Regulation Crowdfunding

Transcription

1 Regulation Crowdfunding By Patrick D. Sweeney & Marc Shepsman New York Newark Washington, D.C. Istanbul

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3 Regulation Crowdfunding By Patrick D. Sweeney and Marc Shepsman* Crowdfunding is a relatively new means through which businesses or individuals can harness the reaches of the internet to raise capital by seeking small individual contributions from a large number of people. Crowdfunding has been utilized to fund clothing start-ups and artistic endeavors, and even President Barack Obama s 2008 presidential campaign, whereby President Obama raised over $200 million in singular donations under $ Typical crowdfunding transactions have generally involved financing a particular project in expectation of receiving a tangible reward relating to such project a music album, for example. Crowdfunding has generally not involved the offer to share in the profits generated from the activities financed through such crowdfunding. This model of crowdfunding, referred to as the equity model, would likely trigger the application of federal securities laws as it would likely involve the offer and sale of securities to the public. Absent an available exemption, the small businesses and startups seeking to utilize the equity model of crowdfunding to fund a particular endeavor would need to register the securities offered prior to any offer or sale under the Securities Act of 1933, as amended (the Securities Act ). The costs associated with conducting a registered offering of securities relative to the aggregate amount of capital typically sought by small businesses and startups, and the limitations applicable to conducting an offering exempt from registration, have generally been cited as the key factors that have prevented the equity model of crowdfunding from being effective and practical for small businesses and startups. Title III of the Jumpstart Our Business Startups Act (the JOBS Act ), established the regulatory framework for small businesses and startups to raise capital using the equity model in a less costly manner by offering securities over the internet. Title III exempts from registration crowdfunding transactions that (i) meet certain volume limitations, (ii) are conducted by issuers who comply with certain disclosure, conduct and ongoing reporting requirements, and (iii) are conducted through a regulated intermediary. Congress directed the Securities and Exchange Commission (the SEC ) to issue rules necessary and appropriate to carry out the provisions of Title III (such rules, collectively, Regulation Crowdfunding ). Notably, and in contrast to the relatively succinct sections of the JOBS Act respecting new private placement and Regulation A rules, Title III sets forth the statutory requirements for crowdfunding transactions in extensive detail. Despite a December 31, 2012 deadline to finalize Regulation Crowdfunding, the SEC released final rules on October 30, I. Volume Limitations A crowdfunding transaction will be exempt provided: i. the aggregate amount sold to all investors is not more than $1 million during the 12-month period preceding the transaction, and the aggregate amount sold to any investor during the 12-month period preceding the transaction does not exceed a. the greater of $2,000 or 5 percent of the annual income or net worth of such investor, if either is less than $100,000, and * Patrick D. Sweeney is a partner, and Marc Shepsman is an associate, at Herrick, Feinstein LLP. 1 VEIKKO ERANTI & JUHO LINDMAN, CROWDSOURCING & CROWDFUNDING A PRESIDENTIAL ELECTION 2 (2013), available at HF v.15 1

4 b. 10 percent of the annual income or net worth of such investor, not to exceed an aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or is greater than $100,000. The JOBS Act does not make the crowdfunding exemption available to any issuer that: i. is not organized under and subject to the laws of a state or territory of the United States or the District of Columbia; i is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act ); is an investment company, as defined in the Investment Company Act of 1940, as amended (the Investment Company Act ); 2 or the SEC, by rule or regulation, determines not to be entitled to the benefits of the exemption. Regulation Crowdfunding largely tracks the language of the JOBS Act with respect to volume limitations. The rules determine an investor s net worth and annual income for the purposes of determining the individual volume limitation using the same method of calculation used for the purposes of determining accredited investor status for natural persons pursuant to Rule 501 of Regulation D. 3 The SEC noted that the JOBS Act created statutory ambiguity as to whether the 12-month volume limitation applied to the aggregate of amounts raised in all exempt transactions, or just transactions that involved crowdfunding. However, it determined that the overall intent of providing the exemption under [Regulation Crowdfunding] was to provide an additional mechanism for capital raising for startup and small businesses and not to affect the amount an issuer could raise outside of the exemption. Thus, the 12-month, $1 million limit applies only to offerings made under Regulation Crowdfunding specifically. The opposite approach the SEC concluded, would be inconsistent with the goal of alleviating the funding gap faced by startups and small businesses... Issuers would be required to include all securities sold in reliance on Regulation Crowdfunding by entities controlled by or under common control with the issuer, including any predecessor of the issuer. As the JOBS Act did not define controlled by or under common control with, the SEC proposed to use the term control as defined in Rule 405 of the Securities Act. 4 Furthermore, the SEC adopted an approach that limited an investor from investing: (1) the greater of $2,000 or 5% of the lessor of the investor s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10% of the lessor of the investor s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more. In addition to the statutory prohibitions, the SEC excluded from Regulation Crowdfunding any issuer that: i. is disqualified pursuant to the bad actor rules (discussed below), 2 The statute also prohibits private funds from engaging in crowdfunding transactions Fed. Reg. 66, The definition of the term accredited investor under Rule 501(a) of Regulation D as applied to a natural person is a person: (i) whose individual net worth, or joint net worth with that person s spouse, exceeds $1 million, excluding the value of the person s primary residence and certain related indebtedness (the net worth test ); or (ii) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person s spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the income test ). 17 C.F.R (a). 4 Id. See 17 C.F.R ( The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. ) 2

