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SEC Adopts Regulation Crowdfunding


November 12, 2015


On October 30, 2015, the Securities and Exchange Commission (“SEC”) finally adopted Regulation Crowdfunding, new rules that permit certain startup companies and small businesses to offer and sell securities through Internet “crowdfunding” portals maintained by SEC registered broker-dealers or registered funding portals.


Regulation Crowdfunding implements Title III of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), including Section 4(a)(6) (“Section 4(a)(6)”) of the Securities Act of 1933, as amended (“Securities Act”), that was adopted as part of the JOBS Act.  Section 4(a)(6) provides an exemption from the registration requirements under federal securities laws to permit the offer and sale of securities through this type of funding mechanism.


The new rules:

  • permit individuals to invest in crowdfunding securities transactions subject to certain limits

  • limit the amount of money a company can raise in reliance upon the exemption

  • require companies to prepare and file with the SEC an offering document containing information regarding their businesses and the securities offered and comply with ongoing reporting requirements

  • establish a regulatory framework for registered brokers and registered funding portals that companies are required to use as intermediaries in the offer and sale of securities in reliance upon the Section 4(a)(6) exemption


The new rules will become effective 180 days after publication in the Federal Register, except that the forms allowing funding portals to register with the SEC will be effective January 29, 2016.


Limits on Amount that May be Raised by a Company


The aggregate amount that may be sold to all investors by a company in reliance upon the new exemption is limited to $1 million during a 12-month period, although amounts raised under other exemptions from federal registration requirements would not be counted toward the $1 million limit.


In determining the amount that may be sold in reliance upon the exemption, a company is required to aggregate:

  • amounts sold during the 12-month period preceding the expected date of sale in reliance upon the exemption, and

  • the amount the issuer intends to raise in reliance on the exemption (but excluding amounts sold in other exempt offerings during the period)


An offering made in reliance upon the new rules will not be “integrated” with any other exempt offering made by a company (such as in reliance upon Rule 506 of Regulation D), provided each offering complies with the requirements of the applicable exemption.

However, amounts sold in reliance upon the new rules by any entity controlled by or under common control with the company or any predecessor must be aggregated with the amount sold by the company in the proposed offering to determine the aggregate amount sold during the preceding 12-month period.


Limits on Amount that May be Invested by an Investor


The aggregate amount of securities that may be sold to any investor (whether accredited or unaccredited) by a company in reliance upon the rules during a 12-month period preceding the date of the transaction, including the securities sold to the investor in such transaction, will be limited as follows:

  • if an investor’s net worth or net income is less than $100,000, an investor may invest the greater of:

    • $2,000, or

    • 5% of the lesser of the investor’s annual income or net worth

  • if an investor’s annual income and net worth are more than $100,000, an investor may invest 10% of the lesser of annual income or net worth, not to exceed an amount sold of $100,000


These investment limits reflect the aggregate amount an investor may invest in all offerings during a 12-month period in reliance upon the exemption by all companies in which the investor has or proposes to invest.


The SEC provided the following chart to illustrate the rules:





An investor’s annual income and net worth are to be calculated in accordance with the rules applicable to “accredited investors” under Rule 501 of Regulation D promulgated under the Securities Act so that, for example, spouses may calculate their net worth or annual income jointly and a natural person’s primary residence may not be included as an asset in the calculation of net worth.


A company is permitted to rely upon the efforts of its intermediary broker-dealer or crowdfunding portal in determining that the aggregate amount of securities purchased by an investor does not cause him or her to exceed the investment limits, provided the company does not have actual knowledge of noncompliance.


Transaction Conducted Through an Intermediary


A transaction in reliance upon the new rules must be conducted through a registered broker-dealer or registered funding portal.


A company may only use one intermediary platform and the offering transaction is required to be conducted exclusively on that intermediary’s platform.  A company may not use multiple platforms to conduct an offering or concurrent offerings.

