The latest JOBS Act guidance comes from the SEC’s Division of Trading and Markets and the Division of Investment Management. On May 7, 2012, Trading and Markets issued FAQs on crowdfunding intermediaries. The SEC has already warned issuers that crowdfunding is unlawful until the Commission adopts the required implementing rules. Trading and Market’s FAQs anticipate the eventual start of crowdfunding. Highlights include:
· FAQ 1-3 — Crowdfunding intermediaries must register with the SEC as either a broker or as a funding portal. Funding portals must register under rules still to be adopted by the Commission. Brokers already registered with the SEC also must wait for these rules before acting as crowdfunding intermediaries. Funding portals must become members of a national securities association registered under Exchange Act Section 15A; funding portals must therefore become members of the Financial Industry Regulatory Authority (FINRA), as FINRA is the only such organization.
· FAQ 4 — The JOBS Act bars a registered funding portal from: (1) giving investment advice or making recommendations, (2) soliciting purchases, sales, or offers to buy securities offered or displayed on its website or portal, (3) compensating employees, agents, or others for solicitations or based on sales of securities displayed or referenced on its website or portal, (4) handling investors’ funds or securities, and (5) engaging in any other activities barred by SEC rules. Funding portals and crowdfunding brokers also must not compensate promoters for providing them with prospective investors’ personally identifying information. Similarly, funding portals and crowdfunding brokers must not allow their directors, officers, or partners to have financial interests in any issuer using the intermediary’s service.
· FAQ 5 — Crowdfunding intermediaries should consider their legal obligations, including informational duties to investors, fraud risk reduction, and ensuring that investors and issuers satisfy JOBS Act Title III.
Additionally, the Division of Investment Management has posted a link referring visitors to guidance issued by the Division of Corporation Finance. Specifically, readers are urged to consider FAQs 20 and 21 of Corp Fin’s JOBS Act Title I guidance. These FAQs explain that investment companies do not qualify as emerging growth companies (EGCs) because they are subject to a regulatory regime that does comport with the JOBS Act exemptions. By contrast, business development companies (BDCs) may qualify as EGCs since BDCs invest in startup and emerging growth companies, and already must comply with disclosure requirements from which JOBS Act Title I provides exemptions. Questions regarding investment companies and the JOBS Act should be directed to Investment Management’s Office of Chief Counsel.