We do not believe it is necessary for us to prescribe how oversubscribed offerings must be allocated if the issuer is required to disclose, at the commencement of the offering, how shares in oversubscribed offerings will be allocated. Commenters were supportive of this approach, [ ] and we believe this disclosure should provide investors with important information while maintaining flexibility for issuers to structure the offering as they believe appropriate. We believe that investors in a crowdfunding transaction will benefit from clear disclosure about their right to cancel, the circumstances under which an issuer may close an offering early and the need to reconfirm the investment commitment under certain circumstances, as they will be more aware of their rights to rescind an investment commitment.
Therefore, we are adopting disclosure requirements covering these points, as proposed. Consistent with Section 4A b 1 G , we proposed in Rule l of Regulation Crowdfunding to require an issuer to disclose the offering price of the securities or, in the alternative, the method for determining the price, so long as before the sale each investor is provided in writing the final price and all required disclosures. Consistent with Section 4A b 1 H , we proposed in Rule m of Regulation Crowdfunding to require an issuer to provide a description of its ownership and capital structure.
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This disclosure would include:. As proposed, the rules would require disclosure of the number of securities being offered and those outstanding, whether or not such securities have voting rights, any limitations on such voting rights and a description of the restrictions on the transfer of the securities. A number of commenters supported the proposed ownership and capital structure disclosure rules, [ ] while two commenters opposed them as burdensome.
We are adopting the ownership and capital structure disclosure rules as proposed, with the addition of language specifying that beneficial ownership must be calculated no earlier than days prior to the date of the filing of the offering statement or report, [ ] consistent with the treatment of beneficial ownership elsewhere in the rule. This should help investors better evaluate the terms of the offer before making an investment decision.
Identity of the Intermediary. Several commenters supported the proposed requirement that issuers identify the intermediary through which the offering is being conducted. Compensation Paid to the Intermediary. Some commenters supported the proposed requirement that issuers disclose the amount of compensation paid to the intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering.
Comments were mixed as to the proposed requirement that issuers include specified legends in the offering statement about the risks of investing in a crowdfunding transaction and the required ongoing reports.
Some commenters supported such a requirement, [ ] while others opposed the requirement. Current Number of Employees. While several commenters supported the proposed requirement that issuers disclose their current number of employees, [ ] two commenters opposed such a requirement. Risk Factors. Commenters were divided as to the proposed requirement that issuers discuss the material factors that make an investment in the issuer speculative or risky.
A number of commenters supported this proposed requirement, [ ] while a number of others opposed it.
Commenters supported the proposed requirement that issuers describe the material terms of any indebtedness of the issuer. Prior Exempt Offerings. Commenters supported the proposed requirement that issuers disclose their prior exempt offerings. Related-Party Transactions. Commenters generally supported our proposal to require disclosure of certain related-party transactions between the issuer and any director or officer of the issuer, any person who is a 20 Percent Beneficial Owner, any promoter of the issuer if the issuer was incorporated or organized within the past three years or immediate family members of the foregoing persons.
One commenter supported the proposal to limit the disclosure of related-party transactions to transactions since the beginning of the issuer's last fiscal year. Other Disclosures. Several commenters specifically recommended that we not require any additional disclosures. As discussed in Section II. We are adopting the additional disclosure requirements as proposed in Rule with several modifications. As discussed below, we have added a requirement to disclose any material information necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
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We agree with the suggestion by some commenters that issuers should not be required to disclose in multiple places the information required to be provided Start Printed Page to investors. Despite the suggestion of one commenter that this disclosure is unnecessary, [ ] we believe requiring an issuer to identify the name, SEC file number and CRD number as applicable of the intermediary through which the offering is being conducted should assist investors and regulators in obtaining information about the offering and use of the exemption.
Requiring an issuer to disclose the amount of compensation paid to the intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering, will permit investors and regulators to determine how much of the proceeds of the offering is used to compensate the intermediary. Based on a comment received, [ ] we understand that in some instances the exact amount of compensation and fees to be paid to the intermediary will not be known at the time the Form C is filed, and we have modified the rule from the proposal to address this issue.
Consistent with this understanding, and to avoid suggesting that only amounts certain and paid to date must be disclosed, the final rules require disclosure of all compensation paid or to be paid to the intermediary for conducting the offering, which may be disclosed as a dollar amount or as a percentage of the offering amount.
If the exact amount of the compensation paid or to be paid is not available at the time of the filing, issuers are permitted to provide a good faith estimate.
In addition, we are modifying the rule text from the proposal to require issuers to disclose any other direct or indirect interest in the issuer held by the intermediary, or any arrangement for the intermediary to acquire such an interest. However, as discussed in Section II. We believe that, similar to the amount of compensation paid to the intermediary, an intermediary's interests in an issuer and the issuer's transaction could be material to an investment decision in the issuer.