The offering may only be conducted through the intermediary’s platform and funding portals are not permitted to physically meet with investors to solicit investments and offerings on its platform, or host launch parties.

A “platform” is defined as “a program or application via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance upon Section 4(a)(6) of the Securities Act.”


Companies Not Eligible to Use Regulation Crowdfunding


The following companies are not eligible to rely upon the exemption provided by the new rules:

  • companies that are not organized under the laws of a state or territory of the U.S. or District of Columbia

  • companies that are subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”)

  • certain investment companies as defined under the Investment Company Act of 1940, as amended (“Investment Company Act”), or companies excluded from the definition of investment company under Sections 3(b) or 3(c) of the Investment Company Act

  • companies disqualified under the rules’ disqualification provisions

  • companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the required new offering statement

  • companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies


Requirements Applicable to Company Relying Upon Exemption


Disclosure Requirements


A company is required to file with the SEC and provide to investors and the intermediary broker or funding portal certain disclosures in an offering statement. 


The company disclosures include:

  • its name and legal status, including form of organization, jurisdiction in which organized and date of organization

  • its physical address and website address of the company

  • the names of its directors and officers, their positions and offices with the company, the period of time in which they have served in such positions, and their three-year business experience

  • the names of persons who are beneficial owners of 20 percent or more of the company’s outstanding voting equity securities

  • a business description and description of its business plan

  • a description of its financial condition

  • the purpose and use of the proceeds of the offering

  • the target offering amount and the deadline to reach the target offering amount

  • procedures for the investor to cancel an investment commitment or complete the transaction

  • the offering price or the method for determining the offering price

  • a description of its ownership and capital structure, including the terms of the securities being offered and the risks of minority ownership and the issuance of additional securities

  • a description of the restrictions on the transfer of the securities

  • the name, SEC file number and CRD number of its intermediary

  • the amount of compensation paid to its intermediary

  • certain legends

  • current number of its employees

  • risk factors

  • material terms of its indebtedness

  • exempt offerings conducted by it during the last three years

  • a description of any related party transactions

  • the location on the company’s website of its annual report

  • any prior failure to comply with the reporting requirements under the rules

  • any direct or indirect interest in the company held by the intermediary

  • other material information

  • certain financial statements prepared in accordance with U.S. GAAP


The company’s disclosures must be filed with the SEC on a new Form C in standard format of eXtensible Markup Language (XML).   The Form C includes an optional question and answer format a company may use to provide disclosures that are not required to be filed in XML format.


Updates on its progress in meeting the target offering amount are required to be made available on the intermediary’s platform no later than five business days after the dates the company reaches the 50% and 100% target offering amounts.  If the company’s intermediary does not provide such updates, the company is required to file a progress report on Form C with the SEC. 


The company must file a report on Form C with the SEC to disclose the total amount of securities sold in the offering at the end of the offering.

In the event of a material change in the terms of the offering or disclosure provided to investors, a company is required to amend its disclosure and file the amended disclosure with the SEC.  Material changes would require confirmation by an investor of his investment commitment within five business days.

Offering Document Financial Statement Requirements


A company must provide the following financial statements, depending upon the amount of securities offered and sold in reliance upon Section 4(a)(6) within the preceding 12-month period:

  • for a company offering $100,000 or less: total income, taxable income and total tax as reflected in the company’s federal tax return (in lieu of filing a copy of the tax returns) and financial statements certified by the company’s principal executive officer (or audited or reviewed financial statements if available)

  • for a company offering more than $100,000 but less than $500,000: financial statements reviewed by an independent public accountant (or audited financial statements if available)

  • for a company offering more than $500,000:

    • for a company offering more than $500,000 but not more than $1 million in reliance on the rule for the first time: reviewed financial statements (or audited financial statements if available)

    • for a company that has previously sold securities in reliance upon the rule, audited financial statements


The financial statements are required to cover the two most recent fiscal years or the period since inception, if shorter, and must be prepared in accordance with U.S. GAAP.


