CROWDFUNDING. Anna Pinedo David Lynn. May 16, Morrison & Foerster LLP All Rights Reserved mofo.com

Transcription

1 CROWDFUNDING 2011 Morrison & Foerster LLP All Rights Reserved mofo.com Anna Pinedo David Lynn May 16, 2012

2 The JOBS Act - Background The Jumpstart Our Business Startups Act, H.R (the JOBS Act ), was passed by the House of Representatives on March 8, On March 22, 2012, the Senate passed H.R with an amendment to Title III (the crowdfunding exemption). On March 27, 2012, the House of Representatives accepted the Senate s amendment. On April 5, 2012, President Obama signed the JOBS Act. The JOBS Act was the culmination of a year-long bipartisan effort in both the House and Senate to address concerns about capital formation and unduly burdensome SEC regulations. This is MoFo. 2

3 Crowdfunding Background Crowdfunding permits entrepreneurs to pool money from individuals who have a common interest and are wiling to contribute to a venture. Crowdfunding may or may not involve the sale of securities. To the extent the effort involves the sale of securities, then the offering must be registered or must rely on an exemption. SEC Crowdfunding Action: In the matter of Michael Migliozzi II and Brian William Flatow, Release No, (June 8, 2011). Migliozzi and Flatow established the BuyaBeerCompany.com website, and then used Facebook and Twitter to advertise the website. They sought pledges from participants in the crowdfunding effort, and in return participants were told that if the $300 million necessary to purchase the Pabst brewery was raised, the participants would receive a crowdsourced certificate of ownership as well as beer of a value equal to the amount of money invested. This is MoFo. 3

4 Crowdfunding - Background Prior to the enactment of the JOBS Act, crowdfunding advocates had called on the SEC to consider implementing a new exemption from registration under the federal securities laws for crowdfunding efforts. For example, it was suggested that the SEC exempt crowdfunding offerings of up to $100,000, with a cap on individual investments not to exceed $100. This is MoFo. 4

5 JOBS Act - Crowdfunding The Crowd Funding Portal or Broker Crowdfunding Entrepreneur $$$ $$$ An all or none offering. No limits on the number or sophistication of investors. Issuer information (including financial information) required. All offering activities must be conducted through an intermediary. This is MoFo. 5

6 JOBS Act - Crowdfunding Title III provides an exemption that could apply to crowdfunding offerings, to be implemented by SEC rules adopted within 270 days. The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000. The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the exemption during the 12-month period preceding the date of the transaction, does not exceed: the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000. This is MoFo. 6

7 JOBS Act - Crowdfunding Information will be filed and provided to investors regarding the issuer and offering, including financial information based on the target amount offered. The provision would prohibit issuers from advertising the terms of the exempt offering, other than to provide notices directing investors to the funding portal or broker, and would require disclosure of amounts paid to compensate solicitors promoting the offering through the channels of the broker or funding portal. Issuers relying on the exemption would need to file with the SEC and provide to investors, no less than annually, reports of the results of operations and financial statements. This is MoFo. 7

8 JOBS Act - Crowdfunding The transaction must be conducted through a registered broker or funding portal. Funding portals would not be subject to registration as a brokerdealer, but would be subject to an alternative regulatory regime, subject to SEC and FINRA authority, to be determined by rulemaking by the SEC and FINRA. A funding portal is defined as an intermediary for exempt crowdfunding offerings that does not: offer investment advice or recommendations; solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; compensate employees, agents, or other persons for such solicitation or based on the sale securities displayed or referenced on its website or portal; hold, manage, possess, or otherwise handle investor funds or securities; or engage in other activities as the SEC may determine by rulemaking. This is MoFo. 8

