Crowdfunding: The SEC Finally Acts on the Proposed Rules
On October 23, 2013 the Securities and Exchange Commission (“SEC”) unanimously voted to propose a set of crowdfuding rules under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Title III of the JOBS Act created an exemption under the securities laws to allow for crowdfunding and directed the SEC to create a set of rules implementing that exemption. While the SEC proposed the rules in October 2013, the rules have languished since then until October 30, 2015 when the SEC finally acted.
The SEC held an open meeting on October 30, 2015 to consider whether to adopt the proposed rules and voted 3 to 1 to approve the rules. The crowdfunding rules are the last major mandated piece of the JOBS Act to be enacted. The rules will permit individuals to invest in crowdfunding transactions subject to certain limitations.
The original rules required an issuer to provide audited financial statements by an independent public accountant if the offering was going to exceed $500,000. As a part of the final rules adopted by the SEC, a change was made to the audit provision requirements. The first time a company relies upon the new rules for an offering that is more than $500,000, but less than $1,000,000, the issuer can provide financial statements that have undergone a review by an independent public accountant rather than audited financial statements. However, if audited financial statements are available, the company must provide them. This exception only applies the first time the issuer utilizes and undertakes a crowdfunding offering.
Some individuals, including SEC Commissioner Piwowar who voted against the proposed rules adoption, believe that the regulations are too burdensome for many small businesses to comply with. Commissioner Piwowar noted, “many traps for the unwary are hidden in the regulations, creating potential nightmares for small business owners that fail to place regulatory compliance at the top of their business plans.” Additionally, the potential costs associated with the offering (including a financial statement review or audit) may prevent small issuers from taking advantage of the crowdfunding rules - rules that were meant to allow exactly those types of company to raise money more easily.
The new rules and forms will become effective 180 days after publication in the Federal Register. Additionally, the staff at the SEC will issue a report regarding the rules and their impact within three years of the rules’ effectiveness. In conjunction with the crowdfunding rules, the SEC has indicated that the forms necessary for the funding portals to register with the SEC will be effective in 2016.