The SEC approved FINRA’s Funding Portal rules for entities that intend to function as funding portals in crowdfunded offerings made pursuant to Regulation Crowdfunding. We had previously posted a link to the rule text. Today, FINRA issued Regulatory Notice 16-06, which provides an overview of the new Funding Portal Rules. The Regulatory Notice can be accessed here: http://www.lexissecuritiesmosaic.com/gateway/finra/regulatory-notices/Regulatory-Notice-16-06.pdf.
The SEC announced that the next meeting of the Investor Advisory Committee will be held on January 21, 2016. Among other things, the Committee will discuss the Financial Accounting Standards Board proposed amendments to the Statement of Financial Accounting Concepts and Notes to Financial Statements concerning disclosure materiality; an update on crowdfunding rules; and the NASDAQ listing standards—shareholder approval rules.
On May 22, 2014, Sebastian Gomez Abero, Chief of the Office of Small Business Policy of the Division of Corporation Finance of the SEC, spoke about the SEC’s crowdfunding and Regulation A+ proposals. Mr. Gomez commented generally on a number of comments and questions raised by commenters to the proposals. Mr. Gomez also noted that the crowdfunding proposals are not yet final and the SEC will have to adopt final rules and that finalizing the Regulation A+ proposals is a priority for the SEC in 2014.
With respect to the SEC’s crowdfunding proposals, Mr. Gomez discussed the offering size limitation, integration with other offerings and the role of intermediaries. Mr. Gomez noted a tendency, while the SEC is deliberating on final rules, to fit crowdfunding under other exemptions from registration, such as Securities Act Rule 506(c) or current Regulation A. Mr. Gomez mentioned that some commenters thought the $1 million offering size limitation should be raised and asked for clarification on whether crowdfunding offerings would be integrated with offerings under other exemptions (e.g., offerings to accredited investors under Securities Act Rule 506(c)). Mr. Gomez said that the SEC is still considering the integration question, but noted that the question is closely tied to the offering size limitation. Mr. Gomez also mentioned guidance in the adopting release for the Securities Act Rule 506 amendments which indicates that a registered offering does not prohibit a Securities Act Rule 506(b) offering, so long as investors in the Rule 506(b) offering are not generally solicited and have a pre-existing relationship with the issuer, and then posed the question whether a crowdfunding offering should be treated as a registered offering in this context. Mr. Gomez also discussed the provisions covering intermediaries (which must register with the SEC and will be subject to FINRA regulation) and emphasized that intermediaries function as “gatekeepers” given that investors in crowdfunding offerings may not be very sophisticated. Another concern expressed by commenters was with liability attaching to intermediaries, although intermediaries are prohibited from providing investment advice in crowdfunding offerings, since the definition of “issuer” under the rule proposals also covers intermediaries. Mr. Gomez went on to discuss the issue of “curating” and noted the safe harbor list of activities provided in the rule proposals, but mentioned that the SEC does not want funding portals to promote types of offerings although funding portals could specialize in certain types of companies (e.g., companies in a particular state or companies in a particular industry). Mr. Gomez noted that the SEC also received comments regarding the information that crowdfunding issuers need to disclose, particularly the financial statement requirements, and that a large number of commenters requested that the threshold for audited financial statements be raised because audited financial statements impose a significant cost for start-up companies and the usefulness of such financial statements for start-up companies is questionable. Mr. Gomez finally mentioned that the SEC is still considering the proposed offering and ongoing reporting requirements for crowdfunding issuers.
With respect to the SEC’s Regulation A+ proposals, Mr. Gomez discussed the preemption of state blue sky laws, which he noted raised the largest number of comments. Mr. Gomez mentioned the coordinated review program approved by the members of the North American Securities Administrators Association (the “NASAA”), which was established to address concerns raised in a GAO report to Congress regarding multi-state review for Regulation A offerings. Mr. Gomez noted that the SEC staff has met with the NASAA to discuss the coordinated review program, although some commenters have noted that there may still be some redundancies even with a coordinated state review process. Mr. Gomez then mentioned that in contrast Securities Act Section 4(a)(6) clearly preempts state blue sky laws but indicated that some states have their established their own rules to exempt crowdfunding offerings. Mr. Gomez also noted that the SEC’s two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Securities Act Rule 147 (which provides a safe harbor for intrastate offerings conducted pursuant to Securities Act Section 3(a)(11)) are examples of the SEC’s efforts to clarify that use of the internet is not incompatible with Rule 147 and state blue sky laws (for more information regarding these two new CD&Is, see our blog post, “SEC Issues New and Revised Guidance on Intrastate Crowdfunding,” available here.
