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Crowdfunding: Preparing for New Regulations

BY Katayun I. Jaffari
September 01, 2016

On May 16, Regulation Crowdfunding came into effect. It was adopted in October 2015 and is applicable to crowdfunding offerings conducted in reliance on Section 4(a)(6) of the Securities Act of 1933, as amended. In preparation for the effectiveness of the crowdfunding rules, the U.S. Securities and Exchange Commission (SEC) has issued a bulletin that serves as a guide for companies and investors, whose activities will be covered by Regulation Crowdfunding (the bulletin). This article summarizes the practical terms of the crowdfunding rules and the bulletin.

What Is Crowdfunding?

Crowdfunding is a method of raising capital through the Internet; this capital is expected to be used by smaller and emerging companies for a range of different purposes. Title III of the Jumpstart Our Business Startups Act of 2012 (JOBS Act) created a federal exemption under the securities laws so that this type of funding method could be used to offer and sell securities. Regulation Crowdfunding is designed to assist smaller companies with capital formation while codifying certain protections for investors of crowdfunded projects. It also creates a new entity ' a funding portal ' to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers.

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