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Journal entry — SEC proposes rule on crowdfunding

Published on: Oct 29, 2013

On October 23, the SEC voted unanimously to issue a proposed rule1 to implement requirements in Title III of the Jumpstart Our Business Startups Act that would permit eligible companies to use “crowdfunding” to offer and sell securities. Crowdfunding is a method of raising capital through the Internet, typically by soliciting small individual contributions from a large number of people.

The proposed rule would permit an individual to use crowdfunding to invest in eligible companies, subject to certain thresholds, on the basis of the annual income or net worth of the individual, and would limit the amount of money a company can raise through crowdfunding offerings to $1 million in a 12-month period. For the safety of investors, companies offering their securities in crowdfunding transactions would (1) need to transact through SEC-registered intermediaries, (2) file certain information (including their reviewed or audited financial statements subject to amounts offered and sold during a 12-month period), and (3) disclose certain other information about their offers. However, certain companies would be prohibited from using crowdfunding transactions to offer and sell securities, including those organized outside the United States and its territories, companies already subject to reporting requirements under the Securities Exchange Act of 1934, investment companies (including hedge funds), and others specified in the proposed rule.

The proposed rule would limit crowdfunding transactions to online platforms and would require that they be conducted through an SEC-registered intermediary (i.e., either a broker-dealer or a “funding portal,”2 which would be a new type of SEC registrant). The proposed rule would also create a regulatory framework for these intermediaries. For example, funding portals would be required to perform certain actions such as providing educational materials to investors and taking measures to reduce the risk of fraud. Intermediaries would also be precluded from certain activities such as offering investment advice or making investment recommendations.

Comments on the proposed rule are due 90 days after its publication in the Federal Register.



1    SEC Proposed Rule Release No. 33-9470, Crowdfunding.

2    The proposal defines a “funding portal” as follows:

[A] broker acting as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), that does not:

(i)     Offer investment advice or recommendations;

(ii)    Solicit purchases, sales or offers to buy the securities displayed on its platform;

(iii)    Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or

(iv)   Hold, manage, possess, or otherwise handle investor funds or securities.

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