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May 2012 - Business Law & Order - Bradley J. Wyatt
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- 3. Manner of No general solicitation or advertising. Offering Offeree and No limitation on offerees. Unlimited accredited investors and 35 non-accredited Purchaser investors. “Accredited investors” include certain institutions; directors, executive Requirements officers and general partners of issuer; natural persons who with spouse meet $1 million net worth (excluding value of primary residence, net of debt secured by the residence up to the value of the residence) or $300,000 income test, or alone meet $200,000 income test; and entities with over $5,000,000 total assets or owned solely by accredited investors. All non-accredited investors under Rule 506 must be sophisticated alone or with purchaser representatives. Information No specific requirements if all purchasers are accredited investors. Specialized Required requirements for non-accredited investors. In either case, must meet anti-fraud standards. Filing File Form D with SEC not later than 15 days after first sale. Filing not a condition of Requirement the exemption. Blue Sky Exempt as “covered security” under NSMIA and Federal Covered Security MUSA 201(f). Other Factors All conditions must be met but subject to Rule 508 substantial compliance relief. Adopted as safe harbor under Section 4(2). Safe harbor from integration.
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Notas del editor
- A 1996 SEC No-Action Letter (IPOnet, SEC No-Action Letter (July 26, 1996)) extended this principle to private offerings posted on the internet. In that case, access to private offering material was granted only after a "member" had been pre-qualified as an "accredited investor" by completing a generic questionnaire. Once qualified, the member was issued a password which enabled access to a website page containing a notice of a private offering. In addition, the operator imposed a suitable "cooling off" period before the qualified member was granted access to the private offering material. The SEC approved the operation of this website. In doing so, the SEC found that the website operator had taken sufficient steps to allow a "pre-existing, substantive" relationship to be established between the issuer/broker-dealer and the offerees.
- Section 201(b) adds a new provision to Section 4, providing that offers and sales of securities exempt under the revised Rule 506 shall not be deemed public offerings under the federal securities laws "as a result of general advertising or general solicitation." In light of past judicial and SEC interpretations suggesting offerings exempt under 4(2) may not include general solicitation, this provision is a conforming change to accommodate the revisions the SEC is required to make to the Rule 506 safe harbor to permit general solicitation.
- Exemption from registration under Section 15 of the Securities Exchange Act of 1934 (Exchange Act) as a broker-dealer for persons that would be required to register solely because of the following activities related to securities sold under Rule 506:Maintaining a platform or mechanism permitting offers, sales, purchases, negotiations, general solicitation or similar activities (whether online, in person or through any other means) by issuers of the securities.Co-investing in the securities.Providing ancillary services, including certain due diligence and standardized documentation services, related to the securities. This exemption is only available if the person:Receives no compensation in connection with the purchase or sale of the securities. It is currently unclear whether this prohibits any compensation or just per-transaction compensation.Does not have possession of customer funds or of the securities in the purchase and sale process.Is not disqualified under Section 3(a)(39) of the Exchange Act.
- The JOBS Act does not affect the application of anti-fraud provisions of the federal securities laws to Rule 506 or Rule 144A transactions. Offering participants might refrain from general solicitation and advertising due to concerns about antifraud liability arising from it;Offering participant might conclude that general solicitation or general advertising activities are unlikely to contribute significantly to the successful marketing of a particular offering.the JOBS Act does not mandate any revisions to Regulation S, which is conditioned on, among other things, the issuer not engaging in certain directed selling efforts in the US. Without additional SEC guidance or rulemaking relating to Regulation S, offering participants might decide general solicitation is still banned in combined Rule 144A/Regulation S offerings;
- Crowdfunding involves the use of the internet and social media to raise capital, typically from a large number of people and in relatively small amounts. Crowdfunding enables small startup businesses that may not have easy access to traditional methods of capital markets and venture capital fundraising to raise capital. Raising capital for a business from investors with a financial interest in business' success brings crowdfunding under the jurisdiction of federal and state securities laws. This type of crowdfunding is illegal without registering the offering with the SEC or fitting within an exemption from registration. Traditional registration exemptions are often unavailable or difficult to take advantage of in the crowdfunding context. By using the internet and social media with limitless reach, crowdfunding also raises complex federal, state and even non-US securities liability questions.
- Natural person's income and net worth are calculated for these purposes using the SEC rules used to measure the income and net worth of an accredited investor .
- Crowdfunding IntermediariesNew Section 4A(a) of the Securities Act requires an exempt crowdfunding transaction to be conducted through a broker or funding portal. Section 4A(a) requires a person acting as such an intermediary to, among other things:Register with the SEC as a broker or a funding portal and register with any applicable self-regulatory organization. Provide any disclosure, including disclosure related to risks and other investor education materials, as the SEC requires by rule.Ensure that each investor:reviews investor education information in accordance with standards established by the SEC; confirms it understands that it is risking the loss of its entire investment and that it can bear such a loss; and answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups and small issuers, the risk of illiquidity and any other matters that the SEC requires by rule.Take measures to reduce the risk of fraud, including background and securities enforcement regulatory checks on the officers, directors and 20% shareholders of each issuer whose securities it offers and any other requirements the SEC adopts.No later than 21 days before the first day on which securities are sold to any investor (or other period that the SEC establishes), make available to the SEC and to potential investors any information provided by the issuer in response to the requirements of Section 4A(b) (see Disclosure and Other Requirements for Crowdfunding Issuers).Ensure that the issuer may only receive the offering proceeds when the aggregate capital raised from all investors equals or exceeds a targeted offering amount, and permit all investors to cancel their commitments to invest, as the SEC determines appropriate by rule.Undertake any efforts the SEC requires to ensure that no investor purchases an amount of crowdfunding securities during any 12-month period that, in the aggregate, from all issuers, exceeds the per-investor limit (see Crowdfunding Exemption).Comply with any privacy or protection of information requirements the SEC adopts. Not compensate promoters, finders, or lead generators for providing the broker or funding portal with personal identifying information for any potential investor.Prohibit its directors, officers, or partners (or any similar person) from having any financial interest in an issuer that uses its services.
- New Section 4A(b) of the Securities Act requires each crowdfunding issuer to file with the SEC, provide to investors and the broker or funding portal, and make available to potential investors:Its name, legal status, physical address and website address.The names of its directors, officers and 20% stockholders.A description of its business and anticipated business plan. A description of its financial condition. The level of detail of the required disclosure depends on the level of crowdfunding activity undertaken by the issuer during the preceding 12 months. For offerings that, together with all other crowdfunding offerings by the issuer in the past 12 months, have, in the aggregate, target offering amounts of:$100,000 or less: the issuer must provide income tax returns for its most recently completed year and financial statements certified by the principal executive officer; more than $100,00 but less than $500,000: the issuer must provide financial statements reviewed by a public accountant that is independent of the issuer; andmore than $500,000 (or such other amount as the SEC establishes by rule): the issuer must provide audited financial statements.A description of the intended use of the proceeds.The target offering amount, the deadline to reach the target offering amount and regular updates regarding the progress towards meeting the target offering amount.The price to the public of the securities or the method for determining the price. Before each sale, each investor must be provided in writing the final price and all required disclosure, with a reasonable opportunity to rescind its purchase commitment.A description of the ownership and capital structure of the issuer, including:a detailed description of the terms of the offered securities and each other class of the issuer's securities;a description of how the issuer's principal stockholders' exercise of their rights could negatively affect the purchasers of the securities being offered; the name and ownership level of each stockholder holding more than 20% of any class of the issuer's securities; how the offered securities are being valued, and examples of methods for how the issuer may value its securities in the future; andthe risks to purchasers of the securities relating to minority ownership in the issuer and future corporate actions, including additional share issuances, a sale of the issuer or transactions with related parties.At least once a year, crowdfunding issuers must also file with the SEC and provide to investors its financial statements and reports of its results of operations, in compliance with rules adopted by the SEC.
- Investment Companies or companies excluded from the definition of investment company by Section 3(b) or 3(c) of the Investment Company Act of 1940.The JOBS Act requires the SEC to issue rules within 270 days of enactment disqualifying certain issuers and intermediaries from relying on the crowdfunding exemption based on the disciplinary history of the issuer or intermediary. The disqualification provisions must be substantially similar to the disqualifications provisions of Rule 262 of Regulation A under the Securities Act. Unless, upon a showing of good cause and without prejudice to any other action by the Commission, the Commission determines that it is not necessary under the circumstances that the exemption provided by this Regulation A be denied, the exemption shall not be available for the offer or sale of securities, if: the issuer, any of its predecessors or any affiliated issuer:has filed a registration statement which is the subject of any pending proceeding or examination under section 8 of the Act, or has been the subject of any refusal order or stop order thereunder within 5 years prior to the filing of the offering statement required by rule 252;is subject to any pending proceeding under rule 258 or any similar section adopted under section 3(b) of the Securities Act, or to an order entered thereunder within 5 years prior to the filing of such offering statement;has been convicted within 5 years prior to the filing of such offering statement of any felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the Commission;is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily restraining or enjoining, or is subject to any order, judgment or decree of any court of competent jurisdiction, entered within 5 years prior to the filing of such offering statement, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security or involving the making of any false filing with the Commission; oris subject to a United States Postal Service false representation order entered under 39 U.S.C. §3005 within 5 years prior to the filing of the offering statement, or is subject to a temporary restraining order or preliminary injunction entered under 39 U.S.C. §3007 with respect to conduct alleged to have violated 39 U.S.C. §3005. The entry of an order, judgment or decree against any affiliated entity before the affiliation with the issuer arose, if the affiliated entity is not in control of the issuer and if the affiliated entity and the issuer are not under the common control of a third party who was in control of the affiliated entity at the time of such entry does not come within the purview of this paragraph (a) of this section.any director, officer or general partner of the issuer, beneficial owner of 10 percent or more of any class of its equity securities, any promoter of the issuer presently connected with it in any capacity, any underwriter of the securities to be offered, or any partner, director or officer of any such underwriter:has been convicted within 10 years prior to the filing of the offering statement required by rule 252 of any felony or misdemeanor in connection with the purchase or sale of any security, involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment adviser;is subject to any order, judgment, or decree of any court of competent jurisdiction temporarily or preliminarily enjoining or restraining, or is subject to any order, judgment, or decree of any court of competent jurisdiction, entered within 5 years prior to the filing of such offering statement, permanently enjoining or restraining such person from engaging in or continuing any conduct or practice in connection with the purchase or sale of any security, involving the making of a false filing with the Commission, or arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, or investment adviser;is subject to an order of the Commission entered pursuant to section 15(b), 15B(a), or 15B(c) of the Exchange Act, or section 203(e) or (f) of the Investment Advisers Act of 1940;is suspended or expelled from membership in, or suspended or barred from association with a member of, a national securities exchange registered under section 6 of the Exchange Act or a national securities association registered under section 15A of the Exchange Act for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; oris subject to a United States Postal Service false representation order entered under 39 U.S.C. §3005 within 5 years prior to the filing of the offering statement required by rule 252, or is subject to a restraining order or preliminary injunction entered under 39 U.S.C. §3007 with respect to conduct alleged to have violated 39 U.S.C. §3005.any underwriter of such securities was an underwriter or was named as an underwriter of any securities:covered by any registration statement which is the subject of any pending proceeding or examination under section 8 of the Act, or is the subject of any refusal order or stop order entered thereunder within 5 years prior to the filing of the offering statement required by rule 252; orcovered by any filing which is subject to any pending proceeding under rule 258 or any similar rule adopted under section 3(b) of the Securities Act, or to an order entered thereunder within 5 years prior to the filing of such offering statement.
- An investor in a crowdfunding offering may bring an action against the issuer under Section 4A(c) for rescission or damages. The issuer will be held liable for written or oral material misstatements or omissions in accordance with Section 12(b) and Section 13 of the Securities Act, as if the liability were created under Section 12(a)(2) of the Securities Act. For more information on liability in securities offerings, see Practice Note, Liability Provisions: Securities Offerings (www.practicallaw.com/6-381-1466).For purposes of determining liability in a crowdfunding offering, the term issuer includes any person who: Is a director or partner of the issuer.Is a principal executive officer, principal financial officer, controller or principal accounting officer of the issuer. Offers or sells securities in the offering.