Earlier this year, the Securities and Exchange Commission’s final rules regarding “Regulation Crowdfunding” became effective. Regulation Crowdfunding implements the new securities law registration exemption available to companies seeking to raise capital – allowing for the sale of securities without registration to both accredited and non-accredited investors.
The concept of pooling funds or crowdfunding as a means for raising funds is nothing new. What is a relatively recent development, however, is the prevalence of social media and the use of same as a means of fundraising. Crowdfunding has been particularly popular in the cultural and artistic communities. Congress got in the game when they passed the JOBS Act of 2012 and created the exemption to securities registration for online crowdfunding transactions that meet certain prescribed criteria. The Regulation Crowdfunding final rules now in effect establish the following basic requirements:
- Sales must be made through a registered securities broker or a registered funding portal. Specific and detailed rules apply to the brokers and funding portals acting as the intermediaries in the crowdfunding transaction. In addition to registration with the SEC, there are a series of disclosures and educational materials to be provided to the investors by the intermediaries and other requirements aimed to reduce the risk of fraud.
- Limitations are set on offering size and individuals’ investment amounts. The maximum offering amount is $1,000,000 in a 12-month period. Investor limitations are based upon annual income and net worth thresholds. Investors with a net worth or annual income of less than $100,000 are limited to an investment of the greater of $2000 or 5% of the lesser of annual income or net worth. Individual investors with an annual income and net worth exceeding $100,000 may invest up to 10% of the lesser the annual income or net worth. No investor may purchase more than $100,000 through the crowdfunding exemption in a 12-month period.
- Detailed written disclosures are required of the issuer, including independently reviewed or audited financial statements depending on the size of the offering and other issuer factors.
Regulation Crowdfunding includes many more details and requirements. Potential issuers and investors need to heed all of the requirements of Regulation Crowdfunding to take advantage of this new securities law exemption.