Sunday, November 06, 2011

Chairman McHenry Crafted Managers Amendment to Crowdfunding Legislation with Input from SEC Staff

The House overwhelming passed legisaltion, HR 2930, allowing companies to pool up to $1 million without the expense of registering with the SEC or up to $2 million if the company provides investors with audited financial statements. Individual contributors are limited to $10,000 or 10 percent of the investor’s annual income, whichever is less. The Entrepreneur Access to Capital Act was sponsored by Rep. Patrick McHenry (R-NC, Chairman of the TARP and Financial Services Subcommittee.

Chairman McHenry crafted a Managers Amendment to HR 2930 based on post-markup feedback from the SEC staff. While the Managers Amendment is primarily a technical amendment, it did contain some substantive changes to the legislation. It requires the issuer to state a target offering amount and a deadline to reach the target offering amount and ensure that the third party custodian withholds offering proceeds until aggregate capital raised from investors other than the issuer is no less than 60 percent of the target offering amount. The issuer is also required to provides the SEC with a notice upon completion of the offering, which must include the aggregate offering amount and the number of purchasers.

Consistent with legislative history that the intermediary facilitating crowdfunding is not envisioned to be a broker-dealer, the Managers Amendment provides that with respect to a crowdfunding transaction involving an intermediary, such intermediary will not be required to register as a broker under section 15(a)(1) of the Securities Exchange Act solely by reason of participation in such transaction. The Managers Amendment also clarifies that the disqualification provision in HR 2930 ensures that both issuers and intermediaries,as well as their predecessors, affiliates, officers, directors or persons fulfilling similar roles, are disqualified from the exemption established in the legislation should they have a history of committing securities fraud.

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