What is crowdfunding and how is it affected by securities registration laws?

The edition of Section 4(a)(6) to the 33 Act introduced equity crowdfunding as a viable option for seeking investors in a new business. Crowdfunding is a sort of mini-public offering that allows the general public to purchase securities directly from an issuer through authorized, private exchanges. Section 4(a)(6) provides for a Section 5 registration exemption for issuances conducted in accordance with specific crowdfunding methods. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer (including all entities controlled by or under common control with the issuer) must meet specified requirements, including the following:

• the amount raised must not exceed $1 million in a 12-month period (this amount is to be adjusted for inflation at least every five years);
• individual investments in a 12-month period are limited to:
• the greater of $2,000 or 5 percent of annual income or net worth of an individual, if the annual income or net worth of the investor is less than $100,000;
• 10 percent of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth of the investor is $100,000 or more (these amounts are to be adjusted for inflation at least every five years); and
• transactions must be conducted through an intermediary that either is registered as a broker or is registered as a new type of entity called a funding portal.

Next Article: Securities Act of 1933 - Applicability Back to: SECURITIES LAW

What are the Requirements for Crowdfunding Brokers?

Many entrepreneurs see the availability of crowdfunding as an important financing option for smaller companies that otherwise lack the resources to seek a public offering or to comply with statutory or rule-based exemptions. Section 4(a)(6) places the burden of compliance on the crowdfunding broker or portal. To become registered as a crowdfunding broker or funding portal, the entity must comply with the following:

• implement procedures to protect purchasers of securities against fraud;
• refrain from providing investment advice or soliciting purchasers;
• provide disclosures substantially similar to those required in a registration or disclosure document;
• allow for questions and feedback on securities being issued;
• file an offering statement with the SEC disclosing the terms and details of all issuances (which is also available to investors); and
• make annual filings with the SEC and make those fillings available to the public on the crowdfunding site or portal.

The qualified broker or portal must also make certain that all investors meet the accreditation standards laid out by Section 4(a)(6). It cannot employ intermediaries to sell securities on behalf of the broker or portal. It must make certain the securities are understood to be restricted and, with limited exception, cannot be sold within a 12-month period of purchase.

Related Topics

• Securities Law (Intro)
• What are Securities Laws?
• What is a Security?
• What qualifies as an Investment contract?
• What are the primary federal securities laws?
• What are the regulatory goals of security laws?
• What is the Securities and Exchange Commission?
• What is an Initial Public Offering?
• What is a Direct Public Offering?
• What is Crowdfunding?
• Securities Act of 1933
• What is an Offer to Sell securities?
• Who are the parties regulated in an offer to sell securities?
• What are the primary disclosure documents required in an offer to sell securities?
• Forward Looking
• Red Herring Prospectus (Securities) Definition
• Registration of Securities
• What is an issuer allowed to do at each stage of the registration process?
• How are issuers classified for purposes of the registration and offering process?
• What is an issuer allowed to do during the Pre-filing Period?
• What are the limitations on the issuer during the Post-filing, Waiting Period?
• What is an issuer allowed to do during the Post-Effective Period?
• What is an Emerging-Growth Company?
• What type of information must an issuer disclose?
• What laws govern the mechanics of disclosure in a securities offering?
• Deficiency Letter (Securities Law)
• Registration Exemptions Securities Act of 1933
• What are Exempt Securities and Exempt Transactions?
• What are Restricted Securities?
• Section 3(a)?
• Section 3(b)?
• What is a Rule 147 Exemption?
• What is a Section 4(a) Exemption?
• Section 4(a)(5)?
• What is a Regulation A Exemption?
• What are Regulation D Exemptions?
• What is a Rule 504 Exemption?
• What is a Rule 505 Exemption?
• What is a Rule 506(b) Exemption?
• What is a Rule 506(c) Exemption?
• What is Rule 502(d) and the Rule 144 Safe Harbor?
• Rule 144a
• What are the disclosure requirements for companies employing an exemption?
• What is the requirement to file Form D?
• What is the effect of failing to register an offering under Section 5?
• Liability Under the Securities and Exchange Act of 1933
• What is civil liability under Section 11 of the 33 Act?
• What is civil liability under Section 12 of the 33 Act?
• What are defenses available to charges under Sections 11 and 12?
• What is civil liability under Section 17 of the 33 Act?
• What is potential criminal liability under the 33 Act?
• The Security Exchange Act of 1934
• When must an issuer register pursuant to the 34 Act?
• What disclosures are required of reporting companies under the 34 Act?
• What is liability under Section 10(b) and Rule 10(b)(5)?
• What is insider trading under Rule 10(b)(5)?
• What damages are available under Section 10 and Rule 10(b)(5)?
• What is insider trading under Section 14 of the 34 Act?
• What is liability under Section 16 of the 34 Act?
• What is liability under Section 18 of the 34 Act?
• What is criminal liability under the 34 Act?
• Liability under the Securities Enforcement Remedies Act?
• Blue Sky Laws State Securities Laws
• What are Blue Sky Laws?
• When is an issuer required to comply with state securities laws?
• What are the registration requirements under state law?
• What is Coordinated Registration under state law?