SEC APPROVES FINAL CROWDFUNDING RULES: SIX THINGS TO DO BEFORE YOUR COMPANY CROWDFUNDS
November 12, 2015
By Jeff Wolfe
On October 30, 2015, the Securities and Exchange Commission (SEC) adopted final rules to permit crowdfunding as a funding method for smaller financings. The federal exemption that permits companies to offer and sell securities (rather than just rewards) through crowdfunding was originally authorized by Congress in Title III of the Jumpstart Our Business Startups (JOBS) Act. Although the JOBS Act was signed by President Obama on April 5, 2012, the SEC did not propose rules to implement the crowdfunding exemption until October 23, 2013 and then took two years to finalize them.
While businesses and other stakeholders waited for the SEC, about half of the states adopted their own crowdfunding rules, most of which are tied to the federal intrastate offering exemption. With the SEC’s new rules, which take up 686 pages, the playing field is now leveled nationwide, which is especially important for states like North Carolina, where crowdfunding legislation never made it out of the legislature.
However, before running out and starting a crowdfunding campaign, here are six things that your company must do before it initiates a crowdfunding campaign that offers securities to non-accredited investors:
1. WAIT A LITTLE BIT LONGER – The crowdfunding rules are not effective until 180 days after the rules have been published in the Federal Register, so expect to see them in force in early May 2016.
2. CHECK YOUR COMPANY’S ELIGIBILITY – The SEC’s final rules disqualify certain companies from engaging in crowdfunding for failing to comply with the crowdfunding rules or certain other “bad actor” securities rules. In addition, the following companies are ineligible to use the federal crowdfunding exemption: non-U.S. companies; certain investment companies; companies that report to the SEC under the Securities Exchange Act of 1934, as amended; 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.
3. CHECK YOUR OFFERING’S ELIGIBILITY – Just as important as the company criteria are the limits placed on the size of crowdfunded offerings. Specifically, a company cannot raise more than $1 million through crowdfunding offerings in any 12-month period. Therefore, you’ll need to analyze your company’s capital needs and will be forced to rely on traditional financing options if that amount is greater than $1 million.
4. UNDERSTAND THE INDIVIDUAL INVESTOR LIMITS – In addition to limits placed on companies and offering sizes, the new rules also place a cap on the amount of investments that individuals may make through crowdfunding. For individuals that have annual income or net worth that is less than $100,000, there is an investment cap of the greater of $2,000 or five percent of the lesser of their annual income or net worth during any 12-month period. For individuals with an annual income and net worth that are both equal to or greater than $100,000, the investment cap is 10 percent of the lesser of their annual income or net worth; provided, that the aggregate amount does not exceed $100,000 in the 12-month period.
5. PREPARE FOR DISCLOSURE REQUIREMENTS – In order to raise money using the federal crowdfunding exemption, companies will need to comply with the SEC’s disclosure requirements. Under the SEC’s final crowdfunding rules, companies must provide to investors and file with the SEC certain information regarding your company (e.g., financial statements, officers and directors, related-party transactions) and the securities offering (e.g., price, target offering amount, deadlines). The financial statement requirements vary based on the offering amount and whether the company is a first-time issuer. On an ongoing basis, a company that conducts a crowdfunding offering will also be required to file an annual report with the SEC and deliver it to its investors.
6. RESEARCH CROWDFUNDING PORTALS AND BROKER-DEALERS – In order to complete a crowdfunding campaign, you must engage either a broker-dealer or a funding portal that is registered with the SEC. Only one intermediary can be used at a time, so you’ll need to conduct a thorough review before selecting an intermediary. This intermediary, which must have an online platform for you to conduct the offering, will also be able to assist your company with certain compliance aspects.
It’s an exciting development that the crowdfunding rules have finally been approved, and hopefully, they will have been worth the wait. However, it remains to be seen whether the limits placed on the crowdfunding offerings and the disclosure obligations will dampen the excitement as companies decide whether to utilize the federal exemption or not. The attorneys of the Forrest Firm are here to help you navigate the SEC’s new crowdfunding rules and assist with all of your securities offering needs.