5 i has sold securities under the crowdfunding exemption, but has not complied with the ongoing reporting requirements (discussed below) applicable to such issuer under Regulation Crowdfunding, or has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies. II. Issuer Compliance A. Disclosure Requirements The SEC created a new offering statement, Form C, for Regulation Crowdfunding transactions. Issuers must file with the SEC, provide to investors and the relevant intermediary, and make available to potential investors the offering statement prior to the commencement of the offering. Additionally, derivations of Form C (such as Form C-A for amendments, and Form C-AR for annual reports) are to be used for the issuer s ongoing disclosure and reporting requirements. The SEC will not undertake a merit review of Form C filings. As such, there is no declaration of effectiveness or qualification by the SEC with respect to the filings made under Regulation Crowdfunding. Congress went to great length to enumerate the information that issuers would be required to disclose. By statute, issuers are required to disclose: i. the name, legal status, physical address, and website address of the issuer; i the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer, a description of the business of the issuer and the anticipated business plan of the issuer, a description of the financial condition of the issuer, accompanied by income tax returns filed by the issuer, or certified or audited financial statements, depending on the size of the offering, 5 v. a description of the stated purpose and intended use of the proceeds of the offering, vi. v vi the price to the public of the securities or the method for determining the price, a description of the ownership and capital structure of the issuer and such other information as the SEC may prescribe. The SEC expanded the statutory disclosure requirements to include: i. all positions and offices with the issuer held by such persons, the period of time in which such persons served in such positions or offices, and their business experience during the past three years; i the current number of employees of the issuer; a discussion of the material factors that make an investment in the issuer speculative or risky; whether the issuer will accept investments in excess of the target offering amount and, if so, the maximum amount that the issuer will accept and whether oversubscriptions will be allocated on a pro-rata, first come-first served, or other basis; 5 The SEC rules relating to financial statements provide that issuers offering $100,000 or less will need only to disclose the amount of total taxable income and total tax as reflected in the issuer s federal income tax returns, certified by the principal executive officer, in lieu of filing a copy of the tax return. 3

6 v. a description of the process to complete the transaction or cancel an investment commitment; vi. v vi ix. a statement that if an investor does not reconfirm his or her investment commitment after a material change is made to the offering, the investor s investment commitment will be cancelled and the committed funds will be returned; the identity of the intermediary through which the offering is conducted; the amount of compensation paid to the intermediary for conducting the offering, including the amount of referral and any other fees associated with the offering; a description of the material terms of any indebtedness of the issuer, including the amount, interest rate, maturity date and any other material terms; x. a description of exempt offerings conducted within the past three years; xi. x xi x xv. xvi. certain related-party transactions; any matters that would have triggered disqualification but occurred before the effective date of Regulation Crowdfunding; updates regarding the progress of the issuer in meeting the target offering amount; where on the issuer s website investors will be able to find the issuer s annual report; whether the issuer or any of its predecessors previously failed to comply with Regulation Crowdfunding s ongoing reporting requirements; and any material information necessary in order to make statements made, in light of the circumstances under which they were made, not misleading. B. Prohibition on Advertising The JOBS Act explicitly prohibits issuers from advertising the terms of a crowdfunding offering except for notices which direct investors to the funding portal or broker. While the SEC noted that it understood the importance that potential issuers likely will place on the ability to advertise, the statute specifically restricts the ability of issuers to advertise the terms of offerings made in reliance on [Regulation Crowdfunding]. The notice permitted may contain no more than: i. a statement that the issuer is conducting an offering, the name of the intermediary through which the offering is being conducted and a link directing the potential investor to the intermediary s platform; i the terms of the offering; 6 and factual information about the legal identity and business location of the issuer. It seems clear that the SEC s intent is to keep crowdfunding transactions exclusively over the internet and through an intermediary. C. Compensation of Promoters The JOBS Act prohibits issuers from compensating any person to promote its offering without taking such steps as the [SEC] shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective of such compensation, upon each instance of such promotional communication. Regulation Crowdfunding tracks the language of the statute and prohibits the compensation of promoters unless the issuer complies with the disclosure requirements provided therefor. 6 The terms of the offering would include: (i) the amount of securities offered; (ii) the nature of the securities; (iii) the price of the securities; and (iv) the closing date of the offering period. 4