If a company is making the offering during the first 120 days of a company’s fiscal year, the company may provide financial statements for the prior fiscal year if financial statements for the most recently completed fiscal year are not available.


Other Offering Document Disclosure Requirements


Oversubscriptions - A company may accept investments in excess of the target offering amount up to the $1 million annual limit.  However, it is required to disclose in its offering document how much it would be willing to accept in oversubscriptions, how subscriptions will be allocated, and the intended purpose of the additional funds.


Offering Price - A company is required to disclose in its offering document either the offering price of the securities or the method for determining the price, provided that prior to sale, the investor must be provided in writing with the final price and all required disclosure.


Type of Securities – The rules do not limit the type of securities that may be offered under Section 4(a)(6) or prescribe the method for valuing the securities, provided a description of the securities and the valuation method is provided in the offering materials.


Annual Reporting


A company that has sold securities in reliance upon Section 4(a)(6) is required to file an annual report with the SEC no later than 120 days after the end of each fiscal year and post it to the company’s website.  No direct notification of posting is required to be delivered to investors of the posting of the report.


The annual report is required to include financial statements certified by the principal executive officer of the company to be true and complete in all material respects.  If the company has available financial statements that have been reviewed or audited by an independent certified public accountant, it is required to provide them in lieu of financial statements certified by its principal executive officer.


The annual report must include the information required in the company’s offering statement, with the exception of the offering-specific information.


The ongoing reporting obligation terminates when:

  • the company is required to file reports under the Exchange Act

  • the company has filed at least one annual report and has fewer than 300 holders of record

  • the company has filed at least three annual reports and has total assets that do not exceed $10 million

  • the company or another party purchases or repurchases all of the securities issued pursuant to Section 4(a)(6), including any payment in full of debt securities or any complete redemption of redeemable securities, or

  • the company liquidates or dissolves in accordance with state law

A company terminating its annual reporting obligations will be required to file a notice with the SEC within five business days of the date the company becomes so eligible.


Exemption from Section 12(g) of the Exchange Act


Section 12(g) of the Exchange Act requires a company with assets in excess of $10 million and a class of securities held by either 2,000 record holders or 500 holders who are not accredited investors to register that class of securities. 


Holders of securities issued pursuant to an offering exempt under Section 4(a)(6) would not be counted toward the number of record holders under Section 12(g) if the company is:

  • current in its annual reporting obligations under Regulation Crowdfunding

  • has less than $25 million in total assets at the end of its last fiscal year, and

  • has engaged the services of a registered transfer agent


Prohibition on Advertising Terms of Offering


The new rules prohibit a company from advertising the terms of the offering but permit it to publish a notice that directs investors to the funding portal or broker. 


The notice may include no more than:

  • a statement that the company is conducting an offering, the name of its intermediary, and a link directing the investor to the intermediary’s platform

  • the terms of the offering (i.e., the amount of securities offered, nature of securities, price, and closing date of the offering period)

  • factual information about the legal identity and business location of the company, limited to the name of the company, its address, phone number and website, and email address of a representative of the company, and a brief description of the business of the company


A company may communicate with investors about the terms of the offering through communication channels provided by its intermediary on the intermediary’s platform as long as the company identifies itself as the issuer of the securities in all communications.

Compensation of Promoters


The new rules prohibit a company from compensating any person for promoting its offering through communication channels provided by its intermediary unless the company takes reasonable steps to ensure that the person clearly discloses the receipt of compensation each time he or she makes a promotional communication.


Any person acting on behalf of the company (including founders, employees and directors) that engages in promotional activities through the intermediary’s communication channels is required to disclose that he or she is engaging in those activities on behalf of the company.


Also, a company may not compensate any person for promoting its offering outside the intermediary communication channels, except for permitted notices that comply with the advertising rules, discussed above.




