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Regulation Crowdfunding – Funding Portals and Other Crowdfunding IntermediariesBy Benji Jones and Alex Bowling
Title III of the Jumpstart Our Business Startups Act (JOBS Act) created a new securities registration exemption for crowdfunding[1] offerings by adding Section 4(a)(6) to the Securities Act of 1933 (the Securities Act). In late October of 2015, the Securities and Exchange Commission (SEC) adopted Regulation Crowdfunding, a new regulatory framework that implements this crowdfunding exemption. In an earlier Alert, we outlined the requirements for issuers to conduct an offering under Section 4(a)(6) and Regulation Crowdfunding. Today's Alert provides an overview of the regulatory requirements for the crowdfunding intermediaries that are required to facilitate such offerings, particularly the newly-created entity called a funding portal. Each crowdfunding offering and associated activities must occur over the Internet or other similar electronic medium that is accessible to the public, through a single crowdfunding intermediary. In the SEC’s view, registered intermediaries are necessary to bring the issuer and potential investors together and to provide safeguards to potential investors. A crowdfunding intermediary must be either: (1) a broker registered under Section 15(b) of the Securities Exchange Act of 1934 (the Exchange Act) or (2) a funding portal registered with the SEC. Funding portals are Internet-based platforms that may facilitate Section 4(a)(6) crowdfunding offerings. The JOBS Act directed the SEC to create an exemption that allows such funding portals to avoid the more fulsome registration requirements imposed on a broker-dealer under the Exchange Act that may otherwise be required based on the character of their activities. The funding-portal registration provisions under Regulation Crowdfunding and the SEC’s Form Funding Portal discussed in this Alert became effective on January 29, 2016. Companies can commence offerings under Regulation Crowdfunding on May 16, 2016. Overview of SEC Funding Portal Registration and ConditionsRegistration. Funding portals must register with the SEC by filing a Form Funding Portal that will be publicly available on EDGAR. Form Funding Portal requires information that is similar to the information required for registered broker-dealers on Form BD, but is less extensive in its requirements. Conditions on the Exemption. In order to qualify for the funding portal exemption under Regulation Crowdfunding, a funding portal may not:
The SEC created a “safe harbor” in Rule 402 of Regulation Crowdfunding to provide some clarity to the conditions listed above. Under the safe harbor, a funding portal is permitted to undertake and participate in the following limited activities, consistent with the general conditions of the exemption, and still qualify for the exemption from the requirement to register as a broker-dealer:
Requirements for Crowdfunding IntermediariesRegulation Crowdfunding also imposes certain obligations on crowdfunding intermediaries (whether they are registered broker-dealers or funding portals) in connection with facilitating crowdfunding offerings, including requiring that crowdfunding intermediaries:
FINRA Funding Portal RulesCrowdfunding intermediaries are required to be a member of a national securities association. Currently, the Financial Industry Regulatory Authority (FINRA) is the only national securities association. On January 28, 2016 (and effective as of the following day), the SEC approved rules and forms for SEC-registered funding portals to become FINRA members that were originally proposed by FINRA in October of 2015. These new Funding Portal Rules include (among other things):
Practical Considerations for Issuers Choosing a Crowdfunding IntermediaryAs the rules under Regulation Crowdfunding take effect, the field of crowdfunding intermediaries is likely to greatly expand. Provided below is a non-exclusive list of questions that issuers should consider when choosing the appropriate intermediary for their financing:
Not all crowdfunding intermediaries will be created equal and, with time and as best practices develop, it should become easier to identify the intermediary that suits your objectives. It is important to note that, in certain cases, actions taken by the intermediary could jeopardize the issuer’s securities registration exemption, causing the issuer to unlawfully sell unregistered securities. We recommend you assess your options carefully before commencing an offering with a particular intermediary. We are available to assist you in vetting your options—now is the time to begin to make your assessment so you can take advantage of Regulation Crowdfunding this spring. 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. [1] 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. |
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