The Crowdfund Act of 2012: An Analysis


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A brief analysis of the Crowd Fund Act of 2012.

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The Crowdfund Act of 2012: An Analysis

  1. 1. The CROWDFUND Act of 2012 Analysis by: Jeffrey A. Koeppel Elias, Matz, Tiernan & Herrick LLP1 Elias Matz Tiernan & Herrick LLP
  2. 2. Brief History A bipartisan effort to permit more small businesses access the capital markets by decreasing the regulatory burden. A combination of six House bills, with significant investor safeguards added by the Senate. Signed by President Obama on April 5, 2012. Final regulations on crowd funding to be published by the U.S. Securities and Exchange Commission by January 1, 2013.2 Elias Matz Tiernan & Herrick LLP
  3. 3. Crowd Funding Flow Chart Investor Connects on the Internet Funding Portal Deposits Funds With: Presents Issuer With: $ to Public Escrow Agent Issuer Delivers Funds to: $ Target Amount Sells securities to:3 Elias Matz Tiernan & Herrick LLP
  4. 4. How Does Crowd Funding Work? Issuer engages Funding Portal to act as an intermediary and to post Issuer’s offering on the Portal’s website. Issuer provides Portal with its disclosure about the company and the offering. Funding Portal hires the Escrow Agent to process subscription payments and stock issuances. Investor accesses the Portal website to obtain information about the Issuer and the offering. Investor decides to subscribe for Issuer’s securities over the Portal; executes and delivers subscription documents to Portal and delivers $$ to Escrow Agent for the shares subscribed. Investor may rescind his/her subscription under certain circumstances and get a refund. If the targeted amount of the offering is raised by the deadline, Escrow Agent releases subscription funds to Issuer and provides stock certificates (paper or electronic) to Investor. If targeted amount is not raised by the deadline, Escrow Agent returns funds to Investor.4 Elias Matz Tiernan & Herrick LLP
  5. 5. What is a “Funding Portal”? Any person acting as an intermediary in a transaction involving the offer or sale of securities for others solely in a crowd funding transaction that does NOT: • Offer investment advice or recommendations; • Solicit purchases or sales offered on its website; • Compensate employees, agents or others for such solicitation or based on the sale of securities; • Hold, manage or handle investor funds or securities or • Engage in other SEC-prohibited activities.5 Elias Matz Tiernan & Herrick LLP
  6. 6. Funding Portal Qualifications To be exempt from having to register with the SEC as a broker-dealer, a Funding Portal must: • Remain subject to the examination, enforcement and rulemaking authority of the SEC; • Become a member of a national securities association and register with the SEC and a self regulatory organization; • Remain subject to further SEC regulation; and • Comply with the other provisions of the Crowd Fund Act.6 Elias Matz Tiernan & Herrick LLP
  7. 7. Funding Portal Rules Can be a broker or funding portal; Must register with SEC and SRO (FINRA, other?); Provide disclosures (risk) and education materials to investors; Obtain investor certifications; Perform background checks on issuer principals; File disclosure materials with the SEC and provide to investors; No distribution of proceeds to issuer unless hit target and permit investors to rescind their subscription; Protect investor privacy; Not pay finders; No financial interest in issuer; Limit investors’ maximum annual investment in all issuers. .7 Elias Matz Tiernan & Herrick LLP
  8. 8. Investor Rules Cannot buy more than $2,000 or 5% of annual income or net worth, if annual income or net worth <$100,000; Cannot buy more than 10% of annual income or net worth, up to $100,000, if annual income or net worth >$100,000; Must buy through a Funding Portal that complies with the Act; and, Issuer must comply with the Act and cannot sell more than $1 Million per year under this Rule.8 Elias Matz Tiernan & Herrick LLP
  9. 9. Issuer Rules Provide basic disclosure about business to SEC and investors; Financial statements: if raising up to $100,000, tax returns and financials certified by CEO; $100,000 - $500,000, reviewed financials; over $500,000, audited financials; Disclose: risks, use of proceeds, targeted amount, deadline, price, portal payment, current ownership, capital structure, rights of existing holders, and updates; No advertising; only directions to funding portal; Provide annual reports with financials to investors and SEC; and, Comply with other SEC rules (when effective).9 Elias Matz Tiernan & Herrick LLP
  10. 10. Restrictions on Transfer Securities purchased in a crowd funded transaction may NOT be transferred for 1 year after purchase, unless they are transferred: – To the issuer; – To an accredited investor; – As a part of a registered offering; or – To a member of the purchaser’s family in the event of his death or divorce; – Subject to other limitations to be imposed by the SEC.10 Elias Matz Tiernan & Herrick LLP
  11. 11. Crowd Funding Cannot be Used by: Foreign companies; Companies that already report under the Securities Exchange Act of 1934; Investment companies; or Other companies as the SEC determines by regulation; and Issuers or portals that are “disqualified” under SEC regulations (i.e, “bad boys”).11 Elias Matz Tiernan & Herrick LLP
  12. 12. Potential Liability to Investors Purchaser in a crowd funded transaction may sue an “issuer” to recover the amount paid for the security plus interest, less any income received on the security, or for damages if s/he does not then own the security. Issuer is liable if it made an untrue statement of material fact or omitted to state a material fact required to make the state- ments, in light of the circumstances under which they were made, not misleading, provided purchaser did not know of the untruth or omission, and issuer did not know, and in the exercise of reasonable care, could not have known of such untruth or omission. “Issuer” includes directors, partners, principal executive, principal financial, controller and principal accounting officers of issuer AND any person who offers or sells the security in such offering.12 Elias Matz Tiernan & Herrick LLP
  13. 13. State Oversight Crowd funded sales are exempt from State registration, documentation and offering requirements as “covered securities” and States may not charge filing fees, except for the State where the issuer has its principal place of business or any State where 50% or more of the purchasers reside. However, States may examine and take enforcement action against any Funding Portal that has its principal place of business in that State. States may also take enforcement action against an issuer, Funding Portal or other person with respect to fraud or deceit or unlawful conduct.13 Elias Matz Tiernan & Herrick LLP
  14. 14. Disqualifiers Issuers and Funding Portals will generally be disqualified from using the crowd funding rules if: – The issuer has filed any registration statement that is/was subject to an SEC stop or refusal order, the issuer is subject to an order of a State securities, banking or insurance commission, or a Postal Service false representation order, has had a Reg. A offering suspended, has been convicted in the last 5 years of a false filing, of a crime involving the purchase or sale of a security, or of an injunction for the purchase or sale of a security; or, – Its directors, officers or 10% beneficial owners, in the last 10 years, have been convicted of a crime relating to the purchase or sale of a security or false filing, a violation of any law prohibiting fraudulent, manipulative or deceptive conduct, or arising out of its business as an underwriter, broker, dealer or investment adviser, or in the last 5 years is subject to a court, SEC or U.S. Postal Service order enjoining certain practices relating the the purchase or sale of securities, has been suspended/expelled from a national securities exchange or barred from a State regulated entity or from engaging in the banking, insurance or securities business.14 Elias Matz Tiernan & Herrick LLP
  15. 15. For More Information: These slides provide basic information about the CROWDFUND Act of 2012. This publication is provided by Elias, Matz, Tiernan & Herrick LLP as a service to clients and friends. The information contained in these slides should not be construed as legal advice. Questions regarding the matters discussed in this presentation may be directed to: Jeffrey A. Koeppel 202-719-1818 (O); 301-785-4319 (M) jkoep@emth.com15 Elias Matz Tiernan & Herrick LLP