Securities issued in reliance upon Section 4(a)(6) may not be transferred by any purchaser (including the initial and any subsequent purchaser) for a period of one year after the date of initial purchase, except to the issuer, an accredited investor, as part of a registered offering, or to a family member, or upon death, divorce or similar circumstances.


“Bad Actor” Disqualification Provisions


Under the rules, a company is not be eligible to offer securities in reliance upon Section 4(a)(6) and an intermediary is not be eligible to participate in transactions if the company or other relevant persons (“covered persons”) or the intermediary have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.  


The disqualification provisions are substantially similar to the disqualification provisions under Rules 262 under the Securities Act and 506 of


Regulation D under the Securities Act. 


The disqualification provisions do not apply to an otherwise disqualifying event that occurred before the effective date of the new rules; however, such event must still be disclosed to all investors in connection with the offering. A person may seek a waiver from disqualification from the SEC.

Intermediary Requirements


A crowdfunding transaction must be conducted either through a “broker” or a “funding portal” that complies with certain requirements under the Exchange Act.


A “broker” is defined as any person that effects transactions in securities for the account of others.


A “funding portal” is defined as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others solely pursuant to Section 4(a)(6) that does not:

  • offer investment advice or recommendations

  • solicit purchases, sales or offers to buy securities offered or displayed on its web site or portal

  • compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its web site or portal

  • hold, manage, possess or otherwise handle investor funds or securities, or

  • engage in such other activities as the SEC by rule determines appropriate

Financial Interest Generally Prohibited


Generally, an intermediary may not have a financial interest in a company using its services.  However, it may have a financial interest in a company offering or selling securities through the intermediary’s platform, provided:

  • it receives the financial interest from the company as compensation for services (and not as an investment) in connection with the offer and sale of such securities through the intermediary’s platform, and

  • the financial interest consists of securities of the same class and having the same terms, conditions and rights as the securities being offered or sold through the intermediary’s platform


Disclosure of any such compensation is required at the time a customer opens his account and on confirmations.


Intermediary Measures to Reduce Fraud


An intermediary is required to take certain measures to reduce the risk of fraud with regard to offers and sales of securities through its portal by requiring the intermediary to:

  • have a reasonable basis for believing that the company complies with Section 4A(b) and Regulation Crowdfunding

  • have a reasonable basis for believing an issuer has established means to keep accurate records of the holders of securities to be offered through the intermediary’s portal

  • deny access to its portal to a company if it has a reasonable basis for believing that the company or any of its officers, directors, or 20% beneficial owners is subject to the Regulation Crowdfunding disqualification provisions, requiring an intermediary to perform a background check with regard to the company, its officers, directors and 20% beneficial owners

  • have each investor open an account with the intermediary and obtain consent to electronic delivery of materials

  • provide certain investor educational materials, including as to the process for the offer, purchase and issuance of securities, risks, type of securities, and restrictions on resale

  • inform investors at account opening:

    • that promoters must clearly disclose in all communications on its platform the receipt of compensation and that he is engaging in promotional activities on behalf of a company

    • of the manner in which they will be compensated in connection with the offering and sale of the securities, including any financial interest received as compensation


Intermediary Transaction Requirements


The following requirements apply to the intermediary in connection with a transaction in reliance upon the rules:


Issuer Information – An intermediary is required to make the company disclosure and offering information publicly available on its platform 21 days prior to the first day on which securities are sold to any investor and for such information to remain publicly available on its platform until the offering is completed or cancelled.  An intermediary cannot require an investor to open an account to access issuer information.


Compliance with Investment Limits – An intermediary may rely upon representations of an investor regarding income, net worth and the amount of other Section 4(a)(6) investments.


Acknowledgement of Receipt of Educational Materials – An intermediary is required to confirm through a questionnaire that the investor has reviewed the intermediary’s educational materials, understands that his entire investment may be lost, is in a financial condition to bear such loss, and has completed a questionnaire demonstrating an understanding of the risks of any potential investment and required statutory elements.