7 D. Filing and Ongoing Reporting Requirements The JOBS Act requires the issuer, not less than annually, to file with the SEC and to provide to investors reports and the results of operations and financial statements of the issuer. Any issuer who has undertaken an offering and sale pursuant to Regulation Crowdfunding must file with the SEC and post on such issuer s website, 7 an annual report of its results of operations and financial statements for the highest aggregate target offering amount previously provided. The report must also include many of the previously discussed disclosures required in the initial Regulation Crowdfunding filing, and must be filed no later than 120 days after the end of the fiscal year covered by such report. An issuer must continue to comply with the ongoing reporting requirements until: i. the issuer becomes a reporting company under the Exchange Act, i the issuer or a third party repurchases all of the securities issued pursuant to Regulation Crowdfunding, or the issuer liquidates or dissolves its business. III. Intermediary Requirements The JOBS Act requires an issuer to conduct its crowdfunding offering through a registered broker dealer or a new kind of regulated intermediary - a funding portal. The JOBS Act specifies the obligations of a crowdfunding intermediary: i. register with any applicable self-regulatory organization; i provide such disclosures as the SEC determines appropriate; ensure that each investor a. reviews the investor-education information, b. positively affirms that the investor understands that the investor is risking the loss of the entire investment, and c. demonstrates an understanding of the risk applicable to investments in startups and unregistered offerings; take such measures to reduce the risk of fraud with respect to such transactions; v. make the required disclosure materials available to the SEC and to potential investors within 21 days prior to the first day on which the securities are sold to any investor; vi. v vi ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investments is equal to or greater than a target offering amount; make such efforts to ensure that no investor in a 12-month period has purchased securities offered pursuant to Regulation Crowdfunding that, in the aggregate, from all issuers, exceed the investment limits previously mentioned; take steps to protect the privacy of the information collected from investors: 7 The SEC noted that it believed that the statutory requirement that issuers provide to investors was satisfied simply by requiring issuers to post the annual report on their websites, as the SEC believed that Congress contemplated that crowdfunding would, by its very nature, occur over the Internet or other similar electronic media accessible to the public, so [it] did not propos[e] to require issuers to provide physical copies of the report to investors. 78 Fed. Reg. 66,451. 5

