any of an issuer’s required filing materials,
in the same manner as if the loss had
occurred due to a misrepresentation or
omission under Section 12(a)( 2) of the
Securities Act. 23 Issuers and their directors,
partners and principal executive, financial
and accounting officers may all be held
directly liable for such loss.24
Can issued crowdfunded securities
be resold?
Securities issued under Section 4( 6)
will be restricted from resale for a period of
one year after issuance. Crowdfunded securities may only be transferred within the
one year period ( 1) to the issuer; ( 2) to an
accredited investor; ( 3) pursuant to a subsequent registered offering; or ( 4) to a family
member or other affiliate. 25 After the one-year holding period, it is unclear what the
secondary market for crowdfunded securities will look like. Presumably, the market
for such securities will be thin, if any market
exists at all.
INTERNET
1992
endnotes
• The World Bank
comes online.
• The term
“surfing the
Internet” is
coined.
How does the crowdfunding exemp-
tion interact with state law?
Securities issued under the crowdfunding exemption are “covered securities,”
which means that they are exempt from
state registration requirements. 26 States may
still require notice filings similar to Form D
notice filings under Rule 506 offerings;
however, unlike Form D notice filings,
states may not charge a filing fee for notice
filings under the crowdfunding exemption
unless ( 1) the principal place of business of
the issuer is located in the state, or ( 2) at
least 50 percent of the securities sold in the
crowdfunding offering are sold to residents
of the state. 27
State securities commissions may still
bring enforcement actions for fraud, deceit
or unlawful conduct by any issuer, broker or
funding portal in connection with a crowdfunding offering. 28
When does the CROWDFUND Act
take effect?
Although the JOBS Act was signed
into law on April 5, 2012, it will not take
effect until the SEC issues its final rules
under the act. The JOBS Act places a dead-
line of December 31, 2012, for the SEC to
promulgate its required rules. 29 However,
the SEC is already behind on its rulemaking
tasks under the Dodd–Frank Act, and has
already missed a July 4, 2012, deadline for
rulemaking under a separate part of the
JOBS Act. 30 Moreover, Title III of the
JOBS Act calls for optional or mandatory
SEC rulemaking under at least two dozen
separate provisions, a task that the SEC has
modestly described as “challenging.” 31
Is securities-based crowdfunding
worth the effort, or will it simply
increase the opportunity for fraud?
As with any type of securities
issuance, there will likely be some instances
of fraud. But, as outlined above, the JOBS
Act contains investor protections, including
ongoing reporting requirements and a
private right of action for losses caused
by material misrepresentations or omissions.
Whether securities-based crowdfunding is
worth the effort will depend largely on an
issuer’s individual circumstances, including
financial and non-financial concerns.
Furthermore, its usefulness also depends on
the SEC’s rulemaking. If the SEC fails to
strike the appropriate balance between
investor protection and promoting efficient
access to capital, those looking to raise capital through crowdfunding may prefer to
use the current models. AZ AT
1. P.L. 112-106, 126 Stat. 306, 306
(2012).
2. Anoraknophobia Pre-Order Press
Release, April 1, 2001, www.mar-illion.com/news/newsitem.htm?i
d= 5 (last visited Nov, 20, 2012).
3. Id.
4. Based on figures from the
Kickstarter Stats page,
www.kickstarter.com/help/stats
(last visited Nov. 20, 2012).
5. Securities Act § 5 (codified at 15
U.S.C.A. § 77e(a)).
6. A.R.S. § 44-1841(B).
7. Securities Act § 4( 6) (codified at
15 U.S.C.A. § 77d(a)( 6)). These
amounts, and other monetary
amounts under Title III of the
JOBS Act, will be periodically
adjusted (not less than every five
years) for inflation. 15 U.S.C.A.
§ 77d- 1(h)( 1).
8. Securities Act § 4( 6)(B)(i), (ii)
(codified at 15 U.S.C.A. §
77d(a)( 6)(B)(i), (ii)).
9. Securities Act § 4A(h) (codified
at 15 U.S.C.A. § 77d- 1(h)( 2));
see also 17 C.F.R. §
230.501(a)( 5).
10. Securities Act § 4( 6)(C)
(codified at 15 U.S.C.A. §
77d(a)( 6)(C)).
11. Securities Act § 4A(a)( 1), ( 2)
(codified at 15 U.S.C.A. §
77d- 1(a)( 1), ( 2)).
12. Securities Act § 4A(a)( 3)-( 12)
(codified at 15 U.S.C.A. § 77d-
1(a)( 3)-( 12))); 15 U.S.C.A. §
78c(a)( 80), (h).
13. 15 U.S.C.A. § 78c(a)( 80).
14. Id. § 78c(a)( 80)(A),(B),(C).
15. Id. § 77d- 1(a)( 4)(B), (C).
16. Id. § 77d- 1(a)( 5).
17. Securities Act § 4A(f) (codified
at 15 U.S.C.A. § 77d- 1(f)).
18. Securities Act § 4A(b)( 1)
(codified at 15 U.S.C.A.
§ 77d- 1(b)( 1)).
19. Id.
20. Id.
21. Securities Act § 4A(b)( 1)(D)
(codified at 15 U.S.C.A. § 77d-
1(b)( 1)(D)).
22. Securities Act § 4A(b)(b)( 4)
(codified at 15 U.S.C.A. § 77d-
1(b)( 4)). As with many other
details of the JOBS Act,
requirements for the frequency,
timing and content of such
reports are to be determined
by the SEC. Id.
23. Securities Act § 4A(c) (codified
at 15 U.S.C.A. § 77d- 1(c));
Securities Act § 4A(c)( 1)(B)
(codified at 15 U.S.C.A. § 77d-
1(c)( 1)(B)). Actions brought
under Securities Act § 4A(c)
are likewise subject to the
provisions of 15 U.S.C.A. §§
77l(b), 77m. Id.
24. Securities Act § 4A(c)( 3)
(codified at 15 U.S.C.A. § 77d-
1(c)( 3)).
25. Securities Act § 4A(e)( 1)
(codified at 15 U.S.C.A. § 77d-
1(e)( 1). The SEC may establish
additional transfer rules.
Securities Act § 4A(e)( 2)
(codified at 15 U.S.C.A. § 77d-
1(e)( 2).
26. Securities Act § 18(b)( 4)(C)
(codified at 15 U.S.C.A. §
77r(b)( 4)(C)).
27. Securities Act § 18(c)( 2)(F)
(codified at 15 U.S.C.A. §
77r(c)( 2)(F)).
28. Securities Act § 18(c)( 1)
(codified at 15 U.S.C.A. §
77r(c)( 1)).
29. P.L. 112-106, Title III, §
302(c), 126 Stat. 306 (2012).
30. Testimony from SEC Chairman
Mary Schapiro, Hearing before
the Subcommittee on TARP,
Financial Services and Bailouts
of Public and Private Programs,
U.S. House of Representatives,
June 28, 2012, Serial No.
112–169.
