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2018 | OriginalPaper | Chapter

9. The Regulation of Crowdfunding in the United States

Author: C. Steven Bradford

Published in: The Economics of Crowdfunding

Publisher: Springer International Publishing

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Abstract

The regulation of crowdfunding in the United States is multifaceted. Donation- and reward-based crowdfunding are essentially unregulated, subject only to the prohibitions on fraud and false advertising that apply to all commercial transactions. But crowdinvesting and most forms of crowdlending must comply with the registration and prospectus requirements of the Securities Act of 1933, unless an exemption is available.
Four different exemptions are available. Two of these, Rules 506(b) and 506(c), allow sales to wealthy or sophisticated investors with little additional regulation. Section 4(a)(6) of the Securities Act and its implementing regulation, Regulation Crowdfunding, allow sales to the general public, but at a high regulatory cost. Section 4(a)(6) and Regulation Crowdfunding heavily regulate all three participants in the crowdfunding process—issuers, intermediaries, and investors—and impose significant limits on the structure of offerings. Finally, many US states have adopted state crowdfunding exemptions that are coordinated with the federal intrastate offering exemption. These state exemptions are of limited usefulness because the issuer and all investors must be located in a single state.
Footnotes
1
Section 5(c) of the Securities Act of 1933 provides that no one may offer securities until a registration statement has been filed with the SEC. 15 U.S.C. § 77e(c). Section 5(a)(1) of the Act prohibits sales of those securities until the registration statement has become effective. 15 U.S.C. § 77e(a)(1).
 
2
15 U.S.C. § 77b(a)(1). Hazen (2016, §§ 1:49–1:79) provides a good general discussion of the interpretation of that definition.
 
3
17 C.F.R. § 230.506(b). Before 2013, when the Rule 506(c) exemption was added, this exemption was known simply as the Rule 506 exemption.
 
4
17 C.F.R. § 230.506(c).
 
5
Pub. L. 112–106, 126 Stat. 306 (2012).
 
6
See Securities Act Rule 501(a), 17 C.F.R. § 230.501(a).
 
7
Securities Act Rule 501(a)(5), 17 C.F.R. § 230.501(a)(5). A spouse’s net worth may also be included to reach the USD 1 million limit. Id.
 
8
Securities Act Rule 501(a)(6), 17 C.F.R. § 230.501(a)(6).
 
9
See, for example, SEC v. Ralston Purina Co., 346 U.S. 119 (1953). In Ralston Purina, the court held that the US private offering exemption (now in section 4(a)(2) of the Securities Act) applies to offerings to those who are “able to fend for themselves” and therefore do not need the protection of registration. Id., at 125.
 
10
Securities Act Rule 506(d), 17 C.F.R. § 230.506(d).
 
11
Securities Act Rule 502(d), 17 C.F.R. § 230.502(d).
 
12
See Securities Act Rule 144, 17 C.F.R. § 230.144.
 
13
Securities Act Rule 506(b)(2)(ii), 17 C.F.R. § 230.506(b)(2)(ii).
 
14
Id.
 
15
Securities Act Rules 501(a), 506(b)(2)(ii), 17 C.F.R. §§ 230.501(a), 230.506(b)(2)(ii).
 
16
Securities Act Rule 502(b), 17 C.F.R. 230.502(b).
 
17
See Securities Act Rule 502(b)(2), 17 C.F.R. § 230.502(b)(2).
 
18
Securities Act Rule 502(c), 17 C.F.R. § 230.502(c).
 
19
See, for example, IPOnet, SEC No-Action Letter (July 26, 1996).
 
20
Securities Act Rule 506(c)(2)(ii), 17 C.F.R. § 230.506(c)(2)(ii).
 
21
Securities Act Rule 506(c)(2)(ii)(A)–(B), 17 C.F.R. § 230.506(c)(2)(ii)(A)–(B).
 
22
See 15 U.S.C. § 77d(a)(6).
 
23
15 U.S.C. §§ 77d(a)(6), 77d-1.
 
24
See 17 C.F.R. § 227.10 et seq.
 
25
17 C.F.R. § 227.100(a)(2)(i),(ii).
 
26
17 C.F.R. § 227.100, Instruction 2 to paragraph (a)(2).
 
27
17 C.F.R. § 227.100, Instruction 1 to paragraph (a)(2); 17 C.F.R. § 230.501(a)(5)(i).
 
28
17 C.F.R. § 227.302(b)(1)(v).
 
29
17 C.F.R. § 227.303(b)(1).
 
30
Id.
 
31
17 C.F.R. § 227.302(b)(1).
 
32
17 C.F.R. § 227.302(b)(2).
 
33
17 C.F.R. § 227.303(b)(2)(i).
 
34
17 C.F.R. § 227.303(b)(2)(ii).
 
35
17 C.F.R. § 227.501.
 
36
Id.
 
37
17 C.F.R. § 227.100(b)(1).
 
38
17 C.F.R. § 227.100(b)(2).
 
39
Investment companies and companies that would be investment companies except for certain statutory exemptions are excluded. 17 C.F.R. § 227.100(b)(3). Also excluded are companies that have no specific business plan or whose business plan is to engage in a merger or acquisition with an unspecified company. 17 C.F.R. § 227.100(b)(6). Companies that have used the crowdfunding exemption in the past and have not filed the required annual reports in the past two years are also excluded. 17 C.F.R. § 227.100(b)(5).
 
