SEC finalizing JOBS Act Crowdfunding Rules for Starups
Two years after first proposing equity crowdfunding rules under the JOBS Act, the SEC plans to finalize the measure to allow startups to raise capital through large groups of everyday investors. The commission also plans to propose changes to so-called “intrastate” crowdfunding rules.
The SEC on October 30, 2015, plans to finalize its equity crowdfunding rules under the JOBS Act, two years after proposing the measure to let startups raise capital through group-based financing over the Internet.Sec. 3 of pl112-106.
The proposed rules in Release No. 33-9470, Crowdfunding, would allow companies to raise as much as $1 million a year through regulated websites, with disclosure and accounting requirements that scale upwards with the size of the offering. Investors do not need to be accredited to participate in the deals, although the proposal in Release No. 33-9470 places limits in how much they can invest based on their income and net worth.
The delay in finalizing the rules has been unusually long, even for an agency known for its slow rulemaking pace. Current and former lawmakers in both parties, as well as startup advocates, have publicly demanded a final rule. Chair Mary Jo White last month signaled a final vote was coming “in the near term” in remarks before the Advisory Committee on Small and Emerging Companies.
The SEC owes the holdup to the challenge of balancing the needs of investor protections and capital formation while staying true to the mandate contained in Title III of the JOBS Act. Criticism has come from both sides. Some, such as Stephen Graham, chair of the small business panel, fear the rule will leave unsophisticated investors vulnerable to fraud. Others, including ex-commissioner Dan Gallagher, a Republican, have attacked Title III as overly prescriptive, placing a too-heavy compliance burden on small companies.
Under Release No. 33-9470, a company raising less than $100,000 must provide investors with prior-year tax returns and a financial statement certified by the CEO. A startup raising between $100,000 and $500,000 must have an independent public accountant review its financial statements. For larger offerings, a company must provide its investors with audited financial statements.
The vote comes months after the SEC adopted final rules on Regulation A+, another key startup fundraising provision of the JOBS Act. The rules, issued in Release No. 33-9741, Amendments to Regulation A, allow companies to carry out unregistered public offerings as large as $50 million, with lighter filing requirements than a full-scale initial public offerings. The process is often likened to a “mini-IPO”.
Also on October 30, the SEC will consider proposing amendments to Rule 147 and Rule 504 of the Securities Act of 1933 to encourage so-called “intrastate” crowdfunding.
The “intrastate” exemption allows companies to raise crowdfunding rounds in their home state, as long as all investors in the offering are also based there. State regulators, not the SEC, are in charge of reviewing the offerings.
Advocates say the startup world has outgrown long-standing restrictions on “intrastate” transactions, and argue the regulations should be changed to allow regional deals and Internet marketing. The Advisory Committee on Small and Emerging Companies in September urged the SEC to update the intrastate rules.
Rule 147 provides safe harbor for companies that use on the exemption in Section 3(a)(11) of the Securities Act. Most states that have set up home-grown crowdfunding systems have relied on that exemption.
California and several other states have structured crowdfunding laws off of Rule 504 in Regulation D of the Securities Act, which allows companies to raise as much as $1 million from non-accredited backers.
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