More delays in implementing the JOBS Act

Canada Media Fund | Antoine van Eetvelde | April 2, 2014

Disclaimer : The following content is intended to provide general information and does not constitute legal or tax advice of any kind. Refer to your local tax credit administrator for more specific guidelines on reporting crowdfunding income for tax credit purposes.

The end of 2013 and the beginning of 2014 saw a number of significant regulatory developments regarding crowdfunding, both here in Canada and in the US. In particular, the US and certain Canadian provinces made significant progress toward making investment crowdfunding a reality. What follows is a summary of the latest significant regulatory developments in North America. This is the second part of a two-part update (first part available here).

What’s new south of the border?

The Securities and Exchange Commission (SEC) has released its proposed rules for investment crowdfunding after almost a year of delay.

This release brings the SEC one step closer to implementing Title III of the JOBS Act which would make investment crowdfunding legal across the US. The proposed rules were open for public comment until February 3, 2014.

The SEC has struggled to create a set of rules that respected the flexible and democratic nature of crowdfunding (which makes it so appealing to very small and early stage start-up companies) while also implementing sufficient regulation to satisfy consumer and investor protection critics who fear that investment crowdfunding is far too open to abuse and fraud.

Key features of the SEC’s proposed rules:

A company will only be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings per 12-month period.
Companies raising less than $500,000 through crowdfunding within any 12-month period will need to share financial statements and income-tax returns with their investors and those raising more than $500,000 will be obligated to provide audited financial statements to investors.
Investors with an annual income or net worth of less than $100,000 will be permitted to invest a maximum of $2,000 or 5% of their annual income or net worth (whichever is greater) per 12-month period.
Investors with an annual income or net worth equal to or greater than $100,000 will be permitted to invest up to 10% of their annual income or net worth (whichever is greater) per 12-month period up to a total maximum of $100,000 in securities.
Companies conducting a crowdfunding offering will need to file certain information with the SEC, the relevant intermediary facilitating the crowdfunding offering and potential investors.
Private crowdfunding offerings will be conducted exclusively online through a registered broker or funding platform (portal). Funding platforms will be required to register with the SEC. Non-US crowdfunding platforms will be able to register with the SEC, subject to an on-site examination

You can access the complete 585-page document that outlines the full set of rules by clicking here.

View: US intrastate equity crowdfunding exemptions: 5 state bills adopted and 16 pending

The proposed rules also include a set of registration rules for crowdfunding platforms, which were developed in partnership with the Financial Industry Regulatory Authority (FINRA). The FINRA released its set of proposed rules—the Funding Portal Rules—for comment at the same time as the SEC published the Regulation Crowdfunding rules.

Further US reading

The SEC has also officially lifted the ban on “general solicitation” as of September, a rule change that was a key directive under Title II of the JOBS Act.

This rule change means that companies can freely advertise private equity offerings to the public via social media and other outreach and media outlets, something that was previously not allowed. Although this rule change does have implications for investment crowdfunding, which relies on general solicitation via social media, it does not actually apply to crowdfunding in the sense that most people understand it. The rule is actually directed at private equity sales to accredited investors and is accompanied by a new proposed rule that companies need to acquire proof that an investor is accredited if they are selling private equity using general solicitation. In other words, the rule does not mean that companies can sell private equity to non-accredited investors (or the general public) using general solicitation, which is what investment crowdfunding seeks to do. However, the rule change does allow certain platforms, such as CircleUp, to legally use the crowdfunding approach to publicly advertise offerings to accredited investors in a much broader way.