Communications Channels – An intermediary is required to provide on its platform channels through which investors can communicate with one another and representatives of the company about the offering. Intermediaries are prohibited from participating in such communications and communications between a company and an investor may only be conducted through the intermediary platform.


Notice of Investment Commitment – Upon receipt of an investment commitment, an intermediary is required to promptly give or send to an investor a notification by electronic means disclosing the amount of the commitment, price of the securities, name of the company, and the date and time by which the investor may cancel the investment commitment.


Receipt and Transmission of Offering Proceeds – A registered broker is required to comply with Rule 15c2-4 under the Exchange Act related to contingent offerings in connection with the receipt and transmission of funds, including escrow arrangements under certain circumstances. 

A funding portal is required to have funds transmitted to a “qualified third party” that has agreed in writing to hold the funds for the benefit of investors and the company and either to promptly transmit the funds to the company upon meeting the offering contingency or to return the funds to the investor in the event the offering contingency is not met. 


A qualified third party includes:

  • a registered broker-dealer that carries customer or broker or dealer accounts and holds funds or securities for those persons

  • a bank, or

  • a credit union insured by NCUA


Alternatively, the funding portal may establish an account with either a “qualified third party” bank or credit union to hold funds for the exclusive benefit of investors and the company pending either transmission of the funds to the company or return of the funds to the investor.


Completion of Offerings, Cancellations and Reconfirmations


Investors are required to have an unconditional right to cancel an investment commitment for any reason until 48 hours prior to the offering deadline identified in the company’s offering documents.


If an issuer reaches the target offering amount prior to the established deadline, it may close the offering once the target offering amount is reached, provided:

  • the offering has been open for at least 21 days

  • notice of the new offering deadline is provided at least five business days prior to the new offering deadline

  • investors are given the opportunity to reconsider their investment decision and cancel their commitment until 48 hours before the new offering deadline, and

  • at the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount.


Also, if there is a material change to the terms of the offering or information provided by the company about the offering, the intermediary is required to send investors who have made an investment commitment notice of the material change stating that the investment commitment will be cancelled unless the investor reconfirms his commitment within five business days.


Further, if the company terminates the offering or fails to meet the target offering amount, the intermediary is required, within five business days, to give notice to investors who have made an investment commitment, direct the return of investor funds, and prevent further commitments.


Registration of Funding Portals and Other Issues


A funding portal is required to register with the SEC by filing a Form Funding Portal, containing information similar, but less extensive, than that contained in the Form BD Uniform Application for Broker-Dealer Registration. 


Also, currently, a funding portal would be required to become a member of FINRA. 


Registration becomes effective on the later of 30 days after filing with the SEC via Edgar or the date the funding portal is approved for membership in FINRA. 


There is no fidelity bonding requirement for a funding portal.


Advising Issuers


A funding portal may advise a company regarding the structure or content of its offering, including assisting the issuer in preparing offering documentation.


Paying for Referrals


A funding portal may compensate a third party for referring a person to the funding portal so long as the third party does not provide it with personally identifiable information regarding any investor and any compensation paid, other than that paid to a registered broker-dealer, is not based on the purchase or sale of a security in reliance upon the Section 4(a)(6) exemption offered on or through its platform. 


Compensation may be paid by a funding portal to a registered broker-dealer for services or by a registered broker-dealer to a funding portal in connection with an offering in reliance upon the exemption provided the funding portal and broker-dealer have entered into a written agreement covering the services, the services are permitted under the new rules, and the compensation is not prohibited under any FINRA rule.

Compliance and Recordkeeping


A funding portal is required to implement written policies and procedures reasonably designed to achieve compliance with federal securities laws relating to its business as a funding portal.  Also, a funding portal is required to make and preserve certain records for a period of five years.


Neil R.E. Carr                                                               
Direct Dial: +1 202 587 2983                                                                           


Kathleen L. Cerveny

Direct Dial: +1 202 779 9507

For more information, please contact: 

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