For most of 2012, the international crowd funding community had their eyes focused on the USA as President Obama signed the JOBs act, and lit the fuse which heralded a change to conventional funding. The law makers and regulators were energized into activity to have the parameters ready for a brave new world that was to come into being from the New Year. But January 1 came and went without the structure being ready, and since then investment crowd funding has seemingly marked time. This all then changed on July 10 with the lifting of the general solicitation ban.
The lifting of the ban will allow companies, hedge funds, and other asset managers to advertise private security offerings to pre-qualified accredited investors – something that had (until now) not been lawful in the USA. The rule still needs to pass through the Federal Register to become law, and this historically takes 60 days, but many say this is just a formality to adapt the wording of the law to fit the Federal Register. With this in mind, general solicitation should be allowed from mid September onward.
The primary consideration since the JOBs Act was signed in April 2012 was to protect the prospective investors from fraudulent activity. In an attempt to bolster the framework set up by the SEC over the past year since they started putting together the laws around crowd funding, they ruled on two other items at the same time as lifting the general solicitation ban:-
- The “bad actor” rule which disqualifies securities offerings involving “felons and other ‘bad actors’.
- The second aims to change the current proposal for issuers to lodge details of their offering (Form D) with the SEC after they first sell shares, to now requiring them to lodge these details 15 days in advance of advertising such shares.
The issues around Form D have seen much debate around adding further complexity and timeframe versus increased levels of probity and consumer protection. The issue is more for those requiring seed capital rather than those in subsequent rounds of fund raising, and will remain the biggest discussion point during the next 60 days.
In the interim, accredited investors are starting to marshal behind the starting blocks. At this stage, accredited investors need to satisfy the following criteria:-
- They must be a US resident
- They can only commit a maximum of 5% of their annual income to a (maximum of $2,000) to crowd fund investing projects if their annual income is under $100,000, or 10% of their annual income (up to a maximum of $100,000) if their income / nett worth is greater than $100,000
- Their investments do not have to be apportioned to one singular investment, and can be spread across a number of ventures
This new statute does not take over from the previous rule under which private fund managers previously offered private fund interests. The previous regulations allowed private fund managers to continue to refrain from a general solicitation and issue private fund interests to an unlimited number of accredited investors and no more than 35 “sophisticated” non-accredited investors. Moving forward, fund managers will need to nominate Form D as to under which rule they will be making their offering.
By employing a combination of the old rule and the new iteration, it is hoped to open up investment crowd funding to a vast number of accredited investors without affecting the essence of the whole concept by removing the crowd from the equation.
In addition to ensuring that investors meet the accreditation criteria, fund managers need to ensure compliance in the following key areas:
- Before engaging in a general solicitation, private fund managers should consider any Commodities Futures Trading Commission (CFTC) Exemptions
- Despite the new regulations in the US, certain foreign countries may consider a general solicitation conducted within or from the United States (including information on a private fund manager’s unrestricted website) to be in violation of their private placement regulations.
- Compliance to The SEC’s current and proposed amendments to Regulation D and Form D, requiring private fund managers offering private fund interests under New Rule 506(c) to, among other things, (i) file a Form D no later than 15 days prior to the commencement of the offering, (ii) include additional disclosures in the private fund’s general solicitation materials and (iii) submit the private fund’s general solicitation materials to the SEC for review.
- While new federal rules are being established, consideration should be given to state legislatures or securities authorities who may amend their applicable statutes and rules in order to address state-specific investor protection concerns.
- Private fund managers must take “reasonable steps” to verify the accredited investor status of each investor and generally will not be able to rely solely on the representations made by an investor in its subscription documents.
The July 10 lifting of the general solicitation ban represents a major step forward to democratizing finance for entrepreneurs in the United States. Not only everyone in the USA but everyone involved in the world of crowd funding will be holding their breath for the next 60 days as we await the official green light enabling investment crowd funding to get underway in the world’s biggest economy.