SEC Enacts Temporary Expedited Crowdfunding Rules
Posted by Securities Attorney Laura Anthony | May 8, 2020 Tags: , ,

Following the April 2, 2020 virtual meeting of the SEC Small Business Capital Formation Advisory Committee in which the Committee urged the SEC to ease crowdfunding restrictions to allow established small businesses to quickly access potential investors (see HERE), the SEC has provided temporary, conditional expedited crowdfunding access to small businesses.  The temporary rules are intended to expedite the offering process for smaller, previously established companies directly or indirectly affected by Covid-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding.

The temporary rules will provide eligible companies with relief from certain rules with respect to the timing of a company’s offering and the financial statements required.  To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between May 4, 2020 and August 31, 2020.


Title III of the JOBS Act, enacted in April 2012, amended the Securities Act to add Section 4(a)(6) to provide an exemption for crowdfunding offerings.  Regulation Crowdfunding went into effect on May 16, 2016.  The exemption allows issuers to solicit “crowds” to sell up to $1,070,000 (as adjusted for inflation in 2017) in securities in any 12-month period as long as no individual investment exceeds certain threshold amounts. The threshold amount sold to any single investor cannot exceed (a) the greater of $2,000 or 5% of the lower of annual income or net worth of such investor if the investor’s annual income or net worth is less than $100,000; and (b) 10% of the annual income and net worth of such investor, not to exceed a maximum of $100,000, if the investor’s annual income or net worth is more than $100,000.   When determining requirements based on net worth, an individual’s primary residence must be excluded from the calculation.  Regardless of the category, the total amount any investor can invest is limited to $100,000.  For a summary of the provisions, see HERE.

In March 2020, the SEC published proposed rule changes to harmonize, simplify and improve the exempt offering framework including Regulation Crowdfunding.  The proposed rules would increase the offering limit to $5 million; increase the investment limit by altering the formula to be based on the greater of, rather than lower of, an investor’s annual income or net worth; remove investment limits on accredited investors; allow the use of special purpose vehicles and reduce the types of securities that can be sold in a Regulation Crowdfunding offering.  However, the timing for implementation of the proposed rules, either as proposed or with changes, is uncertain.

As noted, the temporary rules are intended to provide existing eligible smaller businesses with quick access to capital by reaching out to the “crowd” which may include local investors, customers, vendors, etc., that are willing to support small businesses.  This table, which was included in the SEC press release announcing the temporary rules, and to which I have provided explanatory and further detailed information, is a very good summary of the temporary rules.

Requirement Existing Regulation Crowdfunding Temporary Amendment
Eligibility The exemption is not available to:

  • Non-U.S. issuers;
  • Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
  • Investment companies;
  • Blank check companies;
  • Issuers that are disqualified under Regulation Crowdfunding’s disqualification rules; and
  • Issuers that have failed to file the annual reports required under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement.
To rely on the temporary rules, issuers must meet the existing eligibility criteria PLUS:

  • The issuer cannot have been organized and cannot have been operating less than six months prior to the commencement of the offering; and
  • An issuer that has sold securities in a Regulation Crowdfunding offering in the past, must have complied with the requirements in section 4A(b) of the Securities Act and the related rules (that is, they must have complied with all the Regulation Crowdfunding rules and requirements).
Offers permitted After filing of offering statement (including financial statements) After filing of offering statement, but financial statements may be initially omitted (if not otherwise available)
Investment commitments accepted After filing of offering statement on Form C (including financial statements) After filing of offering statement on Form C that includes financial statements or amended offering statement that includes financial statements.That is, the temporary rule allows a test-the-waters period by allowing the company to file a Form C and post offering information on a funding platform, gathering indications of interest, prior to filing financial statements.  If the offering does not garner interest, the company may determine to abandon or delay the offering and would not have occurred the expense of financial statement preparation.

Certain disclosures will need to be added if no financial statements are included and no investment commitments can be accepted until the financial statements have been provided.

