SEC Adopts Long-Awaited Rules for Crowdfunding

danielM-bioBy Daniel Meyer | In October of 2015, the SEC adopted final rules to permit companies to offer and sell securities to friends, followers and community – otherwise known as “crowdfunding.” Set to go into effect in April of 2016, these new rules, which have been over three years in the making, are designed to assist smaller companies with capital formation and provide investors with additional protections.

The final rules, referred to as Regulation Crowdfunding by the SEC, allow investors to invest in businesses by acquiring a company’s securities through federally-registered crowdfunding portals on the Internet (as well as through traditional broker-dealers) subject to certain investment limits.

On the business side, the issuers of securities relying on the crowdfunding exemption are limited in the amount of money they can raise in a crowdfunding offering and are subject to certain disclosure requirements pertaining to their business and the securities offering itself. The new rules also create the new regulatory framework for the crowdfunding portals and traditional broker-dealers that facilitate crowdfunding transactions.

The final rules and related forms run 685 pages in length and will create a regulatory framework that will be difficult for most start-up founders and other small businesses owners to navigate on their own. Below are some of the key provisions:

• Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.

• Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to an amount determined as follows:

– If either their annual income or net worth is less than $100,000, then the greater of (i) $2,000, or (ii) 5% of the lesser of their annual income or net worth.

– If both their 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.

• During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Certain companies will not be eligible to use the crowdfunding exemption. Perhaps most notable among the class of ineligible companies are those that have no specific business plan (e.g., venture capital and other private equity funds and investment vehicles) and companies that have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Publicly-traded companies, non-U.S. companies, and those that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the immediately preceding two years are also ineligible. The new rules also impose a range of new disclosure and reporting requirements upon those companies that wish to rely on the crowdfunding exemption to offer and sell their securities, retain transferability restrictions on the securities offered and sold, and require that all crowdfunding transactions take place through an SEC-registered crowdfunding portal or broker-dealer.

The new rules should create a great opportunity for start-ups and small businesses to raise capital from a greater universe of prospective investors, but those companies considering such an offering should consult with knowledgeable legal counsel before embarking on a crowdfunding-based capital raise.

To learn more, contact Dan Meyer here.