Key Notes:

  • Crowdfunding coming for non-accredited investors
  • Preliminary restrictions were loosened but remain significant

On October 30, 2015, the Securities and Exchange Commission (SEC) voted 3 to 1 to permit companies to offer and sell securities through crowdfunding. This means startups will be able to raise money by selling stock to Main Street investors under Title III of the 2012 Jumpstart Our Business Startups (JOBS) Act. Until the change, equity crowdfunding had been legal only for “accredited investors,” defined as individuals who own more than $1 million in assets excluding their primary residence, or have maintained an annual income of more than $200,000 for at least two years. With these final rules, the SEC has brought non-accredited investors into the fold. Additionally, the SEC has also made changes to the audit provisions of the crowdfunding rule, allowing, for the first time, companies offering between $500,000 and $1,000,000 of securities to provide reviewed rather than audited financial statements.[i] While Title III expands crowdfunding opportunities to non-accredited investors and provides for relaxed reporting obligations, there are still certain requirements and restrictions that apply, which are briefly discussed below.

Limitations on Crowdfunding

The final rules provide the following key limitations on purchases made by investors through crowdfunding: (i) if an investor’s annual income or net worth is less than $100,000, they are permitted to invest up to $2,000 or the lesser of 5 percent of their annual income or net worth in one 12-month period and (ii) an investor cannot purchase more than $100,000 or 10 percent of the lesser of their annual income or net worth in a 12-month period.[ii]

Disclosure by Companies

Companies that rely on the final rules to conduct a crowdfunding offering are required to make certain disclosures to the SEC and are required to provide this information to investors and the intermediary facilitating the offering. Such disclosure includes, among other things: the offering price; the target offering amount; the deadline to reach the target; a discussion of the company’s financial condition; financial statements of the company; information about officers and directors as well as owners of 20 percent or more of the company; and certain related-party transactions. In addition, companies relying on the crowdfunding exemption are required to file an annual report with the SEC and provide it to investors.[iii]

Funding Portals

All crowdfunding transactions must occur either through an SEC-registered broker-dealer or a funding portal.[iv] A funding portal must file a Form Funding Portal with the SEC and become a member of the Financial Industry Regulatory Authority (FINRA). The portal must, among other things, provide educational materials to prospective investors, make issuer information available throughout the offering period and for the required 21-day public offering period, and provide a communication channel to permit discussions about offerings.[v]

The new rules will become effective 180 days following Federal Register publication. Forms enabling the registration of funding portals with the SEC will become effective January 29, 2016.[vi]