Financial statements required when issuer is offering more than $107,000 and not more than $250,000 in a 12-month period Financial statements of the issuer reviewed by a public accountant that is independent of the issuer Financial statements of the issuer and certain information from the issuer’s federal income tax returns, both certified by the principal executive officer.Must also provide a statement that financial information certified by the principal executive officer has been provided instead of financial statements reviewed by an independent public accountant.
Sales permitted After the information in an offering statement is publicly available for at least 21 days As soon as an issuer has received binding investment commitments covering the target offering amount (note: commitments are not binding until 48 hours after they are given)
Early closing permitted Once target amount is reached if:

  • The offering remains open for a minimum of 21 days;
  • The intermediary provides notice about the new offering deadline at least five business days prior to the new offering deadline;
  • Investors are given the opportunity to reconsider their investment decision and to cancel their investment commitment until 48 hours prior to the new offering deadline; and
  • At the time of the new offering deadline, the issuer continues to meet or exceed the target offering amount.
As soon as binding commitments are received reaching target amount if:

  • The issuer has complied with the disclosure requirements in temporary Rule 201(z) (which is a statement that the offering is being conducted on an expedited basis due to circumstances relating to Covid-19 and pursuant to the SEC’s temporary relief and any additional statements related to the particular relief being relied upon such as financial statement relief);
  • The intermediary provides notice that the target offering amount has been met; and
  • At the time of the closing of the offering, the issuer continues to meet or exceed the target offering amount.
Cancellations of investment commitments permitted For any reason until 48 hours prior to the deadline identified in the issuer’s offering materials.  Thereafter, an investor is not able to cancel any investment commitments made within the final 48 hours of the offering (except in the event of a material change to the offering). For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate).  After such 48-hour period, an investment commitment may not be cancelled unless there is a material change to the offering.

e Crowdfunding Professional Association (C

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SEC Issues Final Rules Implementing The JOBS ACT And Rules On The FAST ACT
Posted by Securities Attorney Laura Anthony | May 10, 2016 Tags: , , ,

On May 3, 2016, the SEC issued final amendments to revise the rules related to the thresholds for registrations, termination of registration, and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934.  The amendments mark the final rule making and implementation of all provisions under the JOBS Act, and implement further provisions under the FAST Act.

The amendments revise the Section 12(g) and 15(d) rules to reflect the new, higher shareholder thresholds for triggering registration requirements and for allowing the voluntary termination of registration or suspension of reporting obligations.  The new rules also make similar changes related to banks, bank holding companies, and savings and loan companies.

Specifically, the SEC has amended Exchange Act Rules 12g-1 through 12g-4 and 12h-3 related to the procedures for termination of registration under Section 12(g) through the filing of a Form 15 and for suspension of reporting obligations under Section 15(d), to reflect the higher thresholds set by the JOBS Act.  The SEC also made clarifying amendments to: (i) cross-reference the definition of “accredited investor” found in rule 501 of Regulation D, with the Section 12(g) registration requirements; (ii) add the date for making the registration determination (last day of fiscal year-end); and (iii) amend the definition of “held of record” to exclude persons who received shares under certain employee compensation plans.

The new rules were initially proposed on December 18, 2015.  A few days before the proposed rules were issued, on December 4, 2015, the FAST Act was enacted into law, including provisions implementing the revised thresholds for savings and loan holding companies, effective immediately without further action by the SEC.  Despite this overlap, the SEC has now cleaned up all the provisions, thus aligning the rules with the statutory requirements.

Following the final implementation of the relevant JOBS Act and FAST Act provisions, a company that is not a bank, bank holding company or savings and loan holding company is required to register under Section 12(g) of the Exchange Act if, as of the last day of its most recent fiscal year-end, it has more than $10 million in assets and securities that are held of record by more than 2,000 persons, or 500 persons that are not accredited.  The same thresholds apply to termination of registration and suspension of reporting obligations.  As discussed below, determining which shareholders are accredited as of the last day of a fiscal year-end can be difficult.

A company that is a bank, bank holding company or savings and loan holding company is required to register under Section 12(g) of the Exchange Act if it has more than $10 million in assets and securities that are held of record by more than 2,000 persons and is allowed to terminate or suspend registration if its securities are held of record by fewer than 1,200 persons.

Registration, Termination of Registration and Suspension of Reporting Obligations

The JOBS Act amended Sections 12(g) and 15(d) of the Exchange Act to adjust the thresholds for registration, termination of registration and suspension of reporting.  Prior to enactment of the JOBS Act on April 5, 2012, the Exchange Act required companies with greater than $10 million in total assets and greater than 500 record holders of any class of equity security to register and file periodic reports with the SEC.  This requirement was burdensome for companies aspiring to raise capital and grow but that were not yet ready to become publicly reporting.

