The SEC recently issued under the JOBS Act the long-awaited crowdfunding rules, whereby small businesses may raise capital from a large number of investors, each of whom contributes a small amount of money, without going through the trouble of filing a registration statement with the SEC. However, it is important to understand the limits and filing requirements imposed by the SEC before moving forward with a crowdfunding transaction.
- Limits. As much as we’d each like to go collect $5 from every person we’ve ever met, the SEC has imposed several limits on crowdfunding in order to protect investors. To qualify for the registration exemption, the aggregate amount of securities sold by a company to all investors in a crowdfunding transaction during a 12-month period cannot exceed $1 million. In addition, the aggregate amount of securities sold by a company to any one investor in a crowdfunding transaction cannot exceed certain limits – if the investor’s annual income or net worth is less than $100,000, the limit is the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth, and if both the investor’s annual income and net worth are equal to or more than $100,000, the limit is 10% of the lesser of the investor’s annual income or net worth. Still with me? The SEC has also limited the aggregate amount of securities sold to one investor through all crowdfunding transactions to a maximum of $100,000. In addition to these limits, a crowdfunding transaction must be done using one – and only one – intermediary (i.e., broker or funding portal). So if you were thinking about crowdfunding through your website or by using multiple funding portals, sorry to be the bearer of bad news.
- Issuer Requirements. As mentioned above, the crowdfunding rules exempt a company from filing a registration statement with the SEC, but create a different obligation to file a new “Form C” with the SEC. The Form C, despite not being as full-blown as a registration statement, still requires detailed disclosures. As of the date of this post, the Form C was not available on the SEC’s website, but the crowdfunding rules tell us that it will require disclosures such as descriptions of the company, financial condition, intended use of proceeds, targeted amount of money to be raised and price per share. Notably, a company will need to provide a complete set of financial statements that are, depending on the amount of securities offered and sold in a crowdfunding transaction during a 12-month period, accompanied by information from the company’s tax returns, reviewed by an independent public accountant or audited by an independent auditor. A company that relies on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless its audited financial statements are available. The Form C will also require disclosures about the company’s officers, directors and any beneficial owners of 20% or more. Each required disclosure has a specific description as to what needs to be included in the Form C, so be sure to read each rule and each instruction to each rule once the Form C becomes available.
- Intermediary Requirements. If you’re interested in crowdfunding from the perspective of the intermediary, this is where your ears perk up. Any person acting as an intermediary in a crowdfunding transaction must register with the SEC as either a broker or funding portal. These registration requirements are also very detailed and include registering with applicable self-regulatory organizations in addition to the SEC. The crowdfunding rules also prohibit an intermediary’s directors, officers or partners from having any financial interest in any company using its services, so be careful to do your research before getting involved in a crowdfunding transaction.
The crowdfunding rules are rather extensive and the above summary is intended only to give some quick answers to the questions we’ve received so far. Remember that the crowdfunding rules, while making it easier for companies to raise capital, are designed with the intention of preventing fraud and protecting investors.