SEC Gets Tough on Crowdfunding

Raising Capital In Minnesota

In the spring of 2012, the “JOBS Act” (Jumpstart our Business Startups Act) went into effect. It included directions for the Securities and Exchange Commission to implement various reforms to its regulations to facilitate funding of businesses through investments by individual investors.  In response, the SEC took the following actions:

Effective in September 2013, the SEC allowed public solicitations in connection with offerings to “accredited investors”;

In October 2013, the SEC issued draft regulations to permit “crowdfunding” by which offerings could be made through investment portals; and

Effective in June 2015, the SEC substantially revised its Regulation A for public offerings

With respect to the public solicitation of accredited investors, the regulation conditioned the public solicitation on the issuer conducting an investigation to confirm the status of the investor as an “accredited investor” and could not simply rely on the investors representation that the investor had the net worth, income level or other basis qualifying them for accredited investor status.  Due to the reluctance of investors to provide the private information such confirmation would require, the opportunity for public solicitation is not being used.

SEC Gets Tough

The proposed “crowdfunding” regulations clearly reflect a hostile attitude by the SEC towards crowdfunding as the requirements are impractical.  The passage of time between the effective date of the JOBS Act and the proposed regulations as well as status of the regulations as being proposed and not in effect confirms the antipathy of the SEC to crowdfunding.

In contrast, it appears the SEC supports an overhaul of its Regulation A and in its extensive explanation of the amendment in its adoption, the SEC notes that Regulation A had withered into non-use at a time that costs of registered offerings had increased dramatically.  It remains to be seen, however, if the staff of the SEC which will review submissions of proposed offerings under the improved Regulation A will make the opportunity useful.

In June 2015, Minnesota joined some 30 other states in implementing a state based crowdfunding exemption.  The so called “MNvest exemption” is based on the allowance under federal law to leave to the respective states the regulation of securities offerings being made by issuers in a state to solely investors in that state.  This is referred to as the “intra-state exemption.”

As with most of the other states which have adopted an intrastate exemption, the new law permits public solicitation of investments, but requires the use of an internet portal to conduct the offering.  There are limitations as to the total funding that may be provided to the issuer as well as restrictions upon the amount an investor may invest in MNvest offering.  There are also disclosure requirements, including the provision of financial statements.

We anticipate use of the new Regulation A by more seasoned issuers seeking capital and use of the MNvest exemption by development stage businesses as well as for real estate investment projects.

For questions or more information, please contact Randy Sparling at rsparling@felhaber.com.