More delays in implementing the JOBS Act

Originally published on Crowdfunding in a Canadian context.

Crowdfunding in a Canadian context

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.

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 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.

One of the discussion questions that the SEC has included as part of the Regulation Crowdfunding document is whether or not equity crowdfunding rules should include an allowance for general solicitation and what, if any, the regulations around that solicitation should be

In response to delays in the implementation of Title III of the JOBS Act that would make investment crowdfunding legal across the US, several States are taking matters into their own hands and taking action to legalize investment crowdfunding at the local level. A summary of what is happening where is provided in the table below:

State Situation
Michigan On December 26, Michigan State Governor, Rick Snyder, signed into law House Bill 4996, which officially makes it legal for companies in Michigan to sell equity to non-accredited investors residing within the State of Michigan via crowdfunding. The law officially came into effect on December 30, 2013. For more information on Michigan’s new law, visit the website of the Michigan Legislature.
Wisconsin Wisconsin State Governor, Scott Walker, signed the 2013 Wisconsin Act 52 into law on November 7, 2013. The Act changes state securities laws to include a crowdfunding exemption, which officially makes intrastate investment crowdfunding legal in the State of Wisconsin. For more details on the exemption, consult the legislative document on the State’s legislative archive website or view this Legislative Council Memo.
Georgia In late 2011, the State of Georgia adopted the Invest Georgia Exemption, which made investment crowdfunding legal in the State even before the JOBS Act was signed into law in 2012. You can view the rules for the Invest Georgia Exemption by clicking here.
Kansas The State of Kansas was actually the first state to ever make provisions for legalizing investment crowdfunding. In early 2011, the State adopted the Invest Kansas Exemption. You can view the details of the exemption by clicking here.
Alabama The State Senate voted in favour of a crowdfunding exemption bill on January 23. The bill still needs to be approved by the House of Representatives before it can be signed into law.
North Carolina The North Carolina House of Representatives passed a bill in June 2013 that would provide an intrastate crowdfunding exemption. The bill still needs to be passed by the Senate before it can be signed into law. You can review the full bill by clicking here.
Washington The State of Washington is also in the process of passing a bill that would allow investment crowdfunding in the state. Details can be found on the website of the State Legislature.
Maine A new bill, the Maine Seed Capital Exemption, was proposed to State Senate in June 2013 followed by an amendment in January 2014. To view the bill text and details on the status of the bill, visit the website of the State Legislature.
California and Florida There are currently lobby efforts underway in both California and Florida for action that would allow intrastate crowdfunding in the respective states.

The issue with these state-based solutions is that they may eventually conflict with the federal rules once implemented. This would complicate things for local businesses hoping to expand their fundraising efforts nationally once that option is available.

Canada and US compared

Read more about the latest significant regulatory developments in Canada on Crowdfunding in a Canadian context, the Canada Media Fund crowdfunding online resource.

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