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On December 19, 2019, the Staff of the U.S. Securities and Exchange Commission’s Division of Corporation Finance issued guidance outlining the Staff’s views about disclosure obligations that companies should consider with respect to technology, data and intellectual property risks that could arise when operations take place outside the United States. Companies should consider this guidance when preparing risk factor and other disclosures included in upcoming periodic reports and registration statements.

Background

The Staff notes that the SEC’s principles-based disclosure regime recognizes that new risks may arise over time, affecting different companies in different ways. For those companies that conduct business operations outside the United States, risks can arise for technology and intellectual property, particularly when operations take place in jurisdictions that do not provide protection that is comparable to the United States. The Staff observes that companies may be exposed to material risks of “theft of proprietary technology and other intellectual property, including technical data, business processes, data sets or other sensitive information.” Exposure to such risks can be heightened when companies conduct business in some foreign jurisdictions, house technology, data and intellectual property abroad, or license technology to joint ventures with foreign partners.
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This article provides a detailed overview of the final rules, Regulation Crowdfunding, which will be applicable to crowdfunding offerings conducted in reliance on Section 4(a)(6) of the Securities Act of 1933 as amended (the “Securities Act”), which was added by Title III of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), as well as to those intermediaries participating in such offerings. We do not address the proposed FINRA framework applicable to funding portals, which will be covered in a separate alert. All rule references, unless otherwise noted, refer to rules under Regulation Crowdfunding.

We will supplement this alert with a more detailed practical analysis comparing the various new offering exemptions available to issuers as a result of the JOBS Act.

PART ONE: GENERAL REQUIREMENTS

Limit on Capital Raised

Consistent with the statutory limitations, Rule 100(a) provides that an issuer may sell up to $1 million in any 12-month period to investors in an offering made pursuant to the exemption. Of course, an issuer may consider conducting other exempt offerings in close proximity with its crowdfunded offering.  In calculating the amounts sold for purposes of the threshold, amounts sold by a predecessor or by an entity under common control with the issuer will be aggregated with the amounts sold by the issuer.

Individual Investment Limits

In the final rules, the Securities and Exchange Commission (the “SEC”) has modified the investor limits from those included in its proposed rules. The final rules make clear that the individual investor limit is an aggregate limit, which applies to all investments made by the individual over a 12-month period in crowdfunded offerings and not to a specific offering.

An investor will be limited to investing:

  1. The greater of: $2,000 or 5% of the lesser of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or
  2. 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more.

As we discuss below, the issuer can rely on the intermediary’s calculation of the investment limit; provided that the issuer does not have knowledge that the investor has exceeded, or would exceed, the investment limits as a result of participating in the issuer’s offering.

Offering through an Intermediary

An issuer would only be able to engage in an offering through a registered broker-dealer or through a funding portal, and an issuer can only use one intermediary for a particular offering or concurrent offerings made in reliance on the exemption.

The offering must be conducted online only through the intermediary’s platform, so that the “crowd” has access to information and there is a forum for an exchange of information among potential offering participants.

A “platform” is defined as “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act.”

Eligible Issuers

The ability to engage in crowdfunding is not available to all issuers. By statute, the following issuers cannot rely on crowdfunding transactions under Section 4(a)(6):

  • issuers not organized under the laws of a state or territory of the United States or the District of Columbia;
  • issuers already subject to Securities Exchange Act of 1934, as amended (the “Exchange Act”) reporting requirements;
  • investment companies as defined in the Investment Company Act of 1940 (the “Investment Company Act”) or companies that are excluded from the definition of “investment company” under Section 3(b) or 3(c) of the Investment Company Act; and
  • any issuer that the Commission, by rule or regulation, determines appropriate.

The final rules also exclude:

  • issuers disqualified from relying on Section 4(a)(6), or “bad actors;” and
  • issuers that have sold securities in reliance on Section 4(a)(6) and have failed, to the extent required, to make required ongoing reports required by Regulation Crowdfunding during the two-year period immediately preceding the filing of the required new offering statement; and
  • any issuer that is a development stage company that has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.


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Untitled Extract PagesThe growing use of social media has created challenges for federal securities regulators and, given the significance of social media as a preferred method of communication for a large percentage of market participants, the need to adapt Federal securities laws and the regulatory framework applicable to broker-dealers and investment advisers to social media channels has

The staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) recently provided guidance on applying its rules regarding communications in connection with securities offerings, tender offers, business combinations and proxy contests when statements are made utilizing certain social media channels. The staff’s guidance permits the use of a hyperlink to information required by certain rules when a character- or text-limited social media channel such as Twitter is used for a regulated communication, and also confirms that, at least in the context of a securities offering, a communication that has been re-transmitted by a third party that is not an offering participant or someone acting on behalf of the issuer is not attributable to the issuer for the purposes of the rules that apply to such communication.
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REGULATION FD

Beginning in 1999 and continuing into 2000, media reports about selective disclosure of material nonpublic information by issuers raised concerns that select market professionals who were privy to this information profited at the expense of others. A consensus began to emerge that selective disclosure (1) adversely affects market integrity (to a similar extent

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