9 JOBS Act - Crowdfunding Among the requirements for exempt crowdfunding offerings would be that an intermediary: Registers with the SEC as a broker or a funding portal, as such term is defined in the amendment; Registers with an applicable national securities association; Provides disclosures to investors, as well as questionnaires, regarding the level of risk involved with the offerings; Takes measures, including obtaining background checks and other actions that the SEC can specify, of officers, directors, and significant shareholders; Ensures that all offering proceeds are only provided to issuers when the amount equals or exceeds the target offering amount, and allows for cancellation of commitments to purchase in the offering; Ensures that no investor in a 12-month period has invested in excess of the limit described above in all issuers conducting exempt crowdfunding offerings; Takes steps to protect privacy of information; Does not compensate promoters, finders, or lead generators for providing personal identifying information of personal investors; Prohibits insiders from having any financial interest in an issuer using that intermediary s services; and Meets any other requirements that the SEC may prescribe. This is MoFo. 9

10 JOBS Act - Crowdfunding A purchaser in a crowdfunding offering could bring an action against an issuer for rescission in accordance with Section 12(b) and Section 13 of the Securities Act, as if liability were created under Section 12(a)(2) of the Securities Act, in the event that there are material misstatements or omissions in connection with the offering. Securities sold on an exempt basis under this provision would not be transferrable by the purchaser for a one-year period beginning on the date of purchase, except in certain limited circumstances. The exemption would only be available for domestic issuers that are not reporting companies under the Exchange Act and that are not investment companies, or as the SEC otherwise determines is appropriate. This is MoFo. 10

11 JOBS Act - Crowdfunding Bad actor disqualification provisions similar to those required under Regulation A would also be required for exempt crowdfunding offerings. The provision pre-empts state securities laws by making exempt crowdfunding securities covered securities, however, some state enforcement authority and notice filing requirements would be retained. This is MoFo. 11

12 Funding Portals SEC and FINRA to adopt rules regarding registration and regulation of funding portals. The JOBS Act provides that state securities or Blue Sky laws are pre-empted with regard to registered Funding Portals; however, preemption does not extend to the laws of the state in which the principal place of business of the registered Funding Portal is located. Any applicable Blue Sky law must not be in addition to, or be different from, the requirements for registered Funding Portals established by the SEC. This is MoFo. 12

13 Broker-Dealer Basics Most "brokers" and "dealers" must register with the SEC and join a "self-regulatory organization," or SRO. Section 3(a)(4)(A) of the Securities Exchange Act of 1934 (the Exchange Act ) generally defines a broker" broadly as: any person engaged in the business of effecting transactions in securities for the account of others. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3(a)(5)(A) of the Exchange Act generally defines a "dealer" as: any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise. This is MoFo. 13

14 Broker-Dealer Basics Questions for determining if you are a broker: Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction? Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation? Are you otherwise engaged in the business of effecting or facilitating securities transactions? Do you handle the securities or funds of others in connection with securities transactions? This is MoFo. 14

15 Broker-Dealer Basics Questions for determining if you are a dealer: Do you advertise or otherwise let others know that you are in the business of buying and selling securities? Do you do business with the public (either retail or institutional)? Do you make a market in, or quote prices for both purchases and sales of, one or more securities? Do you participate in a "selling group" or otherwise underwrite securities? Do you provide services to investors, such as handling money and securities, extending credit, or giving investment advice? Do you write derivatives contracts that are securities? This is MoFo. 15

16 Broker-Dealer Registration Section 15(a)(1) of the Exchange Act generally makes it unlawful for any broker or dealer to use the mails (or any other means of interstate commerce, such as the telephone, facsimiles, or the Internet) to "effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless that broker or dealer is registered with the SEC in accordance with Section 15(b) of the Exchange Act. Associated persons of a broker-dealer usually do not have to register separately with the SEC, however they must be properly supervised by a currently registered broker-dealer. A broker-dealer that conducts all of its business in one state does not have to register with the SEC. This is MoFo. 16

17 Intermediary Comparison Regulatory Environment Conduct of Business Costs Availability of Crowdfunding Exemption Broker-Dealer Well-established SEC and FINRA rules regarding registration and ongoing obligations Handling customer funds and securities, making recommendations, compensating for sales of securities, etc. Significant registration costs, as well as ongoing compliance costs Available for issuers using broker-dealer s platform. Funding Portal To be-established SEC and FINRA rules regarding registration and ongoing obligations. Restrictions on activities traditionally considered to be those of a brokerdealer. Expected to be less ongoing obligations, thus less costs involved. Available for issuers using funding portal s platform. This is MoFo. 17