The Securities and Exchange Commission (SEC) recently issued new temporary rules making it easier for businesses to raise money using Regulation Crowdfunding. These new rules, effective until August 31, 2020, were designed to help companies access capital more easily amid threats of lockdown and recession.
Regulation Crowdfunding is an SEC regulation that allows small businesses to raise capital by selling securities without standard SEC review. While startups still have to jump through a few regulatory hoops, the crowdfunding process is much less complex than traditional equity offerings.
To take advantage of Regulation Crowdfunding, small businesses must comply with the following requirements, among others:
Funding portal. Businesses must offer their shares exclusively online through a registered broker-dealer or a funding portal — a specialized broker for crowdfunding.
Basic information. The issuer must file details with the SEC regarding the company’s business plan, financial information, management, and the terms of the offering. Businesses must also make this information available to potential investors.
Investment threshold. Issuers are only eligible to receive crowdfunding proceeds if the offering meets or exceeds the target amount set by the business and communicated to the SEC.
Yearly maximum. Businesses can only raise a maximum of $1,070,000 in any 12-month period under Regulation Crowdfunding. The upper limit is periodically adjusted for inflation.
Lock-ups. Investors can’t sell their shares for one year, subject to certain exceptions, such as resales to the issuer, sales to an accredited investor, or participation in a registered offering.
Regulation Crowdfunding is also attractive to small businesses because they can raise money from the general public. In most private debt or equity offerings, companies can only sell securities to accredited investors — individuals or institutions with large incomes or net worth. By taking advantage of Regulation Crowdfunding, entrepreneurs can seek investment from friends and family, regardless of socioeconomic status.
The SEC’s New Crowdfunding Regulations
As part of the government’s effort to support small businesses during the COVID-19 pandemic (such as the CARES Act), the SEC recently relaxed several restrictions related to Regulation Crowdfunding.
Some of the highlights of the relaxed requirements include:
Speedy access to investors. To speed up offerings, issuers can start contacting investors after they file initial information with the SEC, even if financial statements aren’t yet available.
Relaxed financial statements. For offerings up to $250,000, the business’s CFO can certify the accuracy of financial statements instead of preparing GAAP-compliant financials reviewed by an independent accountant. Previously, only offerings of up to $107,000 qualified for CFO certification.
Faster access to funds. Companies can complete their offerings 48 hours after reaching the minimum threshold amount. Traditionally, businesses had to wait 21 days after publicly publishing offerings with financial statements before closing the sale.
Which Small Businesses Are Eligible Relaxed Crowdfunding Rules?
To take advantage of the relaxed regulations, small businesses seeking to sell stock must operate for at least six months prior to commencing an offering. As the temporary rules only last until August 31, small businesses must have been formed in February (or earlier) if they want to try to raise money under the revised regulations.
Organizations that have previously sold securities under Regulation Crowdfunding must have complied with federal rules and regulations during previous offerings to be eligible for offerings under the relaxed rules.