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SEC and FINRA Propose Crowdfunding Rules Under the JOBS Act

October 31, 2013

On October 23, 2013, the Securities and Exchange Commission (SEC) voted unanimously to propose new Regulation Crowdfunding, a set of proposed rules that would allow, for the first time, non-accredited investors to invest in startups and small businesses through SEC-registered funding portals. Regulation Crowdfunding would implement new Securities Act Section 4(a)(6), added by Title III of the JOBS Act of 2012, that provides an exemption for crowdfunding transactions.  The SEC’s proposal coincided with the Financial Industry Regulatory Authority’s (FINRA) release of proposed rules and related forms for crowdfunding portals.

Crowdfunding Exemption
Title III of the JOBS Act provides an exemption from registration for companies raising capital through crowdfunding subject to, among other requirements, the following limitations:

  • the company can raise a maximum of $1 million through crowdfunding during a trailing 12-month period.
  • investment in such offerings by an individual investor are capped at:
    • the greater of $2,000 or 5% of the individual’s annual income or net worth where both are less than $100,000; or
    • 10% of annual income or net worth where either is $100,000 or more.
  • transactions must be conducted through a registered funding portal or through a registered broker-dealer.

Capital raised by a company through other means, including other registration exemptions, will not be counted toward the $1 million annual limitation.

Company Requirements
Regulation Crowdfunding requires the company raising funds through crowdfunding transactions to prepare an offering statement on new Form C that must be filed with the SEC, provided to its intermediary and made available to investors that, among other things, discloses:

  • information about officers, directors and 20% owners;
  • a description of the company’s business and business plans, number of employees and the use of proceeds of the offering;
  • information about the risks of the offering;
  • the price to the public of the securities being offered, how the valuation of the securities was determined, the target offering amount, the deadline to reach the target amount and whether the company will accept capital in excess of the target amount;
  • information about related-party transactions;
  • information about the financial condition of the company; and
  • financial statements that, depending on the target amount offered in transactions during the trailing 12-month period, would have to be accompanied by tax returns (for offerings of less than $100,000), reviewed by an independent public accountant (for offerings of more than $100,000 but less than $500,000) or audited by an independent public accountant (for offerings of greater than $500,000).

Requirements on Intermediaries – Funding Portals
Crowdfunding transactions must be effected through a broker-dealer or a new type of SEC-registered entity called a “funding portal” that complies with new Securities Act Section 4A(a).  As proposed, Regulation Crowdfunding would, among other things, require intermediaries to:

  • have a reasonable basis for believing that the crowdfunding company iscomplying with the applicable rules;
  • ensure that the company’s disclosure is made publicly available for 21 days before securities are sold;
  • provide investors with educational materials;
  • take measures to reduce the risk of fraud and deny access to any companywhere it believes the company or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection;
  • make available information about the company and the offering;
  • provide communication channels to permit discussions about offerings on the platform; and
  • avoid offering investment advice or making recommendations. 

FINRA Proposed Rules Release
FINRA released a set of proposed rules, referred to as the Funding Portal Rules, and related forms for SEC-registered funding portals that become FINRA members.  The proposal, which reflects the rules proposed in Regulation Crowdfunding, would implement the provisions of the JOBS Act in the FINRA rules. FINRA has streamlined the proposed Funding Portal Rules to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection.

The SEC has provided a 90 day comment period for Regulation Crowdfunding, after which period will take time to consider all the comments it receives and incorporate them into final rules, which process typically takes several months.  The final rules, once approved, will likely become effective 60 days after being published in the Federal Register.  In the release of the proposed rules, the SEC reminded companies and intermediaries that they may not rely on the crowdfunding exemption created by the JOBS Act until the final rules become effective. FINRA has set a deadline of February 3, 2014 for interested parties to comment on the proposed Funding Portal Rules.

Murtha Cullina LLP will host a Business Breakfast Series seminar on the topic of crowdfunding in January 2014. More information on our Business Breakfast Series winter schedule will soon be available online at

Please contact any of the Securities Law attorneys listed below if you have any questions regarding this client bulletin:

Willard F. Pinney, Jr.: 860.240.6016/
Edward B. Whittemore: 860.240.6075/
David A. Menard: 860.240.6047/
James W. McLaughlin: 860.240.6118/

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