addition to a variety of other measures to encourage capital formation. When HR 3606 was originally adopted in the House of
Representatives, the bill included Title III, titled Entrepreneur Access to Capital. This Title provided for an exemption from registration under the Securities Act for offerings of up to $1 million, or $2 million in certain cases when investors were provided with audited financial statements, provided that individual investments were limited to $10,000 or 10% of the investor’s annual income. The exemption was conditioned on issuers and intermediaries meeting a number of specific requirements, including notice to the SEC about the offering and the parties involved with the offering, which would be shared with state regulatory authorities. The measure would have permitted an unlimited number of investors in the crowdfunding offering, and would have pre-empted state securities regulation of these types of offerings (except that states would be permitted to address fraudulent offerings through their existing enforcement mechanisms). The House measure also contemplated that the issuer would state a target offering amount and a third-party custodian would withhold the proceeds of the offering until the issuer has raised 60% of the target offering amount. The provision also contemplated certain disclosures and questions for investors, and provided for an exemption from broker-dealer registration for intermediaries involved in an exempt crowdfunding offering. After it was adopted, the House crowdfunding measure
drew a significant amount of criticism, with much of that criticism focused on a perceived lack of investor protections. In a letter to the Senate leadership, then-SEC chairman Mary Schapiro noted that “an important safeguard that could be considered to better protect investors in crowdfunding offerings would be to provide for oversight of industry professionals that intermediate and facilitate these offerings,” and also noted that additional information about companies seeking to raise capital through crowdfunding offerings would benefit investors. In the Senate, an amendment to HR 3606 that was submitted by Senator Merkley and approved by the Senate provided additional investor protections for exempt crowdfunding offerings. Many of these protections may now present difficulties as the SEC and market participants seek to make use of the JOBS Act crowdfunding exemption.
Title III of the JOBS Act Title III of the JOBS Act addresses crowdfunding by providing an exemption from registration provided that: • the aggregate amount sold to all investors by the issuer,
including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, is not more than $1 million;
• the aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, does not exceed:
• the greater of $2,000 or 5% 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% 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;
• the transaction is conducted through a registered broker or funding portal that complies with the requirements of the exemption; and
• the issuer complies with a number of specific informational and other requirements specified under the exemption.
Title III specified that the SEC must issue rules to implement this provision not later than 270 days following enactment. The SEC has not yet proposed or adopted any rules, and until final rules are adopted, the crowdfunding exemption contemplated by Securities Act section 4(a)(6) is not available.
Requirements as to intermediaries An exempt crowdfunding offering must be made through an intermediary that has registered with the SEC as a broker or as a so-called funding portal. Funding portals will not be subject to registration as a broker-dealer, but would be subject to an alternative regulatory regime with oversight by the SEC and the Financial Industry Regulatory Authority (Finra), to be determined by rulemaking at the SEC and the Finra. 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.
JOBS Act Quick Start 45
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