A small business can raise capital in a number of different ways, including by selling its securities. Under the federal securities laws, every offer and sale of securities, even if to just one person, must either be registered with the Securities and Exchange Commission (SEC) or conducted under an exemption from registration. One of the exempt offerings wherein SEC permit companies to offer and sell securities is through crowdfunding.
Crowdfunding is an evolving method of raising capital that has been used to raise funds through internet for a variety of projects. Title III of the JOBS Act created a federal exemption under the securities laws to include this type of funding method to offer and sell securities. In 2015, the SEC adopted Regulation Crowdfunding to implement the requirements of Title III. The rules are designed to assist smaller companies with capital formation and provide investors with additional protections.
Regulation Crowdfunding enables eligible companies to offer and sell securities through crowdfunding with fewer regulatory requirements. The rules permit individuals to invest in securities-based crowdfunding transactions subject to certain investment limits. It limits the amount of money an issuer can raise using the crowdfunding exemption, impose disclosure requirements on issuers for certain information about their business and securities offering and also create a regulatory framework for the broker-dealers and funding portals that facilitate the crowdfunding transactions.
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Requirements of Regulation Crowdfunding
In order to rely on the Regulation Crowdfunding exemption for offering its securities, certain requirements must be met by a Company.
1. Maximum offering amount
A company issuing securities in reliance on Regulation Crowdfunding (an “issuer”) is permitted to raise a maximum aggregate amount of $1,070,000 in a 12-month period. In determining the amount that may be sold in a particular offering, an issuer should count the amount it has already sold during a 12-month period preceding the expected date of sale and the amount the issuer intends to raise in reliance on Regulation Crowdfunding in this offering.
2. Investors subject to a cap
Individual investors are limited in the amounts they are allowed to invest in all Regulation Crowdfunding offerings over the course of a 12-month period depending upon an investor’s annual income or net worth. However, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $107,000, regardless of the investor’s annual income or net worth.
3. Transactions through an intermediary
All transactions under Regulation Crowdfunding must be exclusively conducted through one online platform through an SEC-registered intermediary, either a broker-dealer or a funding portal.
The rule requires disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering. Also, securities purchased in a crowdfunding transaction generally cannot be resold for one year.
Eligibility
Some companies are not eligible to use the Regulation Crowdfunding exemption for its securities offerings. These include:
- Non US companies;
- Exchange Act reporting companies;
- Certain investment companies;
- Disqualified companies as per Regulation Crowdfunding’s disqualification rules;
- Companies that have not complied with the annual reporting requirements under Regulation Crowdfunding during the 2 years immediately preceding the filing of its offering statement; and
- Companies that does not any have specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.
Disclosure Requirements
Any issuer conducting a Regulation Crowdfunding offering must electronically file its offering statement on Form C which requires filing of certain information with the Commission including the financial statements.
Depending on the amount offered and sold during a 12-month period, financial statements of the company that are accompanied by information from the company’s tax returns, reviewed by an independent public accountant or audited by an independent auditor. A company offering more than $500,000 but not more than $1,000,000 of securities relying on these rules for the first time are permitted to provide reviewed rather than audited financial statements, unless audited financial statements of the company are available.
In addition, companies relying on the crowdfunding exemption for its securities offering are required to file an annual report with the Commission and provide it to investors in Form C-AR no later than 120 days after the end of its fiscal year.
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