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New Crowdfunding Rule for Securities Sales

Effective Monday, May 16, 2016  investors can purchase new securities through crowdfunding.  In recent years, internet crowdfunding has been popular for raising early-stage funds for numerous endeavors, and this method is now approved for raising capital if SEC and FINRA rules are followed.

FINRA Exam Impact

The topic of crowdfunding may be tested on Series 7, Series 24, Series 65, Series 66, Series 79 and other FINRA qualification exams beginning May 16.

Crowdfunding Rules for Issuers and Intermediaries

Issuing companies can offer crowdfunding investments through a registered broker-dealer or funding portal only.  They may not directly offer crowdfunding to the public. Issuers must register the crowdfunding securities offering with the SEC on Form C. Crowdfunding companies are required to disclose their results of operations and financial statements annually.

Crowdfunding broker-dealers or funding portals must be registered with the SEC and must be FINRA member firms. All funding portal firms and their associated persons are subject to FINRA rules and oversight.  Information about these registered funding portals and firms is available to the public on the SEC’s EDGAR website.

Broker-dealers and funding portals that operate crowdfunding platforms are required to offer educational materials to investors. These materials must detail the risks of crowdfunding investments, including but not limited to the speculative nature of securities, lack of liquidity and lack of disclosure.

Crowdfunding Rules for Investors

Any Investor may purchase securities through crowdfunding but must open an account with a registered intermediary. Purchase limits apply during any 12-month period.

  • Individuals with either annual income or net worth of less than $100,000, can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
  • Individuals with either annual income or net worth of equal to or more than $100,000, can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.

For this calculation, net worth does not include personal residence.

Restrictions on Resale

Investors that purchase shares through crowdfunding are restricted from selling the shares for the first year.  However, during this restricted period they may be transferred:

  • to the company that issued the securities;
  • to an accredited investor;
  • to a family member (defined as a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships);
  • in connection with death or divorce or other similar circumstance;
  • to a trust controlled by the investor or created for the benefit of a family member;
  • as part of an offering registered with the SEC.

Get the Latest from Knopman Marks

Knopman Marks Financial Training is committed to ensuring you have access to the latest updates. As more information becomes available on this topic we will post updates. As always, good luck with your studying and with your exam, and contact us if we can be of help!

Marcia Larson is Vice President, Faculty, at Knopman Marks Financial Training, New York, NY. She has extensive experience in financial licensing and regulatory training, having authored, developed and presented courseware for numerous securities and insurance exam preparation and continuing education and compliance programs. Before joining Knopman Marks, Marcia was Director of Annuity Products and Business Development at CUNA Mutual Group, where she developed and marketed industry-leading annuity products and retirement solutions and implemented distribution relationships. She was previously VP, Securities Products for Kaplan Financial, managing securities training products and subsequently, international training and businesses development. Marcia has trained thousands of financial industry exam candidates throughout their careers, and also college students as an adjunct professor. Marcia was a summa cum laude graduate of Wartburg College with degrees in Business Administration and Piano Performance. Marcia also holds the designations of Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter (CLU®), Certified Employee Benefit Specialist (CEBS), and Fellow Life Management Institute™ (FLMI®). She currently teaches the SIE, Series 6, 7, 24, 50, 52, 63, 65, and 66 exams.

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