I have noticed quite a bit of confusion in blogs when discussing crowdfunding, the JOBS Act, and other recent legislation regarding small business, startups, and emerging growth companies. Even respected news organizations don’t get the specifics exactly right about what this legislation actually says, so I thought I would set the record straight.
President Obama is set to sign H.R. 3606 this week. The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law. Here is a link to the actual PDF format of H.R. 3606. This is an easier to read version I put together on my site with hyperlinks to each section. For an overview and summary of this bill and its history you can read here. These are links directly to the information provided by Congress. Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills. That was the case with the JOBS Act and the crowdfunding provisions. H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate. After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606. This passed the Senate and then went back to the U.S. House after amendments to be passed. It has passed and was forwarded to the President for signature on March 27, 2012. He is expected to sign it this week.
Title I of the bill implements reduced reporting and other limited disclosure requirements for emerging growth companies (those with under $1 billion in gross annual revenue and haven’t hit the other limitations to take them out of this classification). It also sets out changes to Regulation S-K and actions to be taken by the SEC within 180 days to ease the burden on these small to middle market companies to register or comply with SEC rules.
Title II provides the ability to use general advertising and solicitation by companies of investors if they are relying upon a Reg D Rule 506 exemption for that issuance of securities, but all investors must be accredited. Rule 506 previously allowed large private fundraising by companies, but the investor would need to meet the definition of accredited investor or what is referred to as a sophisticated investor if they were not accredited (See recent amendment to Accredited Investor definition). Now, the company can still raise money through non-accredited sophisticated investors; however, if they do this, they cannot use general advertising or solicitation.
Title III discusses crowdfunding, defines it, and places certain requirements on the issuer (company issuing the security in exchange for funding) and any intermediary used to assist in the fund raising process, also called a “funding portal.” Also of note, the funding portal has requirements regarding registering with the SEC and they cannot compensate a so-called finder for bring the investors to the funding portal. Many people refer to the example of Kickstarter, but with the change that now the website would sell stock instead of a “pledge” or gift to large numbers of investors with small investments each.
Title IV amends Section 3(b) of the Securities Act of 1933 (also discussed in SEC Regulation A) to provide a different amount for certain exempt offerings of securities. It previously said the aggregate of such offering could go to $5 million and now is amended to go up to $50 million. They may be sold publicly and interest can be solicited prior to filing an offering statement. Now the SEC is given authority to implement new rules to protect investors and companies must follow certain guidelines and procedures, so we will have to wait to see exactly what these new exemptions may mean for issuers.
Title V provides an amendment for the test to determine when a company crosses the line to be required to comply with reporting obligations with the SEC. Previously, once the company hit 500 shareholders and assets over $10 million, they had to start complying. Now that threshold is increased to either when the company hits 2,000 shareholders or 500 un-accredited shareholders. It exempts from the calculation employees who received stock pursuant to an employee compensation plan. Title VI also discusses amendments related to this same topic.
Title VII is a somewhat vague brief provision that simply tells the SEC to provide an online forum for information and discussion related to small and medium business and certain other classes of businesses.
With all the fervor around crowdfunding, I wanted to be sure people had the actual bill to read so they didn’t start giving incorrect information. You may also see other references to H.R.572, S.1933, S.1970, S.2190, H.R. 2940 which were related bills and ended up being incorporated in some form into HR 3606.