8 ix. not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor; x. prohibit its directors, officers, or partners from having any financial interest in an issuer using its services; 8 and xi. meet such other requirements as prescribed by the SEC. A crowdfunding intermediary needs to have a reasonable basis for believing that an issuer seeking to offer securities under Regulation Crowdfunding through the intermediary s platform complies with the requirements of Regulation Crowdfunding, and that the issuer has established and means to keep accurate records of the holders of its securities. Intermediaries are required to make available to the SEC and to investors any information required to be provided by the issuer. Furthermore, an intermediary must, before accepting any investment commitment: i. have a reasonable basis for believing that the investor satisfies the investment limitations, and obtain from the investor representations that the investor has reviewed the intermediary s educational materials regarding the offering, and a completed questionnaire demonstrating the investor s understanding of the restrictions and risks associated with the offering. A funding portal, as defined by the JOBS Act, is a person acting as an intermediary that does not: i. offer investment advice or recommendations; i solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; compensate employees, agents or other persons for such solicitation based on the sale of securities displayed or referenced on its website or portal; hold, manage, possess, or otherwise handle investor funds or securities; or v. engage in such other activities as the SEC determines appropriate. Essentially, a funding portal is a broker-dealer that limits its activities to raising capital through crowdfunding. As many of the contemplated activities for a funding portal intersect those of a brokerdealer, the JOBS Act grants the SEC the authority to exempt, conditionally or unconditionally, a funding portal from the requirement to register as a broker or dealer under the Exchange Act. 9 The SEC adopted conditional non-exclusive safe harbor for funding portals that engage in certain limited activities. Noting that the statutory provisions also make clear that the activities in which a funding portal may engage are far more limited than those of a registered broker-dealer... [and recognizing] that the statutory prohibitions could be read so broadly as to limit the utility of funding portals, the final rules strike a balance between the two. Accordingly, funding portals that are registered with the SEC pursuant to Regulation Crowdfunding may avail themselves of the non-exclusive safe harbor to assure that they would be exempt from the broker registration requirements of the Exchange Act in connection with their activities as a funding portal. 8 The SEC modified this requirement in the final rules by permitting intermediaries to hold a financial interest in the crowdfunding issuer if such financial interest represents compensation for the services provided to or for the benefit of the issuer in connection with the crowdfunding offer. 9 Jumpstart Our Business Startups Act, 304, 15 U.S.C. 78c(h) (2012). While an issuer may use a registered broker-dealer as a crowdfunding intermediary, it is not expected that many broker-dealers would find the economics of crowdfunding attractive enough to participate as a crowdfunding intermediary. 6

9 Under the safe harbor, a funding portal will be deemed not to engage in the activities prohibited by the JOBS Act if it: i. applies objective criteria to limit the securities offered, i applies objective criteria to highlight offerings on the funding portal s platform, provides search functions or other tools that investors can use to search, sort, or categorize offerings, provides communication channels by which investors can communicate with one another and with representatives of the issuer about the offerings through the funding portal s platform, v. advises an issuer on the structure or content of the issuer s offering; (vi) compensates a third party for referring a person to the funding portal, so long as such compensation, other than that paid to a registered broker or dealer, is not based, directly or indirectly, on the purchase or sale of a security offered pursuant to Regulation Crowdfunding; vi. v vi ix. pays or offers to pay any compensation to a registered broker or dealer meeting certain requirements; receives compensation from a registered broker or dealer for services provided by the funding portal in connection with the offering; advertises the existence of the funding portal and identifies one or more issuers or offerings available on the portal on the basis of objective criteria; denies access to its platform to, or cancels an offering of, an issuer that the funding portal believes may present the potential for fraud or otherwise may raise investor protection concerns; x. accepts, on behalf of the issuer, an investment commitment for securities offered pursuant to Regulation Crowdfunding; xi. x directs investors where to transmit funds or remit payments; and directs a qualified third party to release proceeds to an issuer upon the completion of the crowdfunding offering or to return the proceeds to investors in the event an investment commitment or an offering is canceled. IV. Other Notable Provisions A. Private Right of Action The JOBS Act creates a private right of action for purchasers of securities in crowdfunding transactions. A crowdfunding issuer will be liable to the purchasers of its securities if the issuer makes an untrue statement or omission of material fact, and does not show that the issuer did not know, and in the exercise of reasonable care could not have known, of the untruth or omission. The language of the JOBS Act is nearly identical to the private right of action found in Section 12(a)(2) of the Securities Act, except that liability under the Securities Act is limited only to a person that offers or sells securities whereas the JOBS Act expands the scope of liability. For the purposes of Regulation Crowdfunding liability, the term issuer includes any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer that offers or sells a security in a [Regulation Crowdfunding transaction], and any person who offers or sells the security in such [transaction]. 7

