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The SEC's Final Crowdfunding Rules: Still May Not Be a Crowd Pleaser

November 4, 2015

On October 30, 2015, the Securities and Exchange Commission (the “SEC”) released the final rules under the Jumpstart Our Business Startups (“JOBS”) Act to permit companies to offer and sell securities through crowdfunding. These new rules are designated as “Regulation Crowdfunding.”  The SEC had proposed the rules in October 2013 with a 90-day comment period.  That comment period turned into over two years with close to 500 comment letters.  Companies have been able to use crowdfunding to raise money through small contributions from a large number of individuals without issuing securities (but often by providing a product or a gift) through popular websites such as Kickstarter and Indiegogo.  However, because of federal and state securities laws, crowdfunding has not been available to companies seeking to raise capital through the issuance of securities.  Regulation Crowdfunding will change that and allow such capital raising beginning six months after publication of the rules in the Federal Register.

Under the Securities Act of 1933 (the “Securities Act”), an offer or sale of securities must be registered with the SEC unless an exemption from such registration is available.  Title III of the JOBS Act amends the Securities Act to provide a new exemption from the SEC’s registration requirements for crowdfunding, but it was subject to the SEC adopting final rules.  Under the SEC’s final rules, which are substantially similar to the proposed rules, a new registration exemption (Section 4(a)(6)) would be available from the SEC registration requirements under certain conditions described in this alert.

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