January 18, 2022

Volume XII, Number 18

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January 18, 2022

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Recent SEC Guidance on Crowdfunding

On May 7, 2012, the Securities and Exchange Commission (SEC) Division of Trading and Markets issued guidance to prospective crowdfunding intermediaries under the Jumpstart Our Business Startups (JOBS) Act (H.R. 3606) in the form of Frequently Asked Questions (FAQs). The FAQs are set forth on the SEC’s website. While much of the JOBS Act was intended to make capital raising easier for young companies, the SEC’s guidance makes it clear that the SEC remains concerned about crowdfunding. As such, the final rules are likely to create a fair amount of “friction” for young companies to raise capital for equity through crowdfunding.

The guidance provides that any entities proposing to serve as crowdfunding intermediaries, either as brokers or funding portals, must first register with the SEC and the Financial Industry Regulatory Authority (FINRA), even if such entity is already a registered broker-dealer. The SEC, however, has not yet released the rules to implement the crowdfunding provisions or the registration of intermediaries, and the rules are not due to be released until January 2013. So, until the SEC releases rules on the crowdfunding process (which may or may not be before January 2013), no one can act as an intermediary or take advantage of the crowdfunding statute. The rules, once released, will set forth the process to register with the SEC as an intermediary and become members of a national securities association that is registered under Section 15A of the Exchange Act (FINRA is currently the only national securities association that satisfies this criterion).

In addition to reiterating and confirming that all crowdfunding intermediaries must register with the SEC and FINRA, and that such a process can’t commence until the final rules have been released, the SEC addresses various limitations and prohibitions that each intermediary must be aware of (including prohibitions on providing investment advice and recommendations, and on soliciting purchases and sales on its website). Further, the FAQs stress that there will be certain duties that crowdfunding intermediaries should be familiar with, including the legal implications to acting in that capacity.

While the ability of companies to use pure crowdfunding for equity remains uncertain, we believe the biggest impact of the JOBS Act will be the allowance of general solicitations under Rule 506, which is anticipated to be effective as of July 5, 2012. As the legislation is enacted, if sales are limited to “accredited investors,” companies and funds will be able to solicit capital directly and on-line under the new Rule 506. Ironically, it looks like the JOBS Act may have created “crowdfunding for the affluent.” We are concerned, however, that the SEC may issue additional rules that will place limitations on general solicitations under the new Rule 506.

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume II, Number 138
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About this Author

Daniel I. DeWolf, Mintz Levin, Member, Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice Emerging Companies Lawyer, Venture Capitalism
Member / Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice

Daniel is a leading authority on growth companies and venture capital law — and has worked on pioneering online capital-raising methods since the Internet’s beginning. He is immersed in the national and international ecosystem of emerging companies and investors focused on start-ups. He has also been a member of NYU Law School’s faculty since 2003, where he teaches venture capital law. Earlier, he co-founded and served as managing director of an early stage venture capital firm based in New York City.

Daniel is Chair of Mintz's Technology Practice Group and Co-chair of the firm’s...

212-692-6223
Samuel Effron, Securities Law Attorney, Mintz Levin, Capital Financing Lawyer,Venture Capital & Emerging Companies Securities & Capital Markets
Member

Sam’s practice focuses on venture capital and other private securities transactions, counseling start-ups and emerging growth companies, funds and crowdfunding platforms. Sam is heavily involved in the start-up community in New York and regularly advises and mentors young companies and entrepreneurs regarding the legal and business issues that they face, and speaks at many of the local accelerators, incubators and co-working spaces.

Sam is a co-editor of MintzEdge, an online resource...

212-692-6810
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