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SEC Proposes Rules for Crowdfunding

The SEC has proposed for comment rules that would implement requirements in the Jumpstart Our Business Startups Act (“JOBS” Act) to allow securities in companies not registered with the SEC to be sold through on-line “portals.”  This method of fundraising, commonly called “crowdfunding,” could for the first time be used to sell securities without triggering registration requirements with the SEC.

The crowdfunding provisions of the JOBS Act were designed to provide small businesses with the opportunity to raise capital by making low dollar offerings of securities less costly.  The JOBS Act specifically provided for use of internet funding portals to offer and sell securities.  Under the JOBS Act there are limitations on how much money an entity can raise both in total and from each investor.  In addition, investors must meet specified income thresholds.  The SEC’s proposal asks for comment on how individual investors’ compliance with these limitations can best be verified.

Some have raised concerns that this type of internet-based fundraising might result in fraudulent offerings.  In response, SEC Chair White noted that the agency will “evaluate the types of issuers using the new crowdfunding exemption, how issuers and intermediaries are complying with the rule, and whether the exemption is promoting capital formation and effectively protecting investors.”  She explained that the agency wants “this market to thrive, in a safe manner for investors.”

The public will have 90 days to submit comments on the proposal.

Chair White’s remarks are available here.

The full rule proposal is available here.