Long awaited Regulation Crowdfunding has finally been adopted by the U.S. Securities and Exchange Commission (SEC). It provides startup companies with another tool for raising funds from the public without the need of a registrating a securities offering. However, the rules are complex and may be cost prohibitive to small companies operating on tight budgets. But the Crowdfunding rules allow the small investor to potentially profit in startup companies similar to the venture capitalists. Several important requirements for a startup company that wishes to take advantage of the Crowdfunding rules are noted here.
- Crowdfunding rules limit the amount of money raised to $1,000,000 in any 12 month period.
- Individuals can invest in crowdfunding offerings but their investment amount is restricted to either the lesser of $2,000 or 5 percent of their annual income if it is less than $100,000. Individuals with an annual income of $100,000 and over can invest the lesser of 10 percent of their annual income or net worth. During any 12 month period an investor cannot invest more than $100,000 in all crowdfunding offerings.
- Certain companies are ineligible to use the Crowdfunding exemption. Ineligible companies include those that are non-U.S. based, 1934 Act Exchange reporting, those that are subject to disqualification under the Crowdfunding rules, those that have failed to comply with the Crowdfunding reporting requirements, and certain investment and blind pool type companies.
- Although a company is not required to file a registration statement with the SEC extensive disclosure information governs the Crowdfunding offering. Pricing information, offering conditions, financial condition disclosure, including either a reviewed or audited financial statement, depending on the size of the offering, a detailed use of proceeds statement, information about the officers and directors and disclosure of certain related party transactions are some of the informational areas that need be disclosed.
- The Crowdfunding offering must take place on a registered Crowdfunding Portal that is a member of FINRA.
- The Crowdfunding Portal is required to perform due diligence of the company, disclose to the public company information that is required by the crowdfunding rules; provide a communication channel that permits discussions by potential investors about the offering, and compliance responsibility that the investor adheres with the crowdfunding investment limitation.
Crowdfunding certainly is an option for startup companies or small companies that need to raise money. Crowdfunding portals are becoming more prevalent, and other companies exist to assist with Crowdfunding activities. Nonetheless, the rules are complex and careful thought is required to hold a successful Crowdfunding offering.