar said in his published remarks.

The proposed amendments that would change rules for intrastate offerings to enhance capital formation would increase the aggregate amount of money that may be offered and sold pursuant to Securities Act Rule 504. The SEC will accept public comment on the proposed intrastate offerings amendments for 60 days following their publication in the Federal Register.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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