Decoding the JOBS Act | Harvard Law Forum

All the buzz about crowdfunding regualtion in the Jumpstart Our Business Startups (JOBS) Act needs clarification, though as you’ll see the lines are still very hazy. Comments on these provisions are due in February 2014.

Below are key excerpts to help clarify what’s currently in place as of 10/23/2013. This comes directly from the Harvard Law School Forum on Corporate Governance and Financial Regulation (click link for full version).


“Websites like Kickstarter and IndieGoGo help all sorts of businesses, organizations and people raise money through small individual contributions for an identifiable idea or business. Until the JOBS Act, however, crowdfunding could not be used to offer or sell securities to the general public.

To permit crowdfunding, JOBS Act Title III added two provisions to the Securities Act of 1933: (1) Section 4(a)(6), which creates a new exemption to allow issuers to use crowdfunding to offer and sell securities in unregistered offerings and (2) Section 4A, which requires certain disclosures to be made by crowdfunding issuers and sets forth requirements for crowdfunding intermediaries. Comments on these provisions are due in early February. Here’s how they’re currently written (excerpt):

Who May Be a Crowdfunding Investor?

Anyone. Offerings under Regulation Crowdfunding are private offerings, but there are no limitations on who may invest.

Who May Be a Crowdfunding Issuer?

Many, though not all, US companies would be eligible to rely on the crowdfunding exemption from registration. Non-US companies, issuers that are already SEC reporting companies and both registered and exempt investment companies would not be eligible. Additionally, issuers with certain deficiencies would be ineligible.

How Much Can an Eligible Issuer Raise Using Crowdfunding?

An eligible crowdfunding issuer may raise a maximum of $1 million from all investors in a 12-month period. Only capital raised in reliance on the 4(a)(6) crowdfunding exemption will count towards this $1,000,000 limit.

How Much Can an Investor Invest Initially and Sell in Secondary Transactions?

During the trailing 12 months preceding any crowdfunded transaction, an investor may invest no more than: (i) the greater of $2,000 and 5 percent of its annual income or net worth, as applicable, if both the annual income and net worth of the investor is less than $100,000; or (ii) 10 percent of its annual income or net worth, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or the net worth of the investor exceeds $100,000.

Who May Intermediate a Crowdfunding Offering?

Section 4A permits two types of intermediaries for a crowdfunding offering: a registered broker-dealer and a new type of regulated entity called a “funding portal.” The issuer may use only one intermediary in connection with its offering. Broker-dealers do not need to make special or additional filings in order to engage in crowdfunding offerings, but their activities in this area are governed by Regulation Crowdfunding. Funding portals must register with both the SEC and FINRA.

What Disclosures Must the Issuer Make and When?

An issuer wishing to avail itself of Section 4(a)(6) and Regulation Crowdfunding must file specified disclosures with the SEC and provide these disclosures to investors and the relevant intermediary for dissemination to investors by posting on its platform. These disclosures would include:

  • the issuer’s name, legal status, physical address and website address;
  • information about officers and directors as well as owners of 20 percent or more of the issuer;
  • a description of the issuer’s business, anticipated business plan, planned use of proceeds from the offering and financial condition;
  • disclosure of the current number of employees, material terms of any indebtedness of the issuer and any exempt offerings conducted within the past three years;
  • the proposed public offering price, target offering amount, deadline to reach the target amount and whether the company will accept investments in excess of the target amount;
  • disclosures concerning certain types of related-party transactions;
  • a description of the issuer’s ownership and capital structure;
  • financial statements of the company; [4]
  • information about the intermediary, including its compensation;
  • a discussion of the material risks associated with the investment; and
  • certain mandatory legends.

The intermediary must make available these issuer disclosures for at least 21 days prior to the first securities being sold, but the intermediary may accept indications of interest during this period. While it is unclear whether the issuer can make changes to its disclosures during this 21-day period, the issuer must timely amend its offering document(s) to reflect material changes and provide updates on its progress toward reaching the target offering amount. A final update to investors disclosing the total amount of securities sold in the offering must occur no later than five days after the closing.

In addition to disclosures during the offering, issuers of successful crowdfunding offerings would be required to file an annual report with the SEC and provide it to investors. These annual reports require similar disclosures to the information provided in connection with the offering, but much less than is required of a public company. The SEC expects the issuer to determine how best to convey the information.

What are the Intermediary’s Basic Obligations?

Whether the intermediary is a broker-dealer or a funding portal, its basic obligations in connection with each offering are as follows:

  • Provide an internet platform to facilitate the offering, including the making of applicable disclosures, and that includes a communication channel pursuant to which potential investors and others may discuss the offering;
  • Take measures to reduce the risk of fraud by an issuer, including conducting due diligence concerning the issuer and its offering and denying access to issuers who are disqualified or present the potential for fraud;
  • Open an account for each investor, and provide investors with educational materials, confirmations of investment commitments and purchases, and notifications of various events such as cancellation of the offering; and
  • Arrange for the transmission of funds and securities, as applicable, in connection with the closing (or cancellation) of the offering. [5]

What Advertising of the Offering Can Occur?

An issuer generally may not advertise the terms of the offering, except through the intermediary’s platform. The issuer and its employees may participate in any discussion forum or other similar communication channel on the platform so long as it identifies itself as an issuer. In fact, intermediaries are required to have such a communications mechanism on their platforms and make it available in all offerings. Additionally, the issuer can utilize (and compensate) promoters to participate through the communications channel, so long as the promoter identifies itself as such and discloses that it has or will earn compensation for its efforts.

What Anti-Fraud and Civil Liability Rules Apply to These Offerings?

Newly created Section 4A(c) of the Securities Act sets forth liability standards for issuers in connection with crowdfunding offerings. Moreover, under JOBS Act Section 305(b), the securities enforcement authority of the states applies with respect to crowdfunding issuers, intermediaries and others relying on Section 4(a)(6).


As proposed, Regulation Crowdfunding may provide interesting fundraising possibilities for smaller issuers and commercial opportunities for crowdfunding platforms. As the comment process unfolds and the proposed rules are further refined, further questions are certain to arise.”

-Chris Kluesener, Open Innovation Central



  1. […] crowdfunding-savvy firms continue to experiment, it should be interesting to watch. Moreover, as federal and state governments tweak their policies on equity crowdfunding things should get quite messy […]

  2. What do you mean by crowd funding? Does it mean funding a project by raising monetary contributions from a large number of people through internet?

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