Update: Final SEC Crowdfunding Rules Adopted
The Securities and Exchange Commission’s much-anticipated (and much-delayed) final crowdfunding rules were adopted last week on October 30, 2015.
A brief background on federal crowdfunding: Title III of the JOBS Act, passed in 2012, requires the SEC to adopt rules regulating crowdfunding. Title III allows “non-accredited investors” (a legal term of art referring to individuals who are not required to meet certain income and net-worth thresholds) to invest in startups and other emerging companies. Effectively, crowdfunding allows (1) regular folks to invest in startups over the Internet; and (2) early-stage companies access to investment dollars from individuals that were previously almost untouchable to startups.
In its press release, the SEC stated that Regulation Crowdfunding and the accompanying forms will be available 180 days after the rules are published in the Federal Register.
Regulation Crowdfunding. Here are the specific Regulation Crowdfunding requirements:
· A company can raise a maximum amount of $1 million through crowdfunding in a 12-month period;
· Individual investors can invest, in the aggregate, across all crowdfunding offerings in a 12-month period up to:
o If an investor’s annual income or net worth is less than $100,000, then the greater of: (a) $2,000; or (b) 5% of the lesser of their annual income or net worth.
o If an investor’s annual income and net worth are equal to or more than $100,000, then 10% of the lesser of their annual income or net worth; and
· During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
Company Disclosure Requirements. Companies using Regulation Crowdfunding must file certain information with the SEC and provide such information to investors and the intermediary facilitating the offering. Such information includes:
· The price of the securities, 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;
· Information concerning the company’s financial condition;
· Financial statements of the company that may include certain information from the company’s tax returns, which must be reviewed by an independent public accountant, or audited by an independent auditor. A company that is offering more than $500,000 but not more than $1 million of securities that is relying on Regulation Crowdfunding for the first time can 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 and the use of proceeds from the offering;
· Information about officers and directors of the company as well as owners of 20% or more of the company’s equity; and
· Companies are required to file an annual report with the SEC and provide that report to investors.
If used properly, crowdfunding could be a great way for your company to access capital investments. If you are considering using crowdfunding for your company’s next capital raise, be sure to consult with an attorney specializing in business and securities law to ensure that your company satisfies the SEC’s requirements.