10 The SEC noted that, on the basis of the definition of issuer in Title III, it appears likely that intermediaries, including funding portals, would be considered issuers for the purposes of this liability provision. As a result of this inclusion in the statutory private right of action, intermediaries, as well as directors and executive officers, will need to undertake sufficient due diligence when reviewing an issuer s offering documents so as to evaluate whether such documents misstate or omit material information. B. Restrictions on Sales Generally, securities issued pursuant to a crowdfunding transaction may not be transferred by the purchaser of such securities for a one-year period. Excepted from this limitation are transfers i. to the issuer of the securities, i to an accredited investor, as part of an offering registered with the SEC or to a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance. The term accredited investor is defined in the same manner as under the private placement rules of Regulation D, and member of the family of the purchaser or the equivalent to mean child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, siblings, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the purchaser, and includes all adoptive relationships. The regulation also provides that securities may be transferred during the initial one-year period to a trust controlled by the initial purchaser or to a trust created for the benefit of a member of the family of the initial purchaser or the equivalent. C. Disqualification The JOBS Act directed the SEC to establish certain disqualification provisions under which issuers and intermediaries would be disqualified from participating in crowdfunding transactions. This is consistent with new bad actor rules promulgated under Regulation A and Regulation D. The statute disqualifies any offer or sale of securities by a person that: i. is subject to a final order of a state securities commission (or an agency or officer of a state performing like functions), state authority that supervises or examines banks, savings associations, or credit unions, or a state insurance commission (or an agency or officer of a state performing like functions), in any case that: a. bars the person from 1. associating with an entity regulated by such commission, authority, agency, or officer, 2. engaging in the business of securities, insurance, or banking or 3. engaging in savings association or credit union activities, or b. constitutes a final order based on violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of the filing of the offer or sale, or c. has been convicted of a felony or misdemeanor in connection with the purchase or sale of any security or involving the making of any false filing with the SEC. Pursuant to authority granted under the JOBS Act, the SEC excluded a covered person (detailed 8

11 below) that: i. is subject to an order of the SEC that, at the time of the filing of the offering statement i a. suspends or revokes such person s registration as a broker, dealer, municipal securities dealer or investment adviser, b. places limitations on the activities, functions or operations of such person; or c. bars such person from being associated with any entity; is subject to a cease-and-desist order for various securities laws violations; is suspended or expelled from membership in, or suspended or barred from association with a member of, a registered national or affiliated securities association; has filed, as a registrant or issuer, or was or was named as an underwriter in, any registration statement or Regulation A offering statement that, within five years before the filing of the crowdfunding offering statement, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is, at the time of the filing of the crowdfunding offering statement, the subject of a pending proceeding to determine whether such an order should be issued; or v. is subject to a United States Postal Service false representation order entered within five years before the filing of the crowdfunding offering statement. vi. The SEC also adopted provisions allowing for a waiver from and a reasonable care exception to the disqualification provisions. The bad actor disqualifications under Regulation Crowdfunding are modeled on similar provisions found under newly amended Regulation A and Regulation D, and cover substantially similar persons. The adopted disqualification provisions apply to: i. the issuer and any predecessor of the issuer or affiliated issuer, i any director, officer, general partner or managing member of the issuer, any 20 percent beneficial owner, any promoter connected with the issuer in any capacity at the time of the sale, v. any person that has been or will be paid remuneration for solicitation of purchasers in connection with sales of securities in the offering (a compensated solicitor ), and vi. any director, officer, general partner or managing member of any such compensated solicitor. The officer test under Regulation Crowdfunding mirrors that of Regulation A, rather than following Regulation D s definition of executive officer [and] other officer participating in the offering as the SEC believes that the officers relying on Regulation Crowdfunding may only be a few individuals, with or without formal titles. The SEC proposed the 20 percent beneficial owner test found in Regulation D, as opposed to the 10 percent beneficial test specified in Regulation A because it believed that a 10 percent ownership threshold could impose an undue burden on crowdfunding participants. 10 D. Exclusion from Shareholder Cap Fed. Reg. 66,500 (Nov. 5, 2013)( the potential administrative complexity of monitoring the fluctuating ownership levels and the issuer s inability to control the actions of a shareholder who does not disclose disqualification would be greater under a 10 percent threshold scheme than under a 20 percent threshold scheme ). 9

