Sunday, January 20, 2013

Regulators are Going After Crowdfunding Websites

According to a recent article in the Wall Street Journal, regulators are taking a close look at the crowdfunding web sites at are popping up in anticipation of the more lenient rules regarding the raising of investments from average investors, which would be permitted under the new JOBS Act bill, also known as the Jumpstart Our Business Startups Act.

Based on the research by the North American Securities Administrators Association, there are over 9,000 domain names with the word 'crowdfunding' in the name. “Investors soon can expect to be inundated with crowdfunding pitches, legitimate or otherwise,” said Heath Abshure, NASAA President and Arkansas Securities Commissioner.

The web sites they are referring to are not the Kickstarter or Indiegogo sites, which provides some sort of benefits to donors, such as early products or invitations to contributor parties. These are sites that are being set up in anticipation of the investing side of crowdfunding.

According to the Securities and Exchange Commission, Title III of the JOBS Act amends Section 4 of the Securities Act to create a new exemption for offerings of “crowdfunded” securities. Specifically, the JOBS Act amends Section 4 of the Securities Act to exempt issuers from the requirements of Section 5 of that Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act, some of which will require rulemaking by the SEC.

One of these conditions is that issuers use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.

Funding portals. Title III of the JOBS Act adds new Section 3(h) to the Exchange Act which requires the SEC to exempt, conditionally or unconditionally, an intermediary operating a funding portal from the requirement to register with the SEC as a broker. The intermediary, though, would need to register with the SEC as a funding portal and would be subject to the SEC’s examination, enforcement, and rulemaking authority. The funding portal also must become a member of a national securities association that is registered under Section 15A of the Exchange Act.

A funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or others persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (iv) hold, manage, possess, or otherwise handle investor funds or securities; or (v) engage in such other activities as the SEC, by rule, determines appropriate.

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