SEC’s Final Rules on Regulation Crowdfunding (Finally)

So on October 30, 2015, the SEC adopted final rules which will, after the comment period is done (60) days and they are adopted, allow crowdfunding a/k/a Regulation Crowdfunding a/k/a Equity Crowdfunding in the United States.

At first glance the final rules appear similar to the previously issued versions, with individuals only authorized to invest a portion of their annual salary or net worth through crowdfunding each year.  See the press release here.

Portals which will offer the securities of companies offering same through Regulation Crowdfunding will be effective January 29, 2016 so hopefully a decent number of platforms will be available to start the party in early 2016.

The final rules will be effective 180 days after they are published in the Federal Register. The below is a brief summary in FAQ form covering the Regulation Crowdfunding rules.

  1. How much can be raised how often?Eligible companies can raise up to $1,000,000 in any rolling 12 month period.
  2. Which companies are eligible?Any company that is not one of the following: (i) a foreign company, (ii) any reporting companies under the Exchange Act, (iii) certain investment companies, (iv)  companies that are disqualified (for various reasons one of which is involvement of an individual with past securities violations), (v) companies that have failed to comply with the Regulation Crowdfunding reporting requirements, (vi) shell companies.
  3. How much can I invest?It depends if your net worth and income is greater than or less than $100,000.  If both your income and net worth are greater, then you can invest 10% of the lower of your income or net worth.  If either your income or net worth is lower than $100,000, then you can invest the greater of either $2,000 or 5% of the lower of your income or net worth.  Regardless, during any 12 month period, an individual can invest no more than $100,000 total in all Regulation Crowdfunding purchases.
  4. Can I resell the securities I purchase?Generally the securities purchased via Regulation Crowdfunding will have to be held for a year.
  5. Can I publicly advertise my Company’s offering? Yes, but it is limited to what is referred to as a “Tombstone Ad” which can cover no more than a statement that the offering is occurring, the portal/platform being sold through, and the terms of the offering.  Other contact information for the company and a brief description of its business can be included (and should be).
  6. How difficult of a process is it to raise funds via Regulation Crowdfunding?To raise funds in this way, it will initially require that a portal is used and a filing of Form C is done with the SEC, which form must also be provided to the investors and the funding portal.  The form will contain information about the leadership of the company, the business, the offering details and other information.

    The biggest hurdle most companies will face is the financial disclosures, which vary with the amount raised:  (i) if $100,000 or less is raised in a 12 month period, then the financials can be certified by the company’s CEO (ii) if between $100,000 and $500,000 is raised in a 12 month period, then the financials must be reviewed by an independent public accountant (if audited financials are available those must be used), or (iii) if over $500,000 is raised in a 12 month period, for first time users, only reviewed financials are needed, for previous users the financials must be audited.

    Then after the raise is done, companies must continue to report information annually with the SEC and on the issuers website (with financial statements if available), with information which is similar to that on Form C.  The annual disclosures must continue for a period of time (for small companies for 3 years after the raise).

  7. How are funding portals regulated and used in the process?All investments must occur through a funding portal (i.e. website) approved by the SEC, or through a licensed broker-dealer. The portal must be a member of FINRA, and the portal’s owners must not have any financial stake in an issuer.  The portals must provide information to investors on the Crowdfunding process, take measures to reduce fraud, provide a communication channel about offerings on the portal, and allow for the purchase of the offered securities.  Portals cannot offer investment advice or recommendations, solicit or compensate solicitors based on the sale of securities, and cannot hold or handle the funds or securities.