Richard W. Jones

Mr. Jones is an attorney with the Atlanta,Georgia law firm of Jones & Haley,P.C. Mr. Jones concentrates his practice on securities law matters,such as public offerings,IPO's,private placements,SEC compliance,broker/dealer and investment adviser regulation and hedge funds. For further information go to

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SEC Approves Crowd Funding – Sort Of


            All those lovers of crowd funding can now cheer.  The SEC has passed rules that allow companies to raise capital through the use of crowd funding techniques.   But did the crowd funding proponents really get what they wanted from these rules?  Not exactly.  Let’s examine the new rules,and you will see what I mean.

            For those who may not know,crowd funding is the ability to sell shares of stock in a company – or any other type of security —over the internet to lots of people through relatively small individual purchases.  On October 30,pursuant to the Jumpstart Our Business Start-ups Act,the U.S. Securities Exchange Commission finally adopted rules to permit companies to use crowd funding techniques to raise capital.  The SEC said that it developed the new rules to allow smaller companies to more easily raise capital while at the same time providing protection to investors.  The new rules will take effect in the second quarter of 2016.

Limitations on Amounts being Raised

            There are limitations on the amount of money companies can raise under the new rules. They are limited to raising a maximum of $1 million during any twelve (12) month period.  Also,there are limitations on how much an investor can invest under the crowd funding rules.  If an investor’s annual income or net worth is less than $100,000,the investor will be allowed to invest no more than the greater of $2,000 or 5% of the investor’s annual income.   If the investor’s annual income and net worth are $100,000 or more,the investor may invest 10% of the lesser of the investor’s annual income or net worth,not to exceed $100,000.00.


Limitations on the Companies that can use the New Rules

            Certain business entities are prohibited from raising money using the Crowd Funding Rules.  Those entities are as follows: 

            (1) a business entity that’s organized outside the United States;

            (2) an entity that is publicly reporting under the Securities Exchange Act 1934;

            (3) investment companies;

            (4) an entity that has failed to comply with the annual reporting requirements under the     Crowd Funding Rules during the two (2) years immediately preceding the filing of an       offering statement;and

            (5) an entity that has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with a company that is not identified.  

Disclosure Statement

            In order to use the Crowd Funding Rules an issuer must prepare a disclosure document that provides the information that is similar to the information found in a prospectus.  This document must be filed with the SEC prior to being used,and it must be delivered to each investor. 

Financial Statements

            The type of financial statements that are required to be provided under the Crowd Funding Rules depend upon the amount of funds the issuer is planning to raise in the crowd funding offering.  If the amount to be raised is $100,000 or less,the issuer is only required to provide its total income,taxable income,and the total tax reported on its federal income tax return for the most recently completed fiscal year.   In this case the financial statements must be certified by the principal executive officer of the issuer,but no outside accountant or audit is required.  If the issuer is raising more than $100,000 but less than $500,000,the issuer must provide financial statements that have been reviewed by a public accountant that is independent of the issuer.  If the issuer is planning to raise more than $500,000,it must provide financial statements that are audited by a public accountant that is independent of the issuer.  However,an issuer that is using the Crowd Funding Rules to raise capital for the first time,and who is raising more than $500,000,but not more a $1 million may provide financial statements that are reviewed by a public accountant that is independent of the issuer.  In the event that an issuer has audited financial statements available,those must be provided in any case.

Ongoing Reporting Requirements

            Once an issuer completes an offering of securities under the Crowd Funding Rules,the issuer must file with the Commission,and post on its website an annual report following the end of its fiscal year.  The annual report must contain the following elements:

            (1) financial statements certified by the principle executive officer of the issuer to be true and complete in all material respects;

            (2) a description of the financial condition of the issuer;

            (3) disclosures that are similar to those contained in annual reports filed by reporting         companies. 

            The issuer must continue to file these annual reports until one of the following occurs: 

            (1) the issuer is required under the Securities Exchange Act of 1934 to file reports with     the SEC;

            (2)  If the issuer has less than 300 shareholders,it only has to file the report for one year;(3)  The issuer has filed annual reports for three years and its total assets do not exceed       $10 million;

            (4) the issuer or another party repurchases all the securities issued in the crowd funding    offering;or

            (5) the issuer liquidates or dissolves its business in accordance with state law.

Required Use of Intermediary Platforms

            Sales under the Crowd Funding Rules may only be made through an intermediary platform registered with the SEC.  These platforms can be sponsored by a registered broker or a registered funding portal.  A funding portal is prohibited from providing investment advice or recommendations for the purchase or sale of securities.  In addition,it is prohibited from soliciting purchases,sales or offers to buy the securities displayed on its platform.   Funding portals are also prohibited from compensating employees,agents,or other persons for solicitating sales of securities displayed on its platform.  In addition,portals are prohibited from holding,managing,possessing or otherwise handling investor funds or securities.


            Issuers using the crowd funding rules are very limited in their ability to advertise.  They may only advertise the terms of the crowd funding offering by directing investors to the intermediary’s platform. In addition,an issuer may include no more than the following information in the ad: 

            (1) a statement that the issuer is conducting an offering pursuant to the Crowd Funding     Rules with the name of the intermediary through which the offering is being conducted          and a link directing the potential investor to the intermediary platform;

            (2) the terms of the offering,and

            (3) factual information about the legal identity and business location of the issuer. 

This information must be limited to:

            (a) the name of the issuer;

            (b) the address,phone number and website of the issuer;

            (c) the email address of the representative of the issuer;and

            (d) a brief description of the business of the issuer.  

