Crowdfunding for All Takes Final Steps Toward Actuality, SEC & FINRA Release Rules

On October 25, 2013, the Securities and Exchange Commission (SEC) voted unanimously to propose rules under the JOBS Act that would permit companies to offer and sell securities to non-accredited investors through crowdfunding intermediary portals (crowdfunding portals). The SEC released a fact sheet that highlights several of the proposed rules for startups and investors who want to engage in crowdfunding that include:

• A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
• For investors with annual income and net worth less than $100,000, they would be permitted to invest up to $2,000 or 5 percent of $2,000, or 5 percent of their annual income or net worth, whichever is greater over a 12-month period.
• For investors with annual income and net worth that is equal to or more than $100,000, they would be permitted to invest up to 10 percent of their annual income or net worth, whichever is greater. However, these investors would not be able to purchase more than $100,000 of securities through crowdfunding over a 12-month period.

The fact sheet also provides disclosure requirements for companies and portals.

The Crowdfund Intermediary Regulatory Advocates (CFIRA), an organization formed by the crowdfunding industry's leading platforms and experts, released a brief summary of the new rules and also voiced support for the proposed rules in a recent press release. According to an article from Politico, in an act of bipartisan support, Republicans and Democrats in the House and Senate said they were pleased the SEC proposed the rules.

USA Today columnist Darrell Delamaide touts crowdfunding as an Internet-powered rejuvenation of grass-roots capitalism, rescuing a free-enterprise system that has been hijacked by Wall Street and stifled behind a superstructure of regulations that have failed to protect investors.

However, others are not so optimistic about the new laws and crowdfunding in general. Those who are skeptical include Ohio State Professor Steven Davidoff. In an Op-Ed for The New York Times, Davidoff provides the several reasons that the crowd should be skeptical of crowdfunding, including the potential for fraud.

According to Reuters, Alon Hillel-Tuch, a co-founder and chief financial officer at RocketHub, a crowdfunding platform that is considering registering with the SEC, said that overall he was optimistic about the SEC's plan. However, he is concerned about aspects of the proposal, such as a requirement that a company raising more than $500,000 provide an audited financial statement.

For those interested in commenting on the proposed rules, the SEC plans to release an official call for public comments that will remain open for 90 days after it is initially posted in the Federal Register. All comments will be posted on the SEC website for public review. After an evaluation of all public comments, the SEC will determine whether to adopt the proposed rules.

Last week, the Financial Industry Regulatory Authority, Inc. (FINRA) also issued proposed rules for public comment on crowdfunding portals. FINRA — a self-regulatory, non-governmental organization — will be the primary regulator for U.S. crowdfunding portals. In a publication from Pepper Hamilton LLP., Brian Korn provides a detailed outline of the new FINRA rules and their relationship to current FINRA broker-dealer rules. Mr. Korn also provides the firm's thoughts on the new rules that include:

• FINRA has done a commendable job streamlining a highly complex broker-dealer registration and compliance regimen to tailor it for funding portals.
• FINRA has not proposed that funding portal representatives be licensed (e.g., by maintaining a Series 7, 24 or 63 exam).
• Many of these rules appear to be "check the box" standards, but FINRA will have broad examination and disciplinary authority over funding portals.
• Time will tell if enough entrepreneurs are interested in starting funding portals given the still high-touch regulations and the overall viability of public equity crowdfunding.

For those interested in commenting on the proposed FINRA rules, FINRA has requested comments on all aspects of the proposed funding portal rules. Comments are due February 3, 2014. View the notice...