US$500 And A Click: SEC Proposes 'Crowdfunding' Rules For Start-Up Businesses

Overview

On October 23, 2013, the U.S. Securities and Exchange Commission (SEC) proposed rules under the Jumpstart Our Business Startups (JOBS) Act1 to permit companies to offer and sell securities through "crowdfunding." In a prior memorandum,2 we discussed the key elements of crowdfunding under the JOBS Act. 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 multitude of projects. Title III of the JOBS Act created an exemption under the securities laws to permit this type of funding method to be used to offer and sell securities. The JOBS Act also established the foundation for a regulatory structure for this funding method. The goal of the JOBS Act is to make it easier for startups and small businesses to raise funds from a range of potential investors and provide additional investment opportunities for investors.

The proposed rules would, among other things, permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions. The full text of the proposed rules is available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf.

The SEC is seeking public comment on the proposed rules for a 90-day period following their publication in the Federal Register.

Qualifying under the Proposed Rules

The proposed rules impose the following thresholds and limits:

A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period. Investors, over the course of a 12-month period, would be permitted to invest up to: $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000. 10% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding. Not all companies would be eligible to utilize the crowdfunding exemption. Excluded companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies, companies that are disqualified under the proposed...