            In addition,an issuer or an issuer’s representatives may communicate with investors and potential investors about the terms of the offering through communication channels provided by the intermediary on the intermediary’s platform,provided that the issuer identifies itself as the issuer.  In addition,all persons communicating with potential investors on behalf of the issuer must do so only on the intermediary platform and must identify their relationship with the issuer.  

Compensation to Promoters

            An issuer or person acting on the issuer’s behalf is permitted to compensate a person who promotes the issuer’s offering under the Crowd Funding Rules only if the promoter communicates through communication channels provided by the intermediary on the intermediary’s platform,and the promoter clearly discloses the receipt of such compensation.


            Securities purchased in a crowd funding transaction under the rules cannot be resold by the purchaser for a period of one year from the date of purchase,unless they are sold to an accredited investor.  An accredited investor is generally a person that has annual earned income of $200,000 for two consecutive years and/or a person that has a net worth of $1 million. 

Bad Boy Rules

            Certain issuers are prohibited from issuing securities using the Crowd Funding Rules altogether.  Generally,this applies to any issuer that has a director,officer,general partner,  managing member,or a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,any promoter connected with the issuer in any capacity at the time of such sale,any person who has or will be paid for solicitation of purchasers in connection with the sale of securities,any general partner,director,officer or managing member of the issuer who meets any of the following criteria:

            1) the person has been convicted within ten years before the filing of the offering statement —five years in the case of an issuer’s predecessors and affiliated issuers —of        any felony or misdemeanor: 

            (a) in connection with the purchase or sale of securities;

            (b) involving the making of any false filing with the SEC;or

            (c) arising out of the conduct of the business of an underwriter,broker,or municipal         securities dealer,investment advisor,funding portal or paid solicitor of purchasers of securities.

            2)  The person has been subject to any order,judgment or decree entered within five years before the filing of the offering statement with the Securities Exchange Commission that at the time of such filing restrains or enjoins such persons from engaging or continue to engage in any practice: 

            (a) in connection with the purchase or sale of securities;

            (b) involving making of any false filing to the SEC;or  

            (c) arising out of  the conduct of the business of an underwriter,broker,dealer,municipal securities dealer,investment adviser,funding portal or paid solicitor of purchasers of securities.

            3)  The person is subject to a final order of any state securities commission or state authority that supervises or examines banks,savings association or credit unions that at the time of the filing of the offering statement filed under the Crowd Funding Rules bars a person from: 

                        a)  association with any entity regulated by such commission;

                        b)  engaging in the business of securities,insurance or banking;or

                        c)  engaging in a savings association or credit union activities.

            This also applies to any final order that has been issued against the party based upon a violation of any law or regulation that prohibits fraudulent,manipulative or deceptive conduct entered within ten years before the filing of the offering statement.

            4)   Any person that is subject to an order of the SEC that: 

            (a)  suspends or revokes such person’s registration as a broker,dealer,municipal securities dealer,investment adviser or funding portal;

            (b)  places limitations on the activities,functions or operation of such person;or

            (c)  bars such person from being associated with any entity or from participating in an offering of penny stock. 

            5)   Any person that is subject to any order of the SEC entered within five years before the filing of the offering statement that require a person to cease and desist from committing or causing a violation or future violation of:

            (a)  any scienter-based antifraud provision;or

            (b)  Section 5 of the Securities Act.

            6)  Any person that is suspended or expelled from membership in and/or suspended or barred from association with a member of a registered national securities exchange or a registered national or affiliated securities association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade. 

            7)  Any person that has filed as registrant or issuer with the SEC or if the person was named as an underwriter in any registration statement filed with the SEC that within five years before the filing of the offering statement was the subject of a refusal order,stop order or order suspending a Regulation A exemption or at the time of such filing was the subject of an investigation or proceeding to determine whether a stock order or suspension order should be issued.

            8)  Any person that is subject to a United States Postal Service False Representation Order entered within five years of the filing of the offering statement or is at the time subject to a temporary restraining order or preliminary injunction with the respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of a false representation.


            There are other features of the new rules that are significant but those described above provide a pretty good outline of the newly established rules.  Now that you know the SEC Crowd Funding Rules,you can see that they are much more restrictive than you may have anticipated or had hoped for.  I think many people thought that the new SEC crowd funding program would be a panacea that would allow sales of securities in small amounts to a large number of people on the internet with a minimum of regulation.  Instead,what we have is crowd funding rules that are very restrictive.  The rules restrict which issuers may make sales,and they restrict who the purchasers are that may purchase the securities.  They require fairly expensive disclosure documents to be prepared and filed with the Securities Exchange Commission.  They require the preparation of financial statements,depending on the amount of securities being sold,and most importantly,they require sales to be made only through an authorized portal or intermediary.  In addition,they have bad boy provisions that prohibit the use of the crowd funding rules where the issuer is associated with people that meet an extensive bad boy criteria list.   The rules also require ongoing filing of annual reports,which is costly and time consuming and they prohibit general solicitation or advertising outside of the portal or intermediary platform,unless such advertising meets very specific limited requirements.

            The new Crowd Funding Rules may not be as robust or as flexible as many may have hoped,but they still represent a substantial enlargement of the tools available for businesses to raise money and it is a first step to really take advantage of the internet and crowd funding concept,which is a worthy innovation in itself.  Accordingly,we are available to help any issuers,intermediaries or investors comply with the new Crowd Funding Rules and conduct a successful crowd funding offering.  Feel free to contact us.

   Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at 





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