The SEC has recently released the highly anticipated final rules for Regulation Crowdfunding as part of the JOBS Act. Regulation Crowdfunding – the process of raising capital from small individual investors using an online platform – may be a way for your company to receive funding from your most loyal supporters.
In April 2012, The Jumpstart Our Business Startups Act (the “JOBS Act”) established a regulatory structure for small businesses and startups to raise capital through crowdfunding. This led to the Securities and Exchange Commission’s (SEC) final ruling on October 30, 2015, to adopt Regulation Crowdfunding under the Securities Act of 1933 and the Securities Exchange Act of 1934. Regulation Crowdfunding allows individuals to invest in securities-based crowdfunding transactions, subject to certain limitations and regulations. These securities are exempt from registration requirements of the Securities Act but may be constrained by dollar limits, mandatory disclosures, and approved platforms.
Eligible issuers are allowed to raise a maximum of $1 million in a 12-month period, and individual investors are also subject to certain limitations in the amounts they are allowed to invest. If an individual’s annual income or net worth is less than $100,000, he/she will be able to invest the greater of $2,000, or 5% of the lesser of their annual income or net worth. However, if his/her annual income and net worth are $100,000 or greater, an individual can invest 10% of the lesser of his/her annual income or net worth, up to $100,000.
To protect both the investor and the issuer, there are certain disclosures required by the SEC:
- Names of officers, directors, and any owner of 20% or more of the company;
- Type of business and how the issuer will use the funds;
- Price of the securities offered or the method used for determining the price;
- Description of any related-party transactions;
- The issuer’s financial statements
If the issuer is raising $100,000 or less, only the issuer’s tax returns and certification of the executive officer are required. If the issuer is raising more than $100,000 but less than $500,000, the financial statements must be reviewed by an independent accountant. Offerings of more than $500,000 must include audited financial statements, except for first-time users of Regulation Crowdfunding (which are allowed to provide reviewed financial statements).
Regulation Crowdfunding transactions should only take place through an SEC-registered intermediary – either a broker-dealer or a funding portal. This is intended to protect the investor. In addition, certain companies are deemed ineligible for Regulation Crowdfunding: some of these include non-U.S. companies, companies that do not have a specific business plan or have intentions of engaging in mergers and acquisitions, or companies failing to comply with the Regulation Crowdfunding requirements.
In spite of the strict requirements above, Regulation Crowdfunding is a great alternative that will enable more startups and other small businesses to obtain the capital they need to grow. Chapman Hext & Co., with its 25 years of experience in financial statements reviews, financial statements audits, accounting services and expert knowledge in capital markets, will be your best choice to help navigate the complexities of a Regulation Crowdfunding transaction.