The SEC adopted the final rule allowing companies to offer and sell securities through crowdfunding on October 30, 2015. These new rules (Regulation Crowdfunding) require companies who opt to raise money through crowdfunding to provide the SEC with new disclosures via EDGAR and are expected to take effect during the second quarter of 2016.
Tuesday, November 10. 2015
Crowdfunding is a method of raising capital via the Internet as a means to fund projects and grow businesses. Title III of the Jumpstart Our Business Startups Act (the JOBS Act) created a federal exemption that allows crowdfunding to be used to offer and sell securities. The rule adopted by the SEC will enable smaller companies new ways to raise capital from individuals. Prior to this new rule, private companies could only offer securities to “accredited” investors – those individuals who own more than $1 million in assets or have maintained an income of at least $200,000 for two or more years. With the new crowdfunding rules in place, individuals who have an annual income of less than $100,000 will be able to purchase securities offered via crowdfunding.
Crowdfunding must be done using a broker-dealer or a registered funding portal. Forms enabling funding portals to register with the SEC will be effective January 26, 2016.
How Much You Can Crowdfund
Companies will be able to raise up to a maximum aggregate amount of $1 million through crowdfunding in a 12-month period. This amount includes securities sold by any predecessor of the issuer during the 12-month period.
How Much You Can Invest
Investors will be limited to investing in a certain amount of offerings in a 12-month period across all issuers. The maximum amount an investor can invest is:
- 5 percent of the investor’s annual income or net worth (whichever is less) if either annual income or net worth is less than $100,000, or $2,000 (whichever amount is greater)
- 10 percent of the investor’s annual income or net worth, not to exceed an amount of $100,000, if both annual income and net worth are $100,000 or more
Investors would generally not be able to sell securities purchased via crowdfunding for a year.
What You Need to Disclose
Companies who engage in crowdfunding are required to provide disclosures to the SEC using a new EDGAR form and also make that information available to investors, potential investors, and the SEC-registered intermediary being used to perform the crowdfunding.
Companies will be required to disclose the following (among other information):
- Its name and legal status, including its form of organization, jurisdiction in which it is organized and date of organization;
- Its physical address and its website address;
- The names of the directors and officers, including any persons occupying a similar status or performing a similar function, all positions and offices with the issuer held by such persons, the period of time in which such persons served in the positions or offices and their business experience during the past three years;
- Information about owners of 20 percent or more of the company;
- The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
- A discussion of the company’s financial condition;
- Financial statements of the company that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the company’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor. (A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor);
- A description of the business;
- A description of the purpose of the offering and the intended use of proceeds from the offering; and
- Certain related-party transactions.
On-going disclosures and annual reports are also required for companies. These disclosures would be made on a new XML form called Form C and submitted to the SEC via EDGAR. Form C would be used for each type of crowdfunding disclosure.
Who Can Crowdfund
Certain companies would be ineligible for crowdfunding, including the following:
- non-US companies,
- Exchange Act reporting companies,
- companies that are investment companies as defined in the Investment Company Act or companies that are excluded from the definition of investment company under Section 3(b) or 3(c) of the Investment Company Act,
- companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and
- companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.