On April 10, 2014, the Investor Advisory Committee (the “IAC”) of the Securities and Exchange Commission (the “SEC”) held a meeting during which it recommended that the SEC adopt crowdfunding rules that are both consistent with the Dodd-Frank Act and commensurate with the risks inherent in allowing early stage start-up companies to sell securities based on limited information to unsophisticated, low net worth investors. The IAC specifically made six recommendations to strengthen the SEC’s proposed crowdfunding rules, addressing the following: (1) the amounts of money an investor can invest in crowdfunding offerings; (2) the enforcement mechanisms for investment limits; (3) the obligations of intermediaries and the ability to curate; (4) educational materials; (5) the definition of electronic delivery; and (6) offering integration.
For more information, see our client alert, “Recommendations of the SEC’s Investment Advisory Committee Regarding Crowdfunding Rules,” available at http://www.mofo.com/files/Uploads/Images/140422-SEC-Regarding-Crowdfunding-Rules.pdf.
On April 10, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued one revised and two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Rule 147 under the Securities Act of 1933, as amended (the “Securities Act”), which are summarized below. Section 3(a)(11) of the Securities Act (“Section 3(a)(11)”) provides an exemption from the registration requirements of the Securities Act for any security which is a part of an issue offered and sold only to persons who reside in a single state or territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such state or territory. Rule 147 under the Securities Act (“Rule 147”) provides a safe harbor for offerings conducted pursuant to Section 3(a)(11), which requires that the issuer must be a resident of, and doing business in, the same state in which all offers and sales are made, and the offering may not be offered or sold to non-residents.
Rule 147 does not prohibit general advertising or general solicitation (Question 141.03)
While this revised CD&I did not change substantively, the SEC Staff reiterated that Rule 147 does not prohibit general advertising or general solicitation. However, any general advertising or general solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on the intrastate exemption under Section 3(a)(11) and Rule 147 be made only to persons resident in the state or territory of which the issuer is a resident.
Use of a third-party internet portal to promote an intrastate offering does not preclude reliance on Rule 147 (Question 141.04)
This CD&I notes that an issuer claiming an exemption under Rule 147 may use a third-party internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable crowdfunding within that state if the portal implements measures to ensure that offers of securities are made only to persons resident in the relevant state or territory. These measures must include, at a minimum:
- disclaimers and restrictive legends which make clear that the offering is limited to residents of the relevant state under applicable law; and
- limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (examples of an acceptable confirmation are a representation as to residence or in-state residence information, such as a zip code or residence address).
An issuer’s use of its own website or social media presence to offer securities would likely involve offers to residents outside the state, making the offering inconsistent with Rule 147 (Question 141.05)
This C&DI notes that issuers generally use their websites and social media presence to communicate in a broad and indiscriminate manner. Therefore, although the specific facts and circumstances would determine whether a particular communication is an offer of securities, using an established internet presence to issue information about specific investment opportunities would likely involve offers to residents outside the state in which the issuer does business.
Governor Jeremy C. Stein spoke at the Crowdfunding for Community Development Finance Conference today (see remarks at: http://www.federalreserve.gov/newsevents/speech/stein20140324a.htm). Fed Governor Stein’s remarks emphasized that perhaps all too often crowdfunding is associated only or primarily with tech companies or start-ups, but that crowdfunding may be used for other purposes. In particular, he focused attention on crowdfunding to support community development.
The SEC announced the next meeting of the Investment Advisory Committee, which will be held on January 31st. The agenda includes a discussion of, among other things, decimalization and crowdfunding. The notice of the meeting is available here: http://www.sec.gov/rules/other/2014/33-9510.pdf.
2013 has proven to be a strong year for IPOs. According to a recent PWC study, total IPO volume for 2013, as of December 17, reached 237 public company debuts, which is an increase over 2012. The overwhelming majority of these IPOs were completed by issuers that qualified as emerging growth companies. (The full details of the study are available here: http://www.pwc.com/us/en/press-releases/2013/pwc-q4-2013-ipo-watch-press-release.jhtml.) Issuers and their counsel have become progressively more comfortable with the IPO on-ramp practices. Issuers continue to rely on the confidential submission process for at least one or two amendments. EGCs are regularly relying on the executive compensation disclosure accommodations.
