April 27, 2012
A number of ambiguities in the CROWDFUND Act threaten to undermine its usefulness. In my view, the following are among the most pressing:
(1) The formula in Sec. 4(6)(B) for the aggregate amount that may be sold to any investor contains internally contradictory language in the case of an investor whose annual income is less than $100,000, but whose net worth exceeds that amount. Does the 5% or the 10% computation apply? It is also unclear, despite the language in Sec. 4A(h), how to deal with issues of joint net worth of spouses.
(2) It is unclear whether the requirement in Sec. 4(6)(C) makes the issuer responsible, as a condition of the exemption, to determine that the broker or funding portal has in fact complied with all the requirements of Sec. 4A(b). Unless the issuer can rely on some sort of certification by the intermediary, monitoring may be an impossible task. Some sort of good faith belief standard needs to be promulgated to prevent this from being a trap for issuers.
(3) Section 305(c), relating to permitted state filing requirements, appears to contain an incorrect cross-reference that calls into question its applicability. Crowdfund offerings are defined as covered securities by Securities Act Sec. 18(b)(4)(C). The provision added as Sec. 18(c)(2)(F) applies to any security that is a covered security pursuant to subsection (b)(4)(B). Covered securities under Sec. 18(b)(4)(B) are those exempted by Securities Act Sec. 4(4) (brokers transactions).