information

If you have any questions about the issues addressed here, or any other matters involving Securities law issues, please contact one of the attorneys in our Securities Law Group:

Timothy L. Largay 860.240.6017 tlargay@murthalaw.com

Richard McGrath 203.653.5412 rmcgrath@murthalaw.com

James W. McLaughlin 860.240.6118 jmclaughlin@murthalaw.com

David A. Menard 860.240.6047 dmenard@murthalaw.com

Willard F. Pinney, Jr. 860.240.6016 wpinney@murthalaw.com

Edward B. Whittemore 860.240.6075 ewhittemore@murthalaw.com

October 31, 2013 Securities Law Update

SEC AND FINRA PROPOSE CROWDFUNDING RULES UNDER THE JOBS ACT

On October 23, 2013, the Securities and Exchange Commission (SEC) voted unanimously to propose new Regulation Crowdfunding, a set of proposed rules that would allow, for the first time, non-accredited investors to invest in startups and small businesses through SEC-registered funding portals. Regulation Crowdfunding would implement new Securities Act Section 4(a)(6), added by Title III of the JOBS Act of 2012, that provides an exemption for crowdfunding transactions. The SEC’s proposal coincided with the Financial Industry Regulatory Authority’s (FINRA) release of proposed rules and related forms for crowdfunding portals.

Crowdfunding Exemption

Title III of the JOBS Act provides an exemption from registration for companies raising capital through crowdfunding subject to, among other requirements, the following limitations:

• the company can raise a maximum of $1 million through crowdfunding during a trailing 12-month period.

• investment in such offerings by an individual investor are capped at:

• the greater of $2,000 or 5% of the individual’s annual income or net worth where both are less than $100,000; or

• 10% of annual income or net worth where either is $100,000 or more.

• transactions must be conducted through a registered funding portal or through a registered broker-dealer.

Capital raised by a company through other means, including other registration exemptions, will not be counted toward the $1 million annual limitation.

Company Requirements

Regulation Crowdfunding requires the company raising funds through crowdfunding transactions to prepare an offering statement on new Form C that

must be filed with the SEC, provided to its intermediary and made available to investors that, among other things, discloses:

• information about officers, directors and 20% owners;

• a description of the company’s business and business plans, number of employees and the use of proceeds of the offering;

• information about the risks of the offering;

• the price to the public of the securities being offered, how the valuation of the securities was determined, the target offering amount, the deadline to reach the target amount and whether the company will accept capital in excess of the target amount;

• information about related-party transactions;

• information about the financial condition of the company; and

• financial statements that, depending on the target amount offered in transactions during the trailing 12-month period, would have to be accompanied by tax returns (for offerings of less than $100,000), reviewed by an independent public accountant (for offerings of more than $100,000 but less than $500,000) or audited by an independent public accountant (for offerings of greater than $500,000).

Requirements on Intermediaries – Funding Portals

Crowdfunding transactions must be effected through a broker-dealer or a new type of SEC-registered entity called a “funding portal” that complies with new Securities Act Section 4A(a). As proposed, Regulation Crowdfunding would, among other things, require intermediaries to:

• have a reasonable basis for believing that the crowdfunding company is complying with the applicable rules;

• ensure that the company’s disclosure is made publicly available for 21 days before securities are sold;

• provide investors with educational materials;

• take measures to reduce the risk of fraud and deny access to any company where it believes the company or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection;

• make available information about the company and the offering;

This alert is one of a series of publications by Murtha Cullina LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own lawyer concerning your own

situation and any specific legal questions you may have.

• provide communication channels to permit discussions about offerings on the platform; and

• avoid offering investment advice or making recommendations.

FINRA Proposed Rules Release

FINRA released a set of proposed rules, referred to as the Funding Portal Rules, and related forms for SEC-registered funding portals that become FINRA members. The proposal, which reflects the rules proposed in Regulation Crowdfunding, would implement the provisions of the JOBS Act in the FINRA rules. FINRA has streamlined the proposed Funding Portal Rules to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection.

Timing

The SEC has provided a 90 day comment period for Regulation Crowdfunding, after which period will take time to consider all the comments it receives and incorporate them into final rules, which process typically takes several months. The final rules, once approved, will likely become effective 60 days after being published in the Federal Register. In the release of the proposed rules, the SEC reminded companies and intermediaries that they may not rely on the crowdfunding exemption created by the JOBS Act until the final rules become effective. FINRA has set a deadline of February 3, 2014 for interested parties to comment on the proposed Funding Portal Rules.

Murtha Cullina LLP will host a Business Breakfast Series seminar on the topic of crowdfunding in January 2014. More information on our Business Breakfast Series winter schedule will soon be available online at www.murthalaw.com.

Please contact any of the Securities Law attorneys listed below if you have any questions regarding this client bulletin:

Willard F. Pinney, Jr.: 860.240.6016/wpinney@murthalaw.com

Edward B. Whittemore: 860.240.6075/ewhittemore@murthalaw.com

David A. Menard: 860.240.6047/dmenard@murthalaw.com

James W. McLaughlin: 860.240.6118/jmclaughlin@murthalaw.com