40
See 17 C.F.R. §§ 227.100(b)(4); 227.503.
 
41
17 C.F.R. § 503(a).
 
42
17 C.F.R § 227.100(a)(1).
 
43
17 C.F.R. § 304(c).
 
44
Id.
 
45
Id.
 
46
17 C.F.R. § 227.201(a).
 
47
17 C.F.R. § 227.201(e).
 
48
17 C.F.R. § 227.201(d).
 
49
17 C.F.R. § 227.201(b).
 
50
17 C.F.R. § 227.201(b).
 
51
17 C.F.R. §§ 227.201(c); 227.201(m)(3).
 
52
17 C.F.R. § 227.201(r).
 
53
17 C.F.R. § 227.201(m)(1).
 
54
17 C.F.R. § 227.201(m)(4).
 
55
17 C.F.R. § 227.201(m)(5).
 
56
17 C.F.R. § 227.201(m)(6).
 
57
17 C.F.R. § 227.201(m)(2).
 
58
17 C.F.R. § 227.201(f).
 
59
17 C.F.R. § 227.201(p).
 
60
17 C.F.R. § 227.201(q).
 
61
17 C.F.R. § 227.201(u).
 
62
17 C.F.R. § 227.201(w).
 
63
17 C.F.R. § 227.201(x).
 
64
17 C.F.R. § 227.201(s).
 
65
17 C.F.R. § 227.201(s), Instruction 2.
 
66
Id.
 
67
Id.
 
68
See 17 C.F.R. § 227.201(t).
 
69
17 C.F.R. § 227.201(i).
 
70
17 C.F.R. § 227.201(l).
 
71
17 C.F.R. § 227.201(n).
 
72
17 C.F.R. § 227.201(o).
 
73
17 C.F.R. § 227.201(g).
 
74
17 C.F.R. § 227.201(h).
 
75
17 C.F.R. § 227.201(j).
 
76
17 C.F.R. § 227.201(k).
 
77
17 C.F.R. § 227.201(v)
 
78
17 C.F.R. § 227.203(a)(3)(i).
 
79
17 C.F.R. § 227.203(a)(3)(ii).
 
80
17 C.F.R. § 227.201(y).
 
81
17 C.F.R. § 227.202(a).
 
82
17 C.F.R. § 227.202(a).
 
83
See 17 C.F.R. § 227.202(a).
 
84
17 C.F.R. § 227.202(b)(1),(4),(5).
 
85
17 C.F.R. § 227.202(b)(2).
 
86
17 C.F.R. § 227.202(b)(3).
 
87
17 C.F.R. § 227.300(a).
 
88
See Securities Exchange Act of 1934 § 3(a)(80), 15 U.S.C. § 78c(a)(80); 17 C.F.R. §§ 227.401–227.402.
 
89
17 C.F.R. § 227.300(b).
 
90
17 C.F.R. § 227.300(b)(1),(2).
 
91
17 C.F.R. § 227.302(d).
 
92
17 C.F.R. § 227.204(a).
 
93
17 C.F.R. § 227.205(b).
 
94
17 C.F.R. § 227.204(b).
 
95
17 C.F.R. § 227.303(c).
 
96
17 C.F.R. § 227.303(c)(2),(3).
 
97
17 C.F.R. §§ 227.204(c), 227.303(c)(4).
 
98
17 C.F.R. § 227.205(a).
 
99
17 C.F.R. § 227.303(a)(1),(3).
 
100
17 C.F.R. § 227.303(b)(1).
 
101
17 C.F.R. § 227.301(a).
 
102
17 C.F.R. § 227.301(b).
 
103
17 C.F.R. § 227.301(c)(1).
 
104
Id.
 
105
17 C.F.R. § 227.301(c)(2).
 
106
17 C.F.R. § 227.201(g).
 
107
17 C.F.R. § 227. 303(a)(2).
 
108
17 C.F.R. § 227.304(a).
 
109
17 C.F.R. § 227.304(d).
 
110
17 C.F.R. § 227.304(b).
 
111
17 C.F.R. § 227.304(b)(2),(3).
 
112
Section 3(a)(11) of the Securities Act exempts “[a]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory” 15 U.S.C. § 77c(a)(11).
 
113
17 C.F.R. § 230.147.
 
114
17 C.F.R. § 230.147(c)(1).
 
115
17 C.F.R. § 230.147(c)(2).
 
116
For a fairly typical example of such a state exemption, see NEB. REV. STAT. § 8-1111(24).
 
117
Securities Act of 1933 § 18(b)(4)(E), 15 U.S.C. § 77r(b)(4)(E).
 
118
Securities Act of 1933 § 18(b)(4)(C), 15 U.S.C. § 77r(b)(4)(C).
 
119
Securities Act of 1933 § 18(a), 15 U.S.C. § 77r(a).
 
120
See Securities Act of 1933 § 3(a)(11), 15 U.S.C. § 77c(a)(11); Securities Act Rule 147, 17 C.F.R. § 230.147.
 
121
See Securities Act of 1933 § 12(a)(2), 15 U.S.C. § 77l(a)(2); Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a); Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5.
 
122
Securities Act of 1933 § 4A(c), 15 U.S.C. § 77d-1(c).
 
123
Exchange Act Rule 10b-5, 17 C.F.R. § 240.10b-5.
 
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Metadata
Title
The Regulation of Crowdfunding in the United States
Author
C. Steven Bradford
Copyright Year
2018
DOI
https://doi.org/10.1007/978-3-319-66119-3_9

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