The U.S. Securities and Exchange Commission (SEC) approved the Financial Industry Regulatory Authority, Inc.'s (FINRA) crowdfunding Portal Rules for companies that want to operate an intermediary “funding portal” pursuant to the Regulation Crowdfunding rules under Title III of the Jumpstart Our Business Startups Act of 2012 (JOBS Act). FINRA's crowdfunding Portal Rules became effective on January 29, 2016, when it issued Regulatory Notice 16-06 and the forms necessary to register as a funding portal.  

As we discussed in our November 2015 legal alert, the JOBS Act required the SEC to enact rules relating to securities offered or sold through the Internet.  Simply put, Title III crowdfunding (also referred to as ''equity crowdfunding'') refers to the use of the Internet to raise no more than $1 million of capital annually through limited investments from a large number of accredited and non-accredited investors. Crowdfunding provides access to capital to business and real estate projects to benefit entrepreneurs who struggle to secure funding through traditional means such as venture capital and angel investment. Under Title III of the JOBS Act, a funding portal that hosts securities issuers who utilize the crowdfunding exemption under Title III of JOBS Act must be operated by a registered broker-dealer or funding portal registered with the SEC, and become a member of a national securities association. 

Regulatory Notice 16-06 contains the forms necessary for funding portal registration with the SEC in the Appendices to the Notice. With the new FINRA forms in place, the SEC commenced the registration process for interested companies to become a registered Funding Portal. To date, according to press releases, the SEC has received at least one application. Nevertheless, funding portal applicants must observe the delayed effective date for Title III Crowdfunding of May 16, 2016. Funding Portal applicants may register but no Title III crowdfunding portal business may occur before May 16, 2016.

Meanwhile, crowdfunding only to accredited investors under Rule 506(c) of the Securities Act of 1933, as amended, remains available as it has since July 10, 2013. The SEC adopted Rule 506(c) to accomplish the JOBS Act directive to remove the prohibitions on general solicitation or public advertising for securities offerings exclusively to accredited investors. Since then, crowdfunding platforms have burgeoned in the United States, particularly in the real estate industry, which may now have 40 to 50 crowdfunding sites to offer investments to accredited investors throughout many property classifications and geographies. The $2.5 billion new construction at 3 World Trade Center in New York City was a recent successful example of a 506(c) crowdfunding offering of $2 million of tax-free Liberty Bonds with a $5,000 minimum investment to accredited investors. Typically, access to a deal of this size would be limited to institutional investors with $100 million net worth. The 506(c) crowdfunding websites connect investors with investments in an accessible manner.

Ballard Spahr’s Crowdfunding Initiative brings together attorneys experienced in securities, private equity, business and finance, real estate, corporate law, lending, and intellectual property, to help investors take advantage of this emerging opportunity.

Copyright © 2016 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.