Overview. Last week, the Securities and Exchange Commission (SEC) adopted new rules permitting “crowdfunding,” a method for growing businesses to raise capital over the Internet by soliciting small investments from a large number of individuals. The new rules are the final significant rulemaking procedure required by the Jumpstart of Business Startups (JOBS) Act of 2012 and aim to increase access to capital for new companies nationwide.
For Companies Seeking to Raise Capital. The crowdfunding rules permit issuers to raise up to $1 million in a 12-month period through a funding portal registered with the SEC or through specific online broker-dealer platforms. Only one offering through one intermediary platform is allowed at any time, and advertisements of the offering outside of the platform are limited to information similar to traditional “tombstone” ads. To protect investors from the inherent risks associated with crowdfunding offerings, the SEC requires each issuer to provide certain detailed information on a new Form C, including among other things: a detailed description of the business; the target offering amount; the price of the securities offered; the company’s financial statements (subject to scaled requirements based on the targeted offering size); the intended use of the proceeds; all related-party transactions; and the identities of all significant stakeholders, as well as updates when certain milestones are reached in the offering on a prescribed Form C-U. Issuers will also be required to file annual reports with the SEC on a new Form C-AR and provide the same to investors.
Certain companies are not be eligible to be issuers, such as non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies subject to prior disqualification, and companies with no business plan other than to execute a merger or acquisition.
For Individuals Seeking to Invest. Under the new rules, the SEC established limits on the amounts that an individual can invest in crowdfunding offerings, based on the individual’s income level. Investors with an annual income or net worth greater than $100,000 may invest up to ten percent of their income or net worth every 12 months (in total, across all crowdfunding platforms). For investors with an annual income or net worth below $100,000, the aggregate investment limit is equal to the greater of (i) $2,000 or (2) five percent of their net worth. Regardless of income level, the amount of securities sold to an investor may not exceed $100,000 in a 12-month period.
For Crowdfunding Platforms. Each crowdfunding intermediary is required to register with the SEC and become a member of FINRA. To reduce the risk of fraud, the new rules establish additional operating and process requirements for intermediaries, such as: providing investors with educational materials (on both the issuer and the investment process); reviewing and timely disseminating all issuer disclosures; providing clear channels for prescribed communications; and reasonably policing monetary exchanges. The rules also prohibit certain intermediary activities, including: offering investment advice; having a financial interest in an issuer (unless received as compensation for its intermediary service, subject to restrictions); compensating promoters; and providing platform access to fraudulent companies.
What’s Next? The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling intermediaries to register with the SEC will be effective on January 29, 2016.