June 2012 Bar Bulletin
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June 2012 Bar Bulletin

Crowdfunding Intermediaries To Act as Privatized Regulators


The JOBS Act regulation of the intermediaries through which crowdfunded securities are to be offered substitutes the intermediaries for securities regulators as "gatekeepers" in the offerings.

In addition to registering with the SEC and any applicable self-regulatory organization,1 the crowdfunding intermediary will have to take "measures to reduce the risk of fraud," including obtaining a background and securities enforcement regulatory history check on each officer, director and person holding more than 20% of the outstanding equity securities of the crowdfunding small business.2

The background check should include criminal history in order to confirm that the company is not disqualified from using the crowdfunding mechanism. The problem is that, although at least one commercial data company will now provide a 50-state criminal check for roughly $40 per person, a 50-state securities enforcement regulatory history check is not currently available to the public through a commercial data company at any price.

Presumably, between now and the time the SEC adopts rules implementing crowdfunding under the JOBS Act, one or more commercial data companies will be able to provide a 50-state securities enforcement regulatory history check at a price that will be acceptable to crowdfunding intermediaries.

Crowdfunding intermediaries:

  • must make available to the SEC and to potential investors, not later than 21 days prior to the first day on which crowdfunded securities are sold, the disclosures by the company engaged in the crowdfunding offering;3
  • must ensure that all offering proceeds are provided to the company only when the aggregate capital raised from all investors is equal to or greater than a target offering amount;
  • must allow investors to cancel their commitments to invest;4 and
  • must make efforts to ensure that no investor in a 12-month period has purchased securities that in the aggregate from all crowdfunding companies exceed the applicable investments for that particular investor.5

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