12 The JOBS Act excluded purchasers of securities issued pursuant to a Regulation Crowdfunding transaction from the shareholder cap applicable under the Exchange Act, as amended by the JOBS Act. Now issuers with total assets exceeding $10,000,000 and a class of securities held of record by either 2,000 persons, or 500 persons who are not accredited investors, would trigger the registration requirements under the Exchange Act. As such, for the purposes of determining whether an issuer is required to become a reporting company under the Exchange Act, the definition of held of record will not include securities issued pursuant to Regulation Crowdfunding. As the SEC noted, allowing issuers to sell securities pursuant to [Regulation Crowdfunding] without becoming Exchange Act reporting issuers is consistent with the intent of Title III. E. Relationship with State Law The JOBS Act preempts the ability of states to regulate certain aspects of Regulation Crowdfunding transactions. More particularly, issuers will be exempted from having to register or qualify with state authorities securities issued pursuant to crowdfunding offerings. As the SEC noted, the statutory preemption of state registration laws would reduce issuer uncertainty regarding the necessity of state registration, and it would eliminate the costs that would be associated with state registration. The JOBS Act, however, neither impairs state enforcement authority nor prohibits notice filing requirements for the state of the issuer s principal place of business or in which purchasers of 50 percent or greater of the aggregate amount of the issuance are resident. V. Evaluation of Overall Effect of Regulation Crowdfunding The cost of compliance in connection with a crowdfunding offering may be significant. With respect to potential issuers, by the SEC s own calculations, the cost of raising under $100,000 might be upwards of $39,000, and more than $150,000 to raise $1,000,000. Several commenters have indicated that the $1,000,000 offering limit is too low, especially in light of the costs associated with the initial disclosure and ongoing reporting requirements. The SEC, however, noted that the only reference in the JOBS Act to changing the amount was to update the amount based on the Consumer Price Index, and the statements in the Congressional Record indicated that Congress believed that the $1,000,000 limit was a substantial amount for a small business. The crowdfunding exemption may prove to be an unappealing option for those issuers for whom a private placement is a viable option. In contrast to crowdfunding, there are no aggregate or individual volume limitations under Rule 506 of Regulation D, and therefore, the costs associated with conducting an offering under Regulation D may be much lower relative to the aggregate amount of capital that can be raised It has been suggested by some that the SEC deliberately delayed the implementation of the JOBS Act due to concerns that the law required the SEC to eliminate or reduce many investor safeguards. With respect to Regulation Crowdfunding in particular, the JOBS Act places two of the SEC s core missions the protection of investors and promotion of capital formation on a collision course, trapping the [SEC] in a Catch-22. Jim Saksa, Equity Crowdfunding is a Disaster Waiting to Happen, SLATE (June ), The SEC acknowledged in its proposing release that the proposed rules, if finalized could significantly affect the viability of crowdfunding as a capital-raising method for startups and small businesses. It maintained, however, that while unduly burdensome rules would discourage participation in crowdfunding offerings, rules that are too permissive... may increase the risks for individual investors, thereby undermining the facilitation of capital raising for startups and small businesses. 78 Fed. Reg. 66,

13 With the creation of funding portals, the Congress seems to have acknowledged that many registered brokers or dealers would be unlikely to act as an intermediary in a crowdfunding offering. The intermediary fees generated from any crowdfunding offering would be relatively low as a result of the low limit on the dollar amount of such an offering compared to other capital-raising transactions. Newly created funding portals, which are exempt from registration as a broker or dealer so long as they engage only in permitted activities, may be able to fill this void if their costs of operations turn out to be less burdensome than those of registered broker-dealers. It remains to be seen whether the economics of a crowdfunding offering will favor the emergence of funding portals. The SEC s delay between the enactment of the JOBS Act and the adoption of Regulation Crowdfunding has prompted a substantial number of states to enact similar crowdfunding legislation for issuers seeking to conduct an intrastate offering in reliance on the intrastate exemption from registration under the Securities Act. To date, twenty-four states have enacted intrastate crowdfunding statutes. Generally, the state crowdfunding legislation has included: i. higher maximum aggregate offering limits in the $1,000,000 to $2,000,000 range, with Illinois as high as $4,000,000; i less burdensome disclosure and ongoing compliance requirements, if any; the ability to use nonregistered internet portals; and more permissive rules regarding solicitation. However, the offering and sale of securities through the internet as contemplated by Regulation Crowdfunding does not fit well within the intrastate exemption under the Securities Act, since there is no practical way to limit the offering to investors within the state of qualification. In order to bolster intrastate crowdfunding, the SEC proposed to amend Rule 147, a nonexclusive safe-harbor for reliance on the intrastate exemption, to permit an issuer to conduct offerings of securities using any form of general solicitation or general advertising, including the use of publicly accessible internet websites, without regard to jurisdiction, so long as all sales of securities occurred within the state or territory in which the offer and sale of securities was qualified. VI. Conclusion Regulation Crowdfunding is off to a precarious start in light of what appears to be both congressional ambivalence and SEC reservations, and it remains to be seen whether Regulation Crowdfunding will be a viable opportunity for issuers seeking to conduct an equity-model crowdfunding offering. The SEC largely adopted the final rules as such rules were proposed, without regard to easement-of-burden modifications sought by commentators. With the adoption of the final rules, we now have the opportunity to assess better the viability of Regulation Crowdfunding. 11