SEC Warns Issuers on Premature Use of Crowdfunding Exemption

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

The SEC has issued a notice reminding issuers that the crowdfunding exemption created under the recently enacted Jumpstart Our Business Startups (JOBS) Act is unavailable to them until the Commission adopts implementing rules. Said the SEC: “The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.” The JOBS Act was enacted on April 5, 2012.

Title III of the JOBS Act contains the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (CROWDFUND Act). Section 302(c) of the CROWDFUND Act requires the Commission to adopt rules to implement the crowdfunding exemption set forth in Securities Act Sections 4(6) and 4A. The Commission must consult with state securities commissions and national securities associations in crafting the rules. The SEC also must adopt rules under CROWDFUND Act Section 302(d) to provide for the disqualification of persons and entities from invoking the crowdfunding exemption.

CROWDFUND Act Section 303(a) amended Exchange Act Section 12(g) to exclude crowdfunding investors from the shareholder cap; the Commission must adopt implementing rules per CROWDFUIND Act Section 303(b). Exchange Act Section 3(h), added by CROWDFUND Act Section 304(a)(1), details the criteria by which a registered funding portal has a limited exemption from registration as a broker-dealer; CROWDFUND Act Section 304(a)(2) requires the SEC to issue implementing rules.

Each of the above provisions requires the SEC to adopt rules or regulations within 270 days of enactment.