Section 12(g) of the Exchange Act and the rules promulgated thereunder allowed a company to deregister and relieve itself of the reporting requirements of the Exchange Act if it has fewer than 300 shareholders, or fewer than 500 shareholders and less than $10 million of assets.

Non-bank, Bank Holding Company and Saving and Loan Holding Company Issuers

Title V and Title VI of The JOBS Act amended Section 12(g) and Section 15(d) of the Exchange Act.  Section 501 of Title V amended Section 12(g) of the Exchange Act to increase the “holders of record” threshold for triggering Section 12(g) registration for issuers with total assets of more than $10 million (other than banks and bank holding companies) from 500 or more persons to either (i) 2,000 or more persons or (ii) 500 or more persons who are not accredited investors.  Issuers are required to register within 120 days after its fiscal year-end, if on the day of such fiscal year-end, it meets these thresholds.

Although Section 501 went effective upon passage of the JOBS Act, the automatic amendments did not include a change to the deregistration provisions under Section 12(g).  Accordingly, since April 2012, a company would not be required to register until it had 2,000 shareholders of record or 500 or more persons who are not accredited investors, but could not deregister unless it had fewer than 300 shareholders, or 500 shareholders for those companies with less than $10 million in assets.

The new rules have now aligned the right to terminate registration or suspend reporting obligations with the higher threshold amounts.

With the passage of the new rules, together with all the JOBS Act rules enacted previously, a company is not required to register a class of securities under Section 12(g) if, on the last day of its most recent fiscal year: (i) the company has total assets not exceeding $10 million; or (ii) the class of securities is held of record by fewer than 2,000 persons or 500 persons that are not accredited as defined in Securities Act rule 501.

Bank, Bank Holding Company and Saving and Loan Holding Company Issuers

Section 601 of the JOBS Act amended Section 12(g) to increase the total assets to $10 million and the holders of record threshold for triggering registration for banks and bank holding companies, as such term is defined in the Bank Holding Company Act of 1956, as of any fiscal year-end after April 5, 2012, from 300 or more persons to 2,000 or more persons.  Similarly, Section 601 of the JOBS Act amended Sections 12 and 15 of the Exchange Act to increase the holders of record threshold for deregistration and suspension of reporting obligations for banks and bank holding companies from 300 to 1,200 persons.

Following enactment of the JOBS Act, regulators realized that the Section 601 provisions had inadvertently left out saving and loan holding companies from the new registration and deregistration threshold changes.  Accordingly, both the SEC through rule making, and the legislature through the FAST Act, have implemented changes to correct the oversight and include saving and loan holding companies in these changes.   Following implementation of the FAST Act, the SEC also issued guidance through Compliance and Disclosure Interpretations (C&DI) to help clarify the provisions.  My blog on that guidance can be read HERE.

The new rules clean up the procedures and timing of termination of registration for banks, bank holding companies and savings and loan holding companies as well such that these entities may immediately terminate registration upon the filing of a Form 15 rather than the existing procedures, which required the entities to wait 90 days after filing the Form 15 to be relieved of their obligations.  Similarly, the existing procedures only allowed for the suspension of reporting obligations at the beginning of a fiscal year.  The new rules allow banks, bank holding companies and savings and loan holding companies to suspend reporting obligations, effective immediately, at any time during the year by filing a Form 15, as long as they meet the thresholds for such suspension.

Application of the Increased Threshold for Accredited Investors

Knowing whether an investor or shareholder is accredited has always been a basic premise in determining the availability of an exemption from the registration requirements and the disclosure delivery requirements applicable to such an exemption.  The new registration and deregistration thresholds now extend the importance and timing of knowing the accredited status of shareholders beyond what was ever previously required.

Identifying accredited investors for purposes of the registration, and especially deregistration, requirements could be problematic.  Suggestions in this regard included: (i) allowing issuers to rely on annual affirmations from record shareholders; (ii) reliance on information obtained at the time of an initial investment or most recent sale of securities to such investor; or (iii) third-party verification.

The new rules rely on the current definition of “accredited investor” enumerated in Securities Act Rule 501(a) and require that the “accredited investor” determination be made as of the last day of the fiscal year rather than at the time of the sale of securities.  This provides a dramatic change for issuers who currently have no obligations to assess accredited status after a sale of securities is completed.

