Congress considers registration exemption for "crowdfunding"

March 8, 2012

The U.S. House of Representatives recently passed a "crowdfunding" bill that would allow companies to sell securities to individual investors via non-traditional means such as social networking websites. Specifically, the proposed amendments to the Securities Act of 1933 would provide a registration exemption for transactions involving individual investments limited to the lesser of $10,000 and 10% of an investor's income. The amount raised under the exemption would also be limited to an aggregate annual amount of $1 million, or $2 million if the issuer provided potential investors with audited financial statements. The issuer or intermediary would have to comply with certain requirements in order to utilize the exemption, including with respect to providing investor warnings, and resales of any securities purchased would be limited for one year.

While President Obama has communicated his support for the bill, it has yet to pass the Senate. Whether the bill ultimately survives the legislative process remains to be seen, but advocates are clearly excited at the potential of allowing small businesses to use websites like Kickstarter or social networking sites like Facebook to offer stock to small-stake investors.

On the Canadian front, regulators are similarly considering whether to make changes to the rules respecting the circumstances under which securities can be issued without a prospectus. Specifically, regulators are looking at the "accredited investor" and "$150,000 minimum investment amount" exemptions that are commonly used to raise financing on a prospectus exempt basis. As discussed in a November 2011 post, possible options for regulators include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

The consultation period ended on February 29. Whether U.S. developments ultimately influence the path taken by Canadian regulators remains to be seen.

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