During 2013, the SEC also made substantial progress with JOBS Act implementation. Here is a brief recap:
Title I: The SEC recently published the report required by Section 108 regarding the disclosure requirements of Regulation S-K. Given the dialogue on disclosure reform generally, it seems safe to say that we should expect continued focus on this in 2014.
Title II: Title II provided additional legal certainty (beyond that which had been provided by pre-JOBS Act no-action letters) for matchmaking sites. Even before the Rule 506 amendments were finalized, it became clear that matchmaking sites that use the internet to reach (at that point) accredited investors would play an important role in the private financing market. During 2013, the SEC Staff provided additional guidance on these models both through the issuance of FAQs and through the issuance of no-action letters to AngelList and Funders Club. On September 23, 2013, the amendments relaxing the prohibition against general solicitation in certain Rule 506 offerings and in Rule 144A offerings became effective, as did the bad actor rules (required by the Dodd-Frank Act, not the JOBS Act). The SEC Staff also released guidance on various questions related to Rule 506 offerings and on bad actor issues. However, many questions have arisen regarding the necessary steps for investor verification in Rule 506(c) offerings, and additional guidance on these would be welcome. Relaxing the prohibition against general solicitation raises fundamental questions regarding the demarcation between “private” offerings and “public” offerings, and the integration of offerings occurring in close proximity to one another. SEC representatives have acknowledged that these integration issues will need to be tackled in the future. The SEC also proposed amendments to Regulation D, Form D and Rule 156. These have proven quite controversial, and it is difficult to predict whether certain of these amendments will be adopted.
Title III: The SEC released proposed rules establishing a framework for crowdfunded offerings.
Title IV: Most recently, the SEC released for comment proposed rules that provide a framework for Regulation A+ offerings. The SEC’s proposed rules would implement the JOBS Act mandate by amending and modernizing existing Regulation A; creating two tiers of offerings, Tier 1 for offerings of up to $5 million ($1.5 million for selling stockholders) and Tier 2 for offerings of up to $50 million ($15 million for selling stockholders); setting issuer eligibility, disclosure and reporting requirements; and imposing additional disclosure and ongoing reporting requirements, as well as an investment limit, for Tier 2 offerings, and, given these investor protection measures, making Tier 2 offerings exempt from blue sky requirements. Regulation A+ offerings may prove to be an important financing alternative for non-reporting companies seeking capital and broader market exposure.
All told, it has been a year of significant changes. Over time, we believe these changes are likelier to have more lasting impact on exempt financings than on the IPO market.
In this alert, we provide a detailed overview of the proposed regulatory framework that will be applicable to crowdfunding offerings conducted pursuant to Title III of the JOBS Act in reliance on Section 4(a)(6) of the Securities Act. As we have noted in our prior initial observations related to the rules proposed by the Securities and Exchange Commission, or SEC, in late October 2013, implementing the Congressional mandate to formulate a framework for crowdfunded offerings, whether or not one intends to avail oneself of this new offering exemption, the tailored approach taken by the SEC and by FINRA in their proposed regulations merits a close look. Both the SEC and FINRA acknowledge that regulation of these offerings requires adapting disclosure-based principles and the existing approach to broker-dealer regulation and oversight to an entirely new public offering rubric. While drawing on these well-established principles, the SEC’s and FINRA’s proposed rules stand out because the proposed rules attempt to provide a scaled or “right-sized” approach. For example, the SEC’s proposed rules would establish limited disclosure requirements for issuers that rely on crowdfunding, as well as limited ongoing reporting requirements for these issuers, although these issuers will not be SEC-reporting companies for the purposes of other SEC requirements. This is novel. Similarly, both the SEC’s and FINRA’s proposed rules relating to funding portals establish a pared-down regulatory framework that acknowledges the limited functions of a funding portal. We hope our discussion below provides a perspective as to whether the SEC and FINRA have struck the right balance in designing regulations that facilitate crowdfunding while promoting investor protection concerns.
To read our alert, please visit: http://www.mofo.com/files/Uploads/Images/131115-SEC-FINRA-Crowdfunding.pdf.
Today, FINRA released a regulatory notice with proposed funding portal rules and solicited comments on the seven rules—Funding Portal Rules 100, 110, 200, 300, 800, 900 and 12009—and related forms.
The FINRA release is available here: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p370743.pdf
The proposed regulations are available here: http://www.finra.org/web/groups/industry/%40ip/%40reg/%40notice/documents/industry/p369763.pdf