In our April 2nd post, we talked about crowdfunding and reported that it was not available until the SEC issued final rules on general solicitations but even when available, it would come with a heavy compliance cost. On July 10, the SEC issued two final rules and one proposed rule on this topic. The final rules are effective 60 days after the date they are formally published – sometime in September. The rules confirm our assessment that crowdfunding is not as simple as it might seem.
The new rules that allow crowdfunding do so by eliminating the prohibition against “general solicitation” and “general advertisement” as long as the company meets certain requirements. In order to engage in crowdfunding, all purchasers must be “accredited” meaning they must meet certain income, net worth or other requirements. Right now, investors can simply certify that they are accredited. Once the new rules become final, crowdfunding will be permitted but the company selling the securities will have to verify that the investors are accredited. There are no hard and fast rules about how to do this but the SEC gives some examples of ways that might work, such as getting copies of income tax returns along with a written representation from the investor that he or she believes the income will remain at least the same in the current year, getting a written confirmation from a registered broker-dealer that he or she has taken reasonable steps to verify that a person is accredited, or reviewing bank statements. Under the crowdfunding rules, the intermediary will be charged with this responsibility. So one cost of crowdfunding – or any offering using a general solicitation – is this verification requirement.
The other final rule also provides that a company can’t rely on the rules that allow crowdfunding if the company or any person covered by that rule has had a “disqualifying event.” The list of disqualifying events is a long one and includes, among others, criminal convictions in connection with the sale of securities, making a false filing with the SEC, and certain SEC disciplinary orders or cease and desist orders. Disqualifying events apply to executive officers and officers who participate in the offering.
In addition to the two final rules, the SEC issued a proposed rule. If this rule becomes final, more filings with the SEC and more disclosure to investors will be required. For instance, the proposed rule requires the company to submit expanded filings with the SEC, including one that has to be filed 15 days prior to the offering and one that has to be filed 30 days following the offering.
What does this mean for crowdfunding? As reported in our earlier post, crowdfunding will not simply be a matter of posting your offer on the Internet. Instead, you will need to comply with the complex set of rules stated in our prior posting as well as the additional requirements of the final rules – and more rules are on the way.