The Small Business Capital Formation Committee of the North American Securities Administrators Association (NASAA) has released for internal comment a proposed new NASAA Model Crowdfunding Exemption. The proposed model rule would create a transactional exemption at the state level for the sale of securities through an Internet-based offering to numerous small investors, a procedure known as "crowdfunding."
As discussed in the Request for Member Comments, the key elements of the proposed exemption include the following:
- Issuers are limited to an aggregate offering amount of $500,000 over a 12-month period.
- Individual investments are limited to $1,000 per year, per offering, with a multi-investment limit of eight percent or less of annual income.
- Issuers must make a one-stop filing in the state of the issuer’s principal place of business, using proposed new Form CF.
- Issuers must disclose certain information, including their business plans and proposed use of proceeds, on a website accessible to all state securities regulators.
- Cautionary language has been developed to provide investors with important information about the general investment risks of crowdfunding.
- Issuers must escrow investor proceeds until they reach the target offering amount.
- Individuals and companies with prior disciplinary history will be disqualified from using the exemption.
- Offerings must be conducted through an intermediary that is registered as a broker- dealer, but the intermediary is exempted from certain rules applicable to traditional broker-dealers.
The proposed exemption will not become viable at the state level unless a corresponding exemption is created under federal law. The Committee noted that the proposed model rule contains a lower aggregate offering limit than the current proposals that have been introduced in Congress in H.R. 2930, S. 1791, and S. 1970, but the Committee believes that the model rule otherwise represents a compromise between the competing federal proposals.
In the Committee's view, the most important aspect of the proposed rule may be the requirement that intermediaries register as broker-dealers, presumably because intermediaries would thus fall within the current definition of a "broker-dealer" by accepting transaction-based compensation. The rule, however, sets up a framework for exempting the intermediary from some of the rules that apply to traditional broker-dealers, provided the intermediary’s activities are limited to crowdfunding. In particular, the proposed rule exempts the intermediary from the normal rules related to SRO membership, short sales, penny stocks, suitability, and prospectus delivery requirements. The Committee observed that this approach is similar in some respects to the treatment of security futures dealers in Section 15(b)(11) of the Securities Exchange Act of 1934.
NASAA members will have until February 7, 2012 to comment on the proposed exemption.