Securities and Exchange Commission Adopts Final Rules to Permit Crowdfunding

On October 30, 2015 the Securities and Exchange Commission (the “Commission”) adopted its long-awaited final crowdfunding rules under “Regulation Crowdfunding.”All transactions relying on Regulation Crowdfunding must take place through a registered intermediary, either a broker­dealer registered with the Commission or a funding portal registered with the Commission.  Companies are not permitted to undertake any crowdfunding initiatives without the required intermediation.  A company relying on Regulation Crowdfunding will be required to conduct its offering exclusively through one intermediary platform at a time.In summary, Regulation Crowdfunding permits companies to crowdfund capital subject to the following conditions:

• A company may raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12­month period;

• Individual investors, over a 12­month period, may invest in the aggregate across all crowdfunding offerings up to:

  • If either their annual income or net worth is less than $100,000, than the greater of:

• $2,000 or

• 5% of the lesser of their annual income or net worth.

  • If both their annual income and net worth are equal to or more than $100,000, 10% of the lesser of their annual income or net worth; and

• During the twelve month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Required Disclosures by Crowdfunding Companies

Companies that rely on Regulation Crowdfunding to conduct an offering must file the following information with the Commission and also provide it to investors and the intermediary facilitating the offering:

• The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;

• A discussion of the company’s financial condition;

• Financial statements of the company that, depending on the amount offered and sold during a 12­month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;

• A description of the business and the use of proceeds from the offering;

• Information about officers and directors as well as owners of 20% or more of the company; and

• Certain related ­party transactions.

Companies relying on the crowdfunding exemption must file an annual report with the Commission and provide it to investors.

Regulation of Crowdfunding Platforms

All funding portals must register with the Commission on the new “Form Funding Portal”, and become a member of a national securities association, currently, the Financial Industry Regulatory Authority (“FINRA”).  The rules require intermediaries to, among other things:

• Provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;

• Take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with Regulation Crowdfunding and that the company has established means to keep accurate records of securities holders;

• Make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;

• Provide communication channels to permit discussions about offerings on the platform;

• Provide disclosure to investors about the compensation the intermediary receives;

• Accept an investment commitment from an investor only after that investor has opened an account;

• Have a reasonable basis for believing an investor complies with the investment limitations;

• Provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;

• Comply with maintenance and transmission of funds requirements; and

• Comply with completion, cancellation and reconfirmation of offerings requirements.

The rules also prohibit intermediaries from engaging in certain activities, such as:

• Providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;

• Having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and

• Compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

Regulation Crowdfunding contains certain rules that prohibit funding portals from offering investment advice or making recommendations; soliciting purchases, sales or offers to buy securities; compensating promoters and other persons for solicitations or based on the sale of securities; and holding, possessing, or handling investor funds or securities.The rules provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.

Disqualified Companies

Under the Regulation Crowdfunding, certain companies will not be eligible to use the exemption, including non­U.S. companies, reporting companies registered under the Securities Exchange Act of 1934, as amended, certain investment companies, companies that are subject to disqualification, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Effectiveness

The new Regulation Crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register, except that the forms enabling funding portals to register with the Commission will be effective January 29, 2016.

Additional Proposed Amendments

In a related action, the Commission also proposed amendments to existing Securities Act Rule 147 to modernize the rule for intrastate offerings to further facilitate capital formation, including through intrastate crowdfunding provisions.  The proposal also would amend Rule 504 promulgated under the Securities Act of 1933, as amended, to increase the aggregate amount of money that may be offered and sold pursuant to the rule from $1 million to $5 million and apply bad actor disqualifications to Rule 504 offerings to provide additional investor protection.

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This summary is intended to provide general information only on the matters presented. It is not a comprehensive analysis of these matters and should not be relied upon as legal advice. If you have any questions about the matters covered in this memorandum, please contact:

Travis L. Gering:          travis.gering@wg-law.com| (212) 509-4723
Daniel A. Wuersch:     daniel.wuersch@wg-law.com|(212) 509-4722
Peter C. Noyes:           peter.noyes@wg-law.com|(212) 509-0913
Janet R. Murtha:         janet.murtha@wg-law.com|(212) 509-6314
Marco E. Palmese:      marco.palmese@wg-law.com|(212) 509-6310