What Does the New Crowdfunding Law Say?

President Obama will be signing the legislation on Thursday!

The name of the law is “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ or the CROWDFUND Act.

Here are the basic provisions:

Maximum aggregate amount that can be raised under the exemption: $1 million

Maximum amount per investor:

• For investors with less than $100,000 in annual income or net worth: the greater of $2,000 or 5 percent of the annual income or net worth of such investor
• For investors with $100,000 or more in annual income or net worth: 10 percent of the annual income or net worth of such investor

Intermediary required: The transaction must be conducted through a broker or funding portal (aka intermediary) that complies with the requirements of the Act

Requirements for intermediaries:

• register with the SEC
• register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934)
• provide such disclosures, including disclosures related to risks and other investor education materials, as the SEC shall, by rule, determine appropriate
• ensure that each investor—
• reviews investor-education information, in accordance with standards established by the SEC, by rule;
• positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
• answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers; an understanding of the risk of illiquidity; and an understanding of such other matters as the SEC determines appropriate, by rule
• take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person
• not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the SEC may establish), make available to the SEC and to potential investors any information provided by the issuer
• ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the SEC shall, by rule, determine appropriate
• make such efforts as the SEC determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to the crowdfunding exemption that, in the aggregate, from all issuers, exceed the investment limits of the exemption
• take such steps to protect the privacy of information collected from investors as the SEC shall, by rule, determine appropriate
• not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor
• prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services
• meet such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.

The SEC will exempt funding portals, conditionally or unconditionally, from the requirement to be licensed brokers, as long as they become members of a national securities association and do not

• offer investment advice or recommendations;
• solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
• compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
• hold, manage, possess, or otherwise handle investor funds or securities; or
• engage in such other activities as the SEC, by rule, determines appropriate

Requirements for issuers:

• file with the SEC and provide to potential and existing investors and the intermediary—
• the name, legal status, physical address, and website address of the issuer;
• the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;
• a description of the business of the issuer and the anticipated business plan of the issuer;
• a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under the crowdfunding exemption within the preceding 12-month period, have, in the aggregate, target offering amounts of—
• $100,000 or less—(I) the income tax returns filed by the issuer for the most recently completed year (if any); and (II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;
• more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the SEC, by rule, for such purpose; and
• more than $500,000 (or such other amount as the SEC may establish, by rule), audited financial statements;
• a description of the stated purpose and intended use of the proceeds;
• the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;
• the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;
• a description of the ownership and capital structure of the issuer, including—
• terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;
• a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;
• the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;
• how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and
• the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and
• such other information as the SEC may, by rule, prescribe, for the protection of investors and in the public interest;
• not advertise the terms of the offering, except for notices which direct investors to the intermediary’s web site
• not compensate or commit to compensate, directly or indirectly, any person to promote the offerings without taking such steps as the SEC shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication
• not less than annually, file with the SEC and provide to investors reports of the results of operations and financial statements of the issuer, as the SEC shall, by rule, determine appropriate, subject to such exceptions and termination dates as the SEC may establish, by rule
• comply with such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.

Transferability: Securities issued pursuant to the crowdfunding exemption may not be transferred for one year after purchase except back to the issuer, to an accredited investor; as part of a registered offering; or to a family member

Automatically becoming a public reporting company when a certain number of shareholders and asset amount is reached: securities acquired under the crowdfunding exemption will be exempted, conditionally or unconditionally depending on what the SEC does in its rulemaking, from this cap (which was increased from 500 investors to 2,000 by the JOBS Act – see future blog post on this subject!)

State preemption: the states are not allowed to require registration of offerings that are exempt under the crowdfunding exemption; however the can require notice filings and fees in the state that is the issuer’s principal place of business and in any state in which purchasers of 50 percent or greater of the aggregate amount of the issue are residents

Adjustment for inflation: Dollar amounts under the exemption will be adjusted not less frequently than once every 5 years to reflect any change in the Consumer Price Index

How long until the SEC finishes its rulemaking?  You’ll notice numerous places in the law that mention rulemaking by the SEC; until the SEC completes the rulemaking process, the law cannot go into effect; the statute gives the SEC nine months to complete the rulemaking process but there are no penalties if they do not complete the rulemaking within this time, so it is difficult to say how long it will take.

NOTE:  THIS IS COPIED FROM:  http://cuttingedgecapital.com/2012/04/what-does-the-new-crowdfunding-law-say/