SEC Adopts Rules to Permit Crowdfunding

The SEC adopted final rules, effective April 27, 2016, known as “Regulation Crowdfunding”, which greatly liberalize the manner by which companies privately raise money in small increments from a large number of investors, using the Internet. Regulation Crowdfunding also creates a regulatory framework for the intermediaries — broker-dealers and funding portals –which will facilitate the online transactions.

Below is a brief, non-exhaustive summary of restrictions and requirements applicable to Regulation Crowdfunding offerings.

Limit on Capital Raised.  An issuer may sell up to $1 million in any 12-month period under Regulation Crowdfunding. This limitation does not preclude an issuer from conducting other exempt offerings – including, for example, more traditional private placement offerings under Rule 506 of Regulation D – during this time period.

Individual Investor Limits. The amount individuals may invest in Regulation Crowdfunding offerings is limited to: (1) the greater of: $2,000 or 5% of the lesser of the investor’s annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10% of the investor’s annual income or net worth, not to exceed $100,000, if the investor has annual income and net worth of $100,000 or more.

Required Use of Registered Intermediary. An issuer may only conduct a Regulation Crowdfunding offering through a registered broker-dealer or through a funding portal. Only one intermediary may be used for a particular offering or concurrent offerings made in reliance on the exemption.

Disclosure Requirements. An issuer engaged in a Regulation Crowdfunding offering must comply with certain disclosure requirements, including the filing of “Form C”, which calls for disclosures relating to the issuer’s business, officers, directors and control persons, use of proceeds, capital structure, risk factors, financial results, offering amount and offering mechanics, and type of securities offered. Financial statement disclosure requirements vary based on the size of the offering:

• $100,000 or less: Tax return information and financial statements of the issuer, certified by the principal executive officer of the issuer. If financial statements of the issuer have been reviewed or audited by an independent public accountant, then those should be provided.
• $100,000 to $500,000: Financial statements of the issuer reviewed by a public accountant. If audited financial statements are available, then those should be provided instead of the reviewed statements.
• $500,000 or more: Audited financial statements are generally required. Alternatively, reviewed statements may be used for first-time issuers conducting offerings of between $500,000 to $1 million.

All financial statements must be prepared in accordance with US GAAP.

The SEC’s press release regarding Regulation Crowdfunding can be found here, and the 685 page adopting release can be found here.