SEC’s Proposed Crowdfunding Rules: An Overview

64Px - 011Crowdfunding— Alan N. Walter —

The Securities and Exchange Commission (SEC) has finally proposed rules under the JOBS Act to allow companies to sell securities through the vehicle of crowdfunding. Comments on the proposed rules can be submitted in writing or on the SEC site through February 3, 2014.

I present for your edification (and enjoyment?) an overview (and partial cribbing) of the 585 page proposal. Needless to say, this writeup will, by necessity, not reflect all of the nuances of the proposed rules.


Crowdfunding is a source of capital that allows an individual or entity to raise funds through small individual contributions from a large number of people. Individuals interested in the crowdfunding campaign can share information about the project, cause, idea or business with each other and decide whether to fund the campaign based on the collective wisdom of the crowd.

A number of sites, such as Kickstarter and Indiegogo, currently allow funds to be raised through crowdfunding. In return for contributions, these sites give donors tokens of esteem, but not any equity in the project that funds are being raised for.

The federal JOBS Act, and the proposed rules under the Act, would change that. It would allow equity to be raised and securities to be sold through crowdfunding.

Click through below to see some of the details of the proposed rules.Limitations on Amounts

The proposed rules limit the amount of capital that an individual or entity (as issuer) can raise to $1 million in a 12-month period.

The maximum amount an investor may make in any one company is limited by the investor’s net worth and annual income. In no event, however, may this amount exceed $100,000.

Funding Portals

All investments must be made through a broker-dealer or a crowdfunding portal registered with the SEC.

Funding portals may advertise their existence. And may provide services to, and receive compensation from, registered broker-dealers in connection with the funding portal’s offer or sale of securities.


An issuer raising funds through crowdfunding must disclose certain information to prospective purchasers. This includes:

  • the name, legal status, physical address and website address of the issuer
  • the names of the directors and officers, and each person holding more than 20 percent of the shares of the issuer
  • a description of the business of the issuer
  • the anticipated business plan of the issuer;
  • a description of the financial condition of the issuer
  • a description of the stated purpose and intended use of the proceeds of the offering
  • the target offering amount, the deadline to reach the target offering amount and regular updates regarding the progress of the offering
  • the price to the public of the securities or the method for determining the price
  • a description of the ownership and capital structure of the issuer

Under certain circumstances the issuer must release tax returns and audited financial statements.

Reporting to the SEC would be done on a new Form C on the SEC’s EDGAR system.

Advertising and Promotion

Issuers would not be permitted to advertise their crowdfunding offerings, except for notices including no more than (1) a statement that the issuer is conducting an offering, (2) the name of the intermediary through which the offering is being conducted, (3) a link directing the potential investor to the intermediary’s platform, (4) the terms of the offering, and (5) certain limited factual information about the legal identity and business location of the issuer.

Intermediaries may be compensated for directing issuers or potential investors to the intermediary’s platform. However, they may not be compensated for providing any personally identifiable information of potential investors


Issuers must provide investors, prior to sale, a reasonable opportunity to rescind or cancel the commitment to purchase the securities. Specifically, investors would have an unconditional right to cancel an investment commitment for any reason until 48 hours before the deadline identified in the issuer’s offering materials.

If an issuer does not complete an offering because the target is not reached or the issuer decides to terminate the offering, the funds would need to be refunded to the prospective investors.


Securities purchased through the crowdfunding may not be transferred by the purchaser for one year from the date of purchase, except when the transfer is: (1) to the issuer of the securities, (2) to an accredited investor, (3) part of an offering registered with the SEC, (4) to a family member of the purchaser, or (5) in connection with certain events, such as the death or divorce of the purchaser.

Liability of Issuers

An issuer will be liable to a purchaser of its securities in a transaction, if the issuer makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which they were made, not misleading.

An investor who purchases securities in a crowdfunding transaction may bring an action against the issuer to recover the amount paid for the security with interest, or damages if the person no longer holds the security.


Certain entities and individuals are disqualified from raising funds through crowdfunding.

Disqualified individuals include:

  • those convicted of certain felony and misdemeanor convictions involving the purchase or sale of a security or involving the making of a false filing with the SEC
  • those persons who are the subjects of injunctions and court orders within the last five years against engaging in or continuing conduct or practices in connection with the purchase or sale of securities, or involving the making of any false filing with the SEC
  • persons suspended or expelled from a registered national securities exchange or national securities association for conduct inconsistent with just and equitable principles of trade
  • certain other persons subject to SEC orders

In Conclusion

I feel mixed about the proposed rules. On the one hand, I’m happy that the SEC has finally released a proposal and that we’re one giant step closer to seeing crowdfunding for securities in action. On the other hand, I’m not sure that the SEC has found the right balance between protecting investors and promoting capital raising. Time will tell if the SEC found the proper mix of protection and promotion.

As usual, I’m happy to receive your comments and answer your questions.

— Alan N. Walter —

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