CrowdFund Investing Under the JOBS Act

The JOBS Act: created an exemption from registration requirements under the securities laws to permit Crowdfunding offerings that satisfy certain requirements, including regulations that the Securities and Exchange Commission (SEC) will adopt.

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Title II of the JOBS Act

The following is a summary of the requirements for Crowdfunding offerings under Title II of the JOBS Act as enacted in Rule 506(c) of Regulation D. These statutes were in effect as of September 2013.

Who Can Invest?

• Only Accredited Investors
  • Individuals with a net worth of at least $1 million, excluding their primary residence
  • Individual with an annual income of $200,000 per year the last two years and anticipates to make the same amount again this year
  • Corporations, partnerships, and business trusts with total assets in excess of $5 million
• There is no limit to how much an investor can invest under 506(c)

Issuer Requirements

• The only disqualification is if the issuer is a bad actor under the securities laws (i.e. has been convicted of securities based crime, has had licenses revoked, or is under an order not to engage in the securities business)
• No limit on the amount that can be raised
• Must take reasonable steps to ensure that all investors are accredited investors
  • For income:
    • Review IRS forms that report purchaser’s income for the two most recent years
    • Receive written representation from the investor that he or she has a reasonable expectation making over $200,000 during the current year
  • For net worth:
    • With respect to assets: check bank statements, brokerage statements, and other statements of securities holdings
    • With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies
  • Or can obtain written confirmation form one of the following persons or entities that they have taken reasonable steps to verify that the person is an accredited investor within the prior three months and have determined that such purchaser is an accredited investor
    • Broker-dealer, Investment advisor, licensed attorney, or public accountant
• May generally solicit or advertise the offering to accredited investors
• No annual reporting to SEC or investors required

Limitations and Disclosures

• No disclosures required as all investors are accredited
• Investors cannot resale the securities
• If even a single non-accredited investor is allowed to invest then the transaction does not fall under the exemption to registration

Remedies

• If there is any misleading misstatement or omission in any oral or written communication relating to the offering of the securities, the investor may bring an action to recover the amount invested or for damages against the issuer and its directors, principal executive officers, principal financial officer and principal accounting officer

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Title III of the JOBS Act

The following is a summary of some of the proposed requirements for Crowdfunding offerings under Title III of the JOBS Act. These requirements have not been enacted as of July 2014.

Who Can Invest

• Anyone – Investors can be non-accredited investors
• Investors are subject to annual limits on all crowdfunding investments
• If the annual income or net worth of an investor is below $100,000, the aggregate amount that an investor may invest through crowdfunding during a 12 month period is the greater of $2,000 or 5% of the investors annual net income or net worth
• If the annual income or net worth of an investor is greater than $100,000, the aggregate amount that an investor may invest through crowdfunding during a 12 month period is 10% of the investor’s annual income or net worth, up to a maximum of $100,000

Issuer Requirements

• Must file information (stated in Disclosure Requirements below) with the SEC and provide the same information to potential investors and intermediaries
• Issuer cannot advertise terms of offering except for notices directing investors to broker or funding portal
• Issuer cannot compensate third party promoters without disclosing the compensation to investors
• Annual filing requirements with the SEC and annual reporting to investors
• U.S. Company
• Can raise up to $1 million through crowdfunding in a 12 month period
• Can only crowdfund through an intermediary – like FundRoom – that is either a broker dealer of registered funding portal

Intermediary Requirements

• Register with the SEC as a broker or funding portal
• Register with any applicable self-regulatory organization
• Provide risk factor disclosures and other investor education materials that the SEC may require
• Ensure that each investor:
  • Reviews investor education information
  • Positively affirms that the investor understands that the investor is risking the loss of entire investment
  • Answers questions demonstrating an understanding of:
    • Level of risk generally applicable to investments in startups, emerging businesses and small issuers
    • Illiquidity risk
• Take measures to reduce the risk of fraud, including background and securities enforcement regulatory history checks on each director, officer and 20% equity holder
• Make all information available to the SEC and investors at least 21 days before securities are sold
• Ensure issuer receives offering proceeds only when capital raised equals at least the target offering amount
• Allow all investors to cancel their commitment to invest in a manner determined by the SEC
• Make such efforts as the SEC determines to ensure no investor exceeds aggregate investment limits during a 12 month period
• Take steps to protect the privacy of information collected from investors
• Not compensate promoters, finders or lead generators for providing personal identifying information of any potential investors
• Prohibit directors, officers, or partners from having any financial interest in an issuer using its services
• Cannot offer investment advice or recommendations
• Cannot generally solicit sales off the portal
• Cannot handle investor funds

Issuer Information and Disclosure Requirements

• Name, legal status, physical address and website address of the issuer
• Names of the directors, officers and each person holding more than 20% of the shares of the issuer
• Description of the business and anticipated business plan
• Description of financial condition of the issuer if the target offering amounts of:
  • If target offering $100,000 or less, must provide:
    • Income tax returns for prior year, and
    • Financial statements certified by CEO
  • If target offering is more than $100,000 but not more than $500,000, must provide financial statements reviewed by a public accountant
  • If target offering is more than $500,000, must provide audited financial statements
• Description of purpose and intended use of proceeds
• Target offering amount, the deadline to reach the target and regular updates regarding progress in meeting target
• Price to the public or method for determining the price, with each investor to receive the final price, all required disclosures and a reasonable opportunity to rescind the commitment to purchase securities
• Description of ownership and capital structure, including:
  • Terms of each class of securities and a summary of the difference between the classes, including how the rights of the securities being offered can be diluted or limited by other classes
  • Description of how the exercise of rights of the principal shareholders could negatively impact the purchasers of securities being offered
  • Name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer
  • Method of valuing the securities and examples of how securities may be valued in the future
  • Risks to purchasers relating to minority ownership

Shareholder Limitations

• The maximum investors in any private company is 2,000, however crowdfunding investors are not included
• For one year after the date of purchase, an investor may not transfer the securities, except
  • To the issuer
  • To an accredited investor
  • To a family member or in connection with the death or divorce of the purchaser
  • As part of a registered offering

Remedies

If there is any misleading misstatement or omission in any oral or written communication relating to the offering of the securities, the investor may bring an action to recover the amount invested or for damages against the issuer and its directors, principal executive officers, principal financial officer and principal accounting officer.

For more information regarding the, JOBS Act