In rejecting the ability to unilaterally rely on representations made at the time of a sale of securities to a particular investor, the SEC expressed concern regarding the use of outdated, unreliable information.  Instead, an issuer will need to determine, based on facts and circumstances, whether it can rely upon prior information to form a reasonable basis for believing that the security holder continues to be an accredited investor as of the last day of the fiscal year.

The new rule requires the company to have a reasonable belief as to whether a shareholder is accredited.  The SEC is leaving it to the discretion of the company to determine, based on facts and circumstances, whether it has a reasonable belief that a shareholder is accredited or not.  A company is not precluded from relying on prior information if it has a reasonable belief that such information is still accurate, such as based on the close proximity to the time of sale.  The SEC notes that sale information can be years or even decades old, in which case the issuer could not, of course, rely on such prior information.

However, this begs the practicality question of how exactly that issue will gain the information.  The SEC declined to offer guidance, establish a safe harbor, or otherwise provide any assistance to companies in this regard.

It seems to me that issuers will now need to obtain contractual agreements from investors to provide updated representations; however, determining fair and reasonable consequences for a breach of such an agreement is problematic.  Direct damages will be hard to determine.  I doubt an issuer could claim that the shareholders’ refusal to provide updated information results in the issuer having to register, or continue reporting, and seek damages in the amount of reporting costs.  Likewise, investors will balk at consequences directed toward their share ownership, such as a restriction on voting or dividend rights, though remedies along these lines seem the most workable.

As the proliferation of rules centered on a distinction between accredited and non-accredited investors continues, the definition of accreditation has become the subject of much debate and the SEC is considering, and ultimately will implement, changes to the definition.  For further reading on the definition of accredited investor, see my blog HERE.

Employee Compensation Plans; Determining Holders of Record

The new rules establish a non-exclusive safe harbor that companies may follow to exclude persons who received securities pursuant to employee compensation plans when calculating the shareholders of record for purposes of triggering the registration requirements under Section 12(g). Exchange Act Section 12(g)(5) as amended of the JOBS Act provides that the definition of “held of record” shall not include securities held by persons who received them pursuant to an “employee compensation plan” in exempt transactions. By its express terms, this new statutory exclusion applies solely for purposes of determining whether an issuer is required to register a class of equity securities under the Exchange Act and does not apply to a determination of whether such registration may be terminated or suspended.

The new rule implements the JOBS Act by establishing a statutory exclusion for security holders who received their stock in unregistered employee stock compensation plans, and provides a safe harbor for determining whether holders of their securities received them pursuant to an employee compensation plan in exempt transactions.

The SEC declines to add a new definition of “employee compensation plan”; rather, the SEC incorporates Rule 701(c) and the guidance under that rule for issuers to rely on in their Section 12(g) analysis.  The proposed safe harbor allows an issuer to conclude that shares were issued pursuant to an employee compensation plan in an unregistered transaction as long as all the conditions of Rule 701(c) are met, even if other requirements of Rule 701, such as 701 (b) (volume limitations) or 701(d) (disclosure delivery requirements) are not met.

The new Rule amends the definition of “held of record” such that for purposes of Section 12(g), an issuer may exclude securities that are either:

held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act; or

held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of Section 5 from the issuer, a predecessor of the issuer or an acquired company, as long as the persons were eligible to receive securities pursuant to Rule 701(c) at the time the excludable securities were originally issued to them.

The SEC also excludes securities issued under the “no-sale” exemption to registration theory from the “held of record” definition, including shares issued as a dividend to employees.  That is, the SEC is excluding securities that did not involve a sale within the meaning of Section 2(a)(3), as well as exempt securities issued under Section 3 of the Securities Act.  Examples of securities issued under Section 3 include exchange securities under sections 3(a)(9) and 3(a)(10).

The new rules are meant to encompass securities issued in exchange for or related to business combination transactions, as long as the employee or former employee was eligible to receive the securities under Rule 701(c) at the time of original issuance.

The new rules related to determining securities “held of record,” including both determinations of accredited investors and shareholders that have received shares under employee compensation plans, are complicated and will require meticulous record keeping, chains of title, and follow-up.  I imagine that either transfer agents or separate third-party service providers will need to offer tracing services to assist companies in maintaining these records and meeting their registration requirements.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of, the OTC Market’s top source for industry news, and the producer and host of, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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