Therefore, we believe that issuers should disclose such interests to investors. We are adopting this requirement as proposed. We continue to believe, despite the suggestions of some commenters, [ ] that requiring legends in each issuer's offering statement, regardless of any general warnings available on an intermediary's platform, will provide additional investor protection with minimal costs.
For example, the requirement that an issuer include in the offering statement certain legends about the required ongoing reports, including how those reports will be made available to investors and how an issuer may terminate its ongoing reporting obligations, will help investors understand an issuer's ongoing reporting obligations and how they will be able to access those reports.
Consistent with the proposal and the recommendation of several commenters, [ ] the final rules require disclosure of the current number of employees. We expect that the early-stage issuers who are likely to use securities-based crowdfunding will not have many employees, so we do not believe this requirement will be unreasonably burdensome. We are adopting this disclosure requirement as proposed.
Consistent with the proposal, we are adopting the requirement to provide a description of the material terms of any indebtedness of the issuer. We expect that for many issuers this information will be included in the financial statements, which will satisfy this reporting requirement. While one commenter recommended that we require issuers to disclose the Start Printed Page identities of their creditors, [ ] we do not believe, as a general matter, that such disclosure would provide meaningful information to investors.
Accordingly, under the final rules, such disclosure is required only to the extent the creditor's identity is a material aspect of the indebtedness. Consistent with the proposal and with commenters' recommendations, we are requiring issuers to provide disclosure about the exempt offerings that they conducted within the past three years.
We are adopting this disclosure requirement substantially as proposed. After considering the comments received, we continue to believe the related-party transactions disclosure will assist investors in obtaining a more complete picture of the financial relationships between certain related parties and the issuer and provide additional insight as to potential uses of the issuer's resources, including the proceeds of the offering.
The final rule differs from the proposal in that an issuer is required to disclose transactions with any person who is, as of the most recent practicable date but no earlier than days prior to the date the offering statement or report is filed, the beneficial owner of 20 percent or more of the issuer's outstanding voting equity securities. Limiting the relevant period to days prior to the date of the offering statement or report is consistent with the treatment of beneficial ownership elsewhere in Regulation Crowdfunding. The final rule also includes an instruction to clarify that, for purposes of Rule r , a transaction includes, but is not limited to, any financial transaction, arrangement or relationship including any indebtedness or guarantee of indebtedness or any series of similar transactions, arrangements or relationships.
Given the early stage of development of the small businesses and startups that we expect will seek to raise capital pursuant to Section 4 a 6 , as well as the investment limits prescribed by the rules, we believe that limiting the disclosure of related-party transactions to transactions occurring since the beginning of the issuer's last fiscal year, as proposed, will help to limit compliance costs for issuers while still providing investors with sufficient information to evaluate the relationship between related parties and the issuer.
We also have added an instruction to clarify that any series of similar transactions, arrangements or relationships should be aggregated for purposes of determining whether related-party transactions should be disclosed. We believe that, in light of the sizes and varieties of issuers that may make offerings in reliance on Section 4 a 6 , this approach could mitigate the potential for the requirement to be disproportionate to the size of certain offerings and issuers.
While one commenter suggested we use a percentage threshold less than five percent, we believe this threshold appropriately takes into consideration the need to provide investors with relevant information about the issuer's activities involving related parties during this crucial early stage of development. We are adopting this provision as proposed but with the addition of three issuer disclosure requirements in response to comments received.
The first is a requirement that an issuer disclose the location on its Web site where investors will be able to find the issuer's annual report and the date by which such report will be available on its Web site.
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We do not believe physical delivery of the annual report is necessary due to the electronic nature of the crowdfunding marketplace, nor do we believe that email delivery of the annual report is practical because the Start Printed Page issuer may not have access to email addresses of its investors. Instead, we are requiring issuers to disclose this information in the offering statement, which will assist investors in locating the information while limiting the compliance costs for issuers.
The second additional disclosure requirement, as suggested by a commenter, [ ] is a requirement that the disclosure include any material information necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. The third additional requirement, similar to suggestions from some commenters, [ ] requires the issuer to disclose whether it or any of its predecessors previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding. Although we appreciate that commenters made various suggestions for additional issuer disclosure requirements, such as those relating to executive compensation, market risk and material contracts, we are not mandating further disclosures.
In adopting issuer requirements for Regulation Crowdfunding, we have been mindful of the limited resources and start-up operations of issuers likely to use security-based crowdfunding and have sought to consider the need to provide investors with relevant information to make an informed investment decision while limiting the compliance costs for issuers.