H.R. 2930, one part of the multi-bill JOBS Act being pushed through Congress, was to allow more eased securities regulation of so-called crowdfunding. Some have argued that sites like Kickstarter or others could change their business model (currently only accepts gifts or donations, called pledges, to raise money) to help companies raise money for companies in exchange for stock in that company. Currently, that model would be prohibited under securities laws as general advertising and public sales of stock are not allowed, especially through an intermediary, with certain exceptions like using a registered broker-dealer or registering the stock with the SEC.
H.R. 2930 passed the U.S. House last year, but was stuck in the Senate until today. The Senate passed the JOBS Act, including H.R. 2930, but in amended form so that it must go back to the House for another vote. The prevailing thought is that it will easily pass, even with this amendment, and become law soon.
The amendment puts more limitations on how crowdfunding can be used. Previously, a company could get up to $10,000 per investor to raise a total of $1 million in a 12 month period, or up to $2 million if audited financial statements are provided to investors. Now the total raised would be capped at $1 million and certain financial disclosures to investors would be required in all cases, such as financial statements certified by the CEO and other descriptions of the business. Also, intermediaries used to help bring in this money would now need to be registered with the SEC as a broker-dealer or funding portal, as before they would not need to be a registered broker-dealer.
The term funding portal will start to be heard much more as it will be used by intermediaries to help raise money and the newly proposed definition is:
Definition.–Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following:
“(80) FUNDING PORTAL.–The term `funding portal’ means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)), that does not–
“(A) offer investment advice or recommendations;
“(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
“(C) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
“(D) hold, manage, possess, or otherwise handle investor funds or securities; or
“(E) engage in such other activities as the Commission, by rule, determines appropriate.”.
It sounds like funding portal will be a less stringent bar to overcome than registering as a broker-dealer; however, it is a step in the right direction to cut down on the potential for scam artists stepping unregulated in to raising money through websites. It may reduce the amount of people and situations previously described by Columbia Law Professor Coffey Jr. as “every barroom in America might come to be populated by a character, looking something like Danny DeVito, obnoxiously trying to sell securities to his fellow patrons. He could provide each fellow patron with a business card that noted that the securities carried high risk, but would need to provide no other disclosure.”
There are also some changes in calculating how much each individual investor can put towards a crowdfunding investment based upon their net worth or annual income. The amendments are listed here, but should be more succinctly summarized in the near future.