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SEC Proposes New Crowdfunding Rules

By Aditi Mukherji, JD on October 28, 2013 | Last updated on March 21, 2019

After more than a year of delay, the Securities and Exchange Commission has unanimously approved a proposal of crowdfunding rules to the Jumpstart Our Business Startups (JOBS) Act. The 538-page proposal marks a significant step toward regulating businesses that fund their ventures online.

The public has 90 days to comment on the proposed rules. It could be at least another six months before the agency issues final rules.

Here's a summary of the most significant proposed rules:

  • Crowdfunding cap. Small companies would be allowed to raise up to $1 million a year through crowdfunding without the expense of becoming publicly traded, reports The New York Times.
  • Investor cap. The amount a person would be able to invest in all "crowdfunded" projects over a 12-month period would be capped at 10 percent of annual income or net worth (for those with incomes of $100,000 or more), or the greater of $2,000 or 5 percent of annual income or net worth (for those with incomes of less than $100,000).
  • Broker-dealers and funding portals. Crowdfunding would have to be pursued through a registered broker-dealer or registered "funding portal" (e.g., Kickstarter, IndieGoGo, Prosper, etc.). Broker-dealers and funding portals would not be able to solicit investments, offer investment advice, or compensate employees based on sales.
  • Portal registration. Portals would be required to go through an intensive registration process handled by both the SEC and the Financial Industry Regulatory Authority; they would be required to follow record-keeping and anti-money laundering procedures.
  • Disclosures. Companies selling stock would have to make some disclosures not explicitly required in the original JOBS Act, about risk factors and how much debt they carry. The disclosure document would have to be filed with the SEC at least 21 days prior to first sale.
  • Audits. Companies seeking more than $500,000 would have to release audited financial statements to the SEC.
  • Annual reports would have to be filed with the SEC by any company that completes a crowdfunding round.

These are just a few of the proposed crowdfunding rules. For more guidance on how the rules may affect your business' crowdfunding efforts, you may want to consult with an experienced securities lawyer in your area.

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