Crowdfunding Requirements For Issuers

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”. The Crowdfunding Act, creates a new exemption to the registration requirements under a newly designated Section 4(6) of the Securities Act of 1933, as amended.

The new crowdfunding exemption allows Issuers to raise up to $1 million in a twelve month period, as long as no individual investment exceeds certain threshold amounts.  The threshold amount sold to any single investor, cannot exceed (a) the greater of $2,000 or 5% of the annual income or net worth of such investor, if their annual income or next worth is less and $100,000; and (b) 10% of the annual income or net worth of such investor, not to exceed a maximum $100,000, if their annual income or net worth is more than $100,000.  The Crowdfunding Act reads such that this exemption will integrate with (i.e. be added to) securities sold under other exemptions during the 12 month period.

In addition, an Issuer must:

(1)  File with the SEC and provide investors and the funding intermediary (whether a Funding Portal or broker dealer) and make available to potential investors:

(a) The name, legal status, physical address, and website address of the Issuer;

(b)  The names of the directors and officers, and each person holding more than 20% of the shares of the Issuer;

(c)  A description of the business of the Issuer and the anticipated business plan of the Issuer;

(d)  a description of the financial condition of the Issuer, including (i) for offerings of $100,000 or less – income tax returns for the most recently completed year and financial statements certified by the principal executive officer as true and correct; (ii) for offerings of more than $100,000 but less than $500,000 – financial statement reviewed by an independent public accountant in accordance with SEC standards and rules for such review; and (iii) for offerings more than $500,000 – audited financial statements; (note that the offering amount is determined by totaling all Section 4(6) offerings within the preceding 12 month period)

(e)  A description of the stated purpose and intended use of the proceeds of the offering;

(f)  The target offering amount and a deadline to reach the target and regular updates regarding the progress of meeting the target;

(g)  The price to the public of the securities and the method of determining the price;

(h)  A description of the ownership and capital structure of the Issuer including (i) terms of other securities offered and all other classes of securities of the Issuer including details on the differences and potential dilution that could result from a different class (for example, if preferred stock was converted); (ii) a description of how the exercise of rights held by principal shareholders could negatively impact the purchasers of the securities being offered; (iii) name and ownership levels of each existing shareholder owning 20% or more; (iv) how securities being offered are valued and examples of how they may be valued in the future; and (v) risks related to minority ownership and other capital related risk, such as by the issuance of additional shares, sales of assets, transactions with related parties;

(i)  All other risk factors of the offering;

(2)  Not advertise the terms of the offering, except for notices which direct investors to the Funding Portal or broker;

(3)  Not compensate, directly or indirectly, any person to promote the offering, unless certain disclosures are made regarding all such compensation; and

(4) File annual reports with the SEC and provide such reports to investors, with results of operations and financial statements.

These are the requirements laid out in the Crowdfunding Act and all are subject to “such other requirements that the SEC may, by rule, prescribe, for the protection of investors and the public.”  The SEC has not issued proposed rules as of today.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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