Crowdfunding is a method of raising funds through Internet-based solicitations of the general public, with the objective of raising substantial amounts in small increments per funding participant. Historically, the Securities and Exchange Commission and state regulators viewed investment-related crowdfunding as a public securities offering that requires registration. In April 2012 the JOBS Act changed the regulatory landscape by mandating that the SEC adopt rules to exempt crowdfunding from the registration process. In October 2013, the SEC published a 585-page release setting out its proposed crowdfunding exemption. That proposal is complicated and highly controversial, and more than a year and half later the SEC still has not issued a final crowdfunding rule. In the meantime, 17 states have adopted their own crowdfunding initiatives, but those initiatives come with their own set of limitations and complexities.
Now the SEC has published a different set of JOBS Act-mandated rules that, although not designed for crowdfunding, could be used for such offerings, and even present some advantages over SEC and state crowdfunding initiatives.
Conducting a Crowdfunding Offering under Regulation A+
On March 25, 2015 the Securities and Exchange Commission adopted final rules which completely revamp an old offering exemption known as Regulation A. Old Regulation A allowed public offerings of up to $5 million but had fallen into disuse because of the disproportionate effort and expense of meeting its conditions. New Regulation A – commonly referred to as Regulation A+ – addresses those defects and is divided into two distinct tiers. Tier 1 covers offerings of $20 million or less within a 12-month period. Tier 2 covers offerings as large as $50 million within a 12-month period. Below is a brief summary of the key elements of Regulation A+ that are germane to crowdfunding.
Preclearance. Most state crowdfunding initiatives do not require the issuer to preclear offering documents with the state securities administrator.1 The SEC’s proposed crowdfunding rule does require filing– but not preclearance – of offering documents with the SEC. In contrast, Regulation A+ requires the issuer to obtain preclearance (“qualification”) of the offering.
Under Regulation A+ a detailed filing is made with the SEC on Form 1-A. That document must be delivered to the SEC electronically, through the SEC’s EDGAR system.
Offerings under Tier 1 generally must also be qualified by state securities administrators in each state in which the securities are to be offered. NASAA (an association of state securities administrators) has adopted a “coordinated review” protocol with an eye toward facilitating the process of obtaining the necessary state approvals.
Use of Sales Materials. The Form 1-A includes an “offering circular” for delivery to prospective purchasers of the securities. Often, an issuer will want to use written summaries, notices, or other sales materials that differ from the offering circular. The extent to which the issuer may use such materials changes during the offering process.
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Crowdfunding campaigns often make use of short video presentations. EDGAR currently cannot handle the filing of materials in video format. An issuer that uses a video presentation during the pre-qualification stage will instead need to file on EDGAR a written transcript of that presentation. It should be anticipated, however, that the SEC Staff might require supplemental filing of the video at the pre-qualification stage. State securities administrators generally have their own rules for filing of such materials, either before or after qualification.
At all stages of the process, the issuer is allowed to ask the offeree for a response form that includes his or her name, address, telephone number, and email address. That form could include a consent to electronic delivery of the offering materials.
Use of Broker-Dealers. In a Regulation A+ offering, the issuer can offer and sell its securities directly to the public, or can choose to hire a licensed broker-dealer to help sell the securities.
Use of Crowdfunding Portals. Crowdfunding campaigns often rely on special Internet portals to attract potential participants and handle the mechanics of the offering. The SEC’s crowdfunding rule will offer a new licensing process designed specially for these portals, but that scheme is not yet in effect. In the meantime, only portals run by licensed broker-dealers will be permitted to serve as intermediaries and collect commissions on sales.
Per-Investor Limits. Crowdfunding rules (both existing and proposed) generally limit the dollar amount of securities that any one person can purchase in an offering. Tier 2 of Regulation A+ imposes per-investor limits. An issuer that is conducting a Tier 1 offering, however, need not impose any investor limits.
Offering Limits. By statute, the SEC crowdfunding exemption will be limited to sales of not more than $1 million of the offered securities within a 12-month period. Some state crowdfunding statutes allow offerings larger than that. None allow offerings of $20 million or $50 million – which are the relevant limits of a Tier 1 or Tier 2 offering under Regulation A+.
Minimum Offering Escrow. Crowdfunding rules (both existing and proposed) generally require the issuer to specify a minimum size of the offering, and generally require all offering proceeds to be held in escrow until that minimum is exceeded. Regulation A+ does not impose any such requirements.
Post-Offering Reporting. The proposed SEC crowdfunding rule will require the issuer to provide reports to the SEC and investors at least annually, even after the offering ends. Some state initiatives likewise require ongoing reporting after crowdfunding. An issuer that relies on Tier 2 of Regulation A+ will be required to file reports at least semiannually. Tier 1 requires no such ongoing reporting.
Regulation A+ versus State/SEC Crowdfunding