By Laura Crosby-Brown, Director
Since the passage of the Dodd-Frank Act, it seems everyone has been talking about Title III and equity crowdfunding. Well, the time may have finally come with the publishing of the SEC rules in the Federal Register in November. But wait…there could be more delays.
Preliminary SEC Registration Filings: These forms, to allow funding portals with the SEC, will be available beginning January 29, 2016. However, prior to approval of the registration the rules require the portal to also be registered with FINRA and their rules, while proposed, have not yet been approved.
Funding Rules Effective: The actual SEC rules permitting equity crowdfunding are not effective until May 16, 2016 and it looks like requests by some commenters prior to approval and actions by legislators could delay the implementation. Further, if you’re not registered you cannot engage in the business. Finally, there is no indication on when the FINRA rules and registration process will be implemented.
So let’s assume everything goes according to plan and the current rules become effective… what does this mean?
SEA Regulation CF will permit companies to raise up to $1 million in capital over a 12 month period using crowdfunding and issue equity to investors, rather than providing them with a product or other gift as allowed under non-equity crowdfunding. However, this is not without restrictions, some of which may prove difficult for portals or companies to monitor. These include the following individual investor limits:
- For investors with annual income or net worth less than $100,000, the allowable investment is the greater of
- $2,0000 or
- 5% of the lesser of their annual income or net worth.
- For investors with annual income or net worth of $100,000 or higher, the allowable investment amount is 10% of the lesser of their annual income or net worth.
- For any investors, the total aggregate investment per investor across all crowdfunding offerings cannot exceed $100,000 in a 12 month period.
This last limitation could prove to be the most challenging since investors will have a variety of portals and offerings available and it is unlikely the industry as a whole will want to create a centralized database of investment activities across all portals to monitor each investor’s activities.
Certain companies will also be prohibited from engaging in equity crowdfunding. These restrictions can be little tricky once you get beyond foreign or public reporting companies so issuers are encouraged to consult an attorney prior to engaging in an equity crowdfunding offering.
Aside from registration and membership with FINRA, portals would be restricted from facilitating offerings on more than one platform at a time and would be required to provide investors with a number of things, including:
- Education materials related to the process of investing on a platform, the securities being offered and any restrictions or imitation;
- Disclosure information on the company throughout the offering and for a minimum of 21 days before any securities could be sold;
- Communication channels to permit discussions;
- Disclosure on compensation being received by the intermediary (portal operator);
- Notices when an investment commitment has been made and confirmations at or before the completion of the transaction.
Funding portals that are not also registered as a broker-dealer would be restricted from:
- Offering investment advice or making recommendations;
- Soliciting purchases, sales or offers to buy securities;
- Compensate promoters or others for solicitations or sales of securities; and
- Handling customer funds or securities.
Where do we go from here?
First, potential portals need to analyze the rules, understand their obligations and assess the cost/benefit of entering this market. Next, they need to get registered with the SEC and become members of FINRA, either as a portal when available or as a broker-dealer. Once registration is complete, the portal operators will need to understand the rules and regulations to ensure that they and the companies posting offerings are compliant with Regulation CF and the FINRA rules to come. Then, let the equity crowdfunding begin.
Regulatory Compliance, LLC and National Compliance Services have been assisting broker-dealers and investment advisers with industry critical compliance responsibilities for over 25 years. Together we continue to provide products and services to thousands of firms in the financial services industry. If you have questions related to compliance obligations, compliance requirements, or other compliance topics, please contact us at 888-REG-COMP (888-734-2667).