Corporate & Securities Attorney Jennifer Post Comments On SEC's Final Crowdfunding Rules Under JOBS Act
The Impact of the New Rules on Emerging Companies Remains to be Seen
LOS ANGELES, Nov. 2, 2015 /PRNewswire/ -- Last Friday, the Securities and Exchange Commission (SEC) voted to adopt the final rules permitting general equity crowdfunding under Title III of the JOBS Act. The rules facilitate a new era of capital raising opportunities for new and growing businesses by allowing such businesses to seek equity capital from ordinary investors. The new rules and related forms will become effective 180 days following Federal Register publication.
"While Title III will provide a more cost effective method for newly formed and emerging companies to seek capital absent the costs and limitation of traditional private placements and public offerings, it remains to be seen what types of companies benefit the most from the new rules," said Jennifer Post, Chair of the Securities Practice Group at Raines Feldman LLP. "I suspect that most investors will respond to investment opportunities in local markets and in industries they can easily understand and relate to, such as consumer products, entertainment, real estate and restaurants. Beyond that, companies with a highly technical businesses or companies that require continuous capital infusions may not benefit from crowd investors."
In keeping with the JOBS Act, private companies will be able to raise up to $1 million in any 12-month period. An individual who invests in a crowdfunded business is subject to certain investment limitations based on income: if the individual's annual income or net worth is less than $100,000, then the greater of $2000 or 5% of the lesser of their annual income or net worth, but not to exceed $100,000. If both annual income and net worth are over $100,000, then 10% of the lesser of the individual's annual income or net worth. There is also an overall cap – limiting an investor to $100,000 of crowdfunded investments in any twelve month period.
The final rules appear to give some relief on financial disclosure requirements by requiring only those companies seeking to raise over $500,000 (and up to $1,000,000) to provide outside, reviewed financials (and not audited financial statements, as contemplated by the proposed rules). The rules also provide that companies may use an optional Q&A format in preparing and disclosing business information to investors.
An issuer is required to use an intermediary through which its securities would be offered on the internet. Intermediaries must be registered as either a broker-dealer or a funding portal. As expected, the intermediary will bear substantial responsibility in presenting information about an offering including disclosing educational materials about the offering, disclosing risk factors, measuring investment limitations, updating materials throughout the minimum offering period and generally taking measures to reduce the risk of fraud in crowdfunded offerings.
The securities sold in a crowdfunded offering will be transfer-restricted for one year and will be exempt from the Exchange Act 12(g) threshold provided that the issuer satisfies certain conditions, including, among other things, a requirement to retain a registered transfer agent and not exceed $25 million in assets.
"In addition, even though adoption of the rules would imply that the flood gates are open for private companies to seek capital from the crowd, the question remains as to whether small companies will ultimately refrain from taking investor dollars given the many legal and regulatory requirements of issuing securities, including complex legal compliance and exposure to litigation," continued Post. "These are hurdles many startups – even well-funded startups – struggle with. All the same, the rules do provide many companies that previously did not have access to working capital with a new avenue to succeed."
SOURCE Raines Feldman LLP
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