The Securities and Exchange Commission adopted final rules permitting companies to offer and sell securities through internet crowdfunding to all types of investors, whether or not accredited, and regardless of the investor’s net worth, income or sophistication. Regulation Crowdfunding sets forth rules governing the offer and sale of securities under new Section 4(a)(6) of the Securities Act, which was adopted to implement the requirements under Title III of the Jumpstart Our Business Startups Act. The new rules are intended to assist start-up and early development companies in raising capital by expanding potential target investors in private placements.
In order to satisfy the new crowdfunding rules:
- the issuer may not raise more than $1 million per a year in crowdfunding under this rule (in addition to capital raised pursuant to other offerings, such as private placements under Rule 506 under Regulation D);
- the transaction is required to be facilitated through a registered intermediary broker-dealer or funding portal, which is subject to extensive restrictions and requirements regarding disclosure, compensation, and role in the transaction;
- the issuer must satisfy disclosure requirements, including filing certain information with the SEC (in connection with the offering and annually) and providing information to investors and the intermediary facilitating the offering, such as disclosure related to the terms of the offering, the use of the proceeds, the company’s financial condition, description of business, affiliated party transactions, and information regarding management and 20% or more equity holders; audited or reviewed financial statements of the issuer; and depending upon the amount offered, issuer tax returns; and
- individual investors, over a 12-month period, may invest in the aggregate across all crowdfunding offerings up to:
- if either their annual income or net worth is less than $100,000, than the greater of $2,000 or 5 percent of the lesser of their annual income or net worth or
- if both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth;
- during any 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000;
- the issuer may not be a non-U.S. company, an Exchange Act reporting company, certain investment companies, a company that violated the crowdfunding rules during the two years immediately preceding the filing of the offering statement, companies that have no specific business plan or only plan is to engage in a merger or acquisition with an unidentified company, or otherwise be subject to disqualification under the rules; and
- securities purchased through crowdfunding may not be resold for one year, except to an accredited investor and certain others.
As a result of the new rules, internet crowdfunding, which was previously only available to accredited investors under sites such as AngelList, Crowdfunder, Equitynet and RealtyMogul, may now be offered to all investors, and donation, product or rewards-based funding portals such as Indiegogo or Kickstarter, may offer securities, in each case subject to satisfying portal, issuer and investment requirements of Regulation Crowdfunding. There is no limitation on the type of security which may be offered.
Issuers who satisfy the requirements of other exemptions from the registration requirements of the Securities Act may rely upon those exemptions simultaneously with (or in lieu of) a Regulation Crowdfunding offering and such other exempt offering will not be integrated with the crowdfunding exempted offering for any purpose. An offering in compliance with Regulation Crowdfunding will preempt any registration requirements under State securities laws.
Given the cap on offering and investment size, issuer disclosure obligations and extensive regulatory conditions for crowdfunding intermediaries, it remains to be seen whether crowdfunding to non-accredited investors under Regulation Crowdfunding will provide a meaningful method for raising capital. If portals and/or broker dealer compliant platforms are established and registered with the SEC, this would be the first significant step to open a new avenue for capital raises.
Regulation Crowdfunding will be effective 180 days after the rules are published in the Federal Register. The forms enabling funding portals to register with the SEC will be effective January 29, 2016. The SEC’s final release is available here.