Equity Crowdfunding: Understand Proposed SEC Rules

mondaq_logo2 Article by Technically Philly,
Fox Rothschild LLP, Equity crowdfunding is one giant step closer to becoming a reality for entrepreneurs and startups who have eagerly been awaiting the SEC’s final rule making.

The SEC issued proposed rules and forms last month that would finally implement Title III of the JOBS Act, which created an exemption from registration under the Securities Act of 1933 for certain “crowdfunding” securities offerings conducted through “crowdfunding intermediaries.”

In other words, the government agency charged with overseeing capital investment is creating a structure for average people — not just accredited investors — to buy equity in companies so that they might own a portion of their future success and failure.

The exemption remains unavailable until the SEC finally adopts these implementing rules, but this most recent step means that final rules are coming shortly.

Under the proposed SEC rules, issuers who intend to conduct a crowdfunding offering are required to file certain information with the SEC and provide this information to investors, potential investors and the crowdfunding intermediary that they’ll be using — there are many vying for dominance, but Kickstarter is a popular example.

In addition, an issuer — for our purposes, let’s think of them as a startup company, but other groups will get involved — is required under the proposed rules to prepare and file a Form C on EDGAR (the Electronic Data-Gathering, Analysis, and Retrieval system, which is used by those required by law to file forms with the SEC) before the offering commencement. Among other things, Form C requires the reporting to the SEC of the following:

information on the issuer, directors and officers, owners (if they own 20 percent or more of the issuer),
business plan,
intended use of proceeds,
targeted offering amounts,
offering price and how it was determined,
information about the intermediary being used,
and additional information set forth in the proposed rules.
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