SEC Adopts Final Rules for Crowdfunding
On October 30, 2015, the Securities and Exchange Commission (SEC) adopted final rules permitting “crowdfunding” by private companies without registering the offering with the SEC (“Regulation Crowdfunding”). The final rules will become effective 180 days after being published in the Federal Register. Please click here for a copy of Regulation Crowdfunding.
Regulation Crowdfunding permits small businesses to raise a maximum aggregate amount of $1 million through crowdfunding offerings over any given 12-month period from any interested investor – not just investors who meet specific qualifications – such as accredited investors with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000 or $300,000 jointly with their spouse. It also provides for funding portals – Internet-based platforms or intermediaries – to facilitate the offer and sale of securities without having to register with the SEC as brokers.
Investment limitation. Under Regulation Crowdfunding, the aggregate amount sold to any one investor during the 12-month period preceding the date of a particular investment is capped (i) for investors with annual income or net worth of less than $100,000, at the greater of (a) $2,000 or (b) 5% of the lesser of their annual income or net worth and (ii) for investors with annual income and net worth each equal to or more than $100,000, at up to 10% of the lesser of their annual income or net worth. The aggregate amount of securities sold to an investor during any 12-month period through all crowdfunding offerings cannot exceed $100,000.
Disclosure requirements. The offering document, which needs to be filed with the SEC on new Form C, needs to include a variety of disclosures about the issuer and the offering, which include a description of the company's business and financial condition, the use of proceeds from the offering, information about officers, directors, and owners, information about certain related-party transactions, the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount. The offering document must also contain a complete set of financial statements of the issuer prepared in accordance with U.S. generally-accepted accounting principles covering the shorter of the two most recently completed fiscal years or the period since the inception of the business. Regulation Crowdfunding also requires an issuer to file annual reports with the SEC (with information similar to that of the offering document) and to provide them to investors.
Crowdfunding platforms. Under Regulation Crowdfunding, an offering of securities must be conducted through either a broker or a "funding portal." A "funding portal" is a new type of intermediary that performs limited functions in connection with the offer and sale of securities under the crowdfunding exemption, and is required to, among other things, (i) provide investors with certain information, such as materials that explain the process for investing on the platform and the types of securities being offered; (ii) take measures to reduce the risk of fraud; (iii) make available to the SEC and potential investors the disclosure required to be provided by issuers prior to any sale; and (iv) provide communication channels to permit discussions about offerings on the platform.
If you have any questions about Regulation Crowdfunding, or any other investment or securities issues, please contact Jamie Baker, the author of this alert, at 603.373.2006 or jbaker@pierceatwood.com, or any member of Pierce Atwood’s Business Practice Group.