JOBS Act Update: SEC Adopts Regulation Crowdfunding
Over three years after the passage of the landmark Jumpstart Our Business Startups Act (JOBS Act), in late October the Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding, a new regulatory framework that implements the “crowdfunding” exemption under Title III of the JOBS Act. Crowdfunding is a growing and developing method of raising capital using the Internet. Title III of the JOBS Act (which created the Section 4(a)(6) exemption from registration under the Securities Act of 1933, as amended (the Securities Act), to enable crowdfunding) was designed to help provide start-ups and small businesses with capital by making relatively low dollar offerings of securities less costly.
Regulation Crowdfunding, which will become effective for companies looking to raise capital (or “issuers”) on May 16, 2016, imposes restrictions on issuers as well as on the “crowdfunding intermediaries” that must be used to conduct such offerings. The SEC’s crowdfunding regulations are detailed, complex and lengthy (encapsulated in a nearly 700 page adopting release). We summarize below the requirements imposed on issuers and will address SEC rules related to crowdfunding intermediaries in a separate Alert.
Overview of Regulation Crowdfunding for Issuers
Regulation Crowdfunding (or Reg. C) will, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering and create a regulatory framework for the intermediaries facilitating crowdfunding transactions. More specifically, the rules:
Securities purchased in a crowdfunding transaction generally will not be able to be resold for one year. Holders of these securities will not count toward the threshold that requires a company to register its securities under Section 12(g) of the Securities Exchange Act of 1934, as amended (the Exchange Act), if the company is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year.
Requirements for Crowdfunding Offerings
Ineligible Companies. Certain types of issuers may not rely on the Section 4(a)(6) crowdfunding exemption, including (among others) non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification, companies that have failed to comply with the annual reporting requirements under Reg. C and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Offering Intermediary. All Reg. C offerings and associated activities must occur over the Internet or other similar electronic medium that is accessible to the public, through a SEC-registered intermediary, either a broker-deal or a funding portal. Issuers are allowed to use only one intermediary to conduct a crowdfunding offering.
Disclosure Requirements. An issuer offering securities pursuant to Reg. C must file specified disclosures with the SEC, provide these disclosures and certain financial information to the relevant broker or funding portal and make these disclosures available to actual and potential investors.
Form C. The SEC has created a new “Form C,” which is designed to enable issuers to satisfy initial (and ongoing) disclosure requirements. Form C utilizes the standard eXtensible Markup Language (XML) format for certain information, and issuers will either customize the presentation of the rest of their disclosures or utilize a question and answer format and file those disclosures as exhibits to the Form C. Among other things, the Form C must disclose:
Financial Information. As required by the JOBS Act, the SEC’s rules require an issuer to provide certain financial information to investors participating in a crowdfunding offering. Generally, issuers must provide U.S. GAAP financial statements for the two most recently completed fiscal years (or shorter period during which the issuer has been operating); however, the detail of review depends on the amount of money to be raised in the offering, as follows:
Restrictions on Advertising and Communications. Issuers in a crowdfunding offering are only permitted to advertise their offerings through a special notice (similar to “tombstone ads” under Rule 134 of the Securities Act for public offerings), which includes a limited amount of information about the offering. The rules also permit, within certain limitations, an issuer to communicate with investors and potential investors through communication channels provided by the intermediary on the intermediary’s platform.
Please contact us if you have any questions or would like to learn more about the new rules covered in this Alert and for further guidance if you are considering a crowdfunding offering.
 Although the meaning for the term varies with context, “crowdfunding” as used in this Alert refers solely to securities offerings made in reliance on Section 4(a)(6) of the Securities Act.
 The new rules permit the Internet-based platforms to facilitate the offer and sale of securities without having to register with the SEC as brokers (although registration as a “funding portal” will be required).
 A Form C (or related form) must be filed with the SEC on EDGAR: (1) before the commencement of a crowdfunding offering; (2) during the pendency of a crowdfunding offering to report progress toward the funding goal and, when applicable, certain changes to the offering or updates (unless the intermediary provides frequent updates regarding the issuer’s progress towards its goal); (3) annually after completing a crowdfunding offering; and (4) at the